Is GST Registration Necessary for Sole Proprietorship Firms?

A sole proprietorship is the most preferred choice in the unincorporated business sector in India. It is the most uncomplicated and simplest form of business since it is formed with only one person as its owner, giving him exclusive control over the management of the business. A sole proprietary concern is the best suited for small businesses with low investments like self employments, freelancers, consultants, etc.

The sole proprietor is the one who legally and exclusively owns and manages the proprietorship firm and the law that governs it is the Shops and Establishments Act of the state in which the sole proprietor has his fixed place of business.

Features of a Sole Proprietorship

A sole proprietorship is a small business organisation in the unstructured sector, having its own merits and demerits to count and is often desirable by those who intend to start a business with the lowest investment or with the immediate resources available in hand.

Some features of such proprietorship concerns are enlisted below:

1. The sole proprietor exercises sole and absolute control and ownership over the affairs of his business.
2. Since a proprietorship is not a going concern, it does not enjoy perpetual succession. It shall end with the death of its sole owner and cease to exist thereafter.
3. It does not enjoy a separate legal status from the proprietor, as the proprietorship is not a distinct entity before the law.
4. Since it has no legal status, therefore the liability of the sole proprietor is also unlimited. As such, he is personally liable for the loss and debt of the firm.
5. The cost to set up a proprietorship firm is minimal and nominal expenses are incurred for its formation.
6. Also, the cost of indirect taxation is reduced to a great extent as all the earnings of the proprietary business is computed in the personal income of the proprietor as per the Income Tax Act, 1961.

What Laws are Applicable to a Sole Proprietorship  Business Concern?

One of the ostensible facets of such a business is that it has minimal enactments of law governing and regulating it. The laws applicable to a sole proprietorship may not be limited to just one particular act but a multiple of those, depending upon its location, nature or type of business, turnover, etc. Some of these may be:

1. Shops and Establishments Act of the state in which the registered place of business of the proprietorship is located.
2. Goods and Service Tax, 2017
3. Income Tax Act, 1961
4. Law relating to general and specific licenses
5. Labour laws or the Employee Regulations like Employee Provident Fund (EPF), Employees’ State Insurance Corporation (ESIC), etc
6. Laws applicable to the specific business activity undertaken by the proprietor

Registration of a Sole Proprietorship Business

The registration of a sole proprietorship is not a mandatory requirement under the Indian laws but it is always recommended to get the business registered to enable an unchallenging walkway for the proprietorship to venture into markets.

Does a Sole Proprietorship Need GST Registration?

The Goods and Service Tax (GST) law in India is a destination tax reform applicable to the whole of India. It has presented a unified tax system in the country by replacing the earlier Value Added Tax (VAT), excise duty and service tax regimes. It operates under a dual system where both the Central and the State governments levy taxes on the same transaction, categorized into Central GST (CGST), State GST (SGST) and Integrated GST (IGST).

The registration under the GST law is free of cost and can be applied online on the official website of the government. A GST registration for a sole proprietorship business is based on the nature of its business activities and its annual turnover.

A sole proprietorship may either be involved in the merchandise or the service sector. The threshold limits are different for each type of business form and operation.

Like for example, the threshold limit beyond which a business would be required to be registered:

1. in the merchandise sector, if the turnover exceeds Rupees Forty Lakh per annum
2. in the service sector, if the turnover exceeds Rupees Twenty Lakh per annum
3. businesses set in the hilly areas or the North-Eastern regions, if the annual turnover exceeds Rupees Ten Lakh, and so on.

A GST registration for sole proprietorships is not mandatory unless they exceed the prescribed threshold limits in the same manner as above. They may acquire a registration voluntarily, but such sole proprietorships are subject to certain criteria, which, if met, would require them to register under the GST Act, 2017. A sole proprietorship would need to be registered if:

1. a sole proprietor is engaged in the inter-state sale or purchase of goods and services or
2. he wants to claim credit on the tax paid by him on inputs or
3. the turnover of his business exceeds Rupees Twenty Lakh per annum.

However, criteria for mandatory registration of a sole proprietor’s business under GST is not limited only to the above situations. Besides the aforementioned, there may be certain other situations where a need for GST registration arises and sets off to be mandatory.

The registration under GST for a sole proprietorship is mandatory irrespective of the annual turnover if the nature of the business activities is as below:

1. Inter state goods and services – If the sole proprietor is engaged in the sales of goods or services from one state to another, then registration becomes mandatory as the business is not confined to the lines of only one particular state.
2. Casual taxpayers – Some proprietors transact occasionally through a temporary stall or set up or exhibition in another state where they do not have a fixed place of business. Such individuals have to obtain a GST registration, even if for a temporary period in the state where they intend to transact.
3. Importers and exporters – For the purpose of compliance with import and export policy and international trade standards, it is important for a trader engaged in import or export to have himself registered under GST as well.
4. Tax payers under old laws – Those proprietary concerns who were required under the old regime to have a registration or are transitioning to the new GST law without exemption need to be registered under the GST Act of 2017.
5. Business under Reverse Charge Mechanism – Any business where the recipient is liable to pay GST must have a GST registration.
6. E-Commerce / Aggregators – Where the goods and services are traded, bought or sold digitally, that is, on online platforms or portals then such merchants are mandatorily required to have a GST registration.
7. Non Resident Business – Any such business where the sole proprietor is based in a country outside India but carries out his business in the Indian territories is required to have a GST registration in India.
8. Online Information and Database Access or Retrieval (OIDAR) – When a sole proprietor offers, supplies or delivers his services electronically or over a digital platform across states or internationally, he needs to obtain a registration under GST.

Voluntary Registration Under GST

Registration under GST law may be obtained by applying voluntarily even if threshold limits are not exceeded because opting for it is always beneficial. A registered sole proprietorship can always claim input tax credit and become trustworthy on the available platforms in the market.

Benefits of Being GST Registered

Even though the registration is not mandatory and is based on several particulars, what a GST registration can do for a sole proprietorship is that it enhances their up and running magnitude and helps build their image in retail markets with potential growth and flexibility.

Let us understand how a GST-registered concern is privileged as compared to those unregistered:

1. Competitive edge: A GST-registered sole proprietorship is at an added advantage in contrast to the ones not registered by being more competitive in the market as the clients, vendors and even customers find a registered business to be more reliable and trustworthy. This gives them an upper hand to perform better and achieve their better revenues.
2. Access to government tenders: The business wing of the government offers its tenders and contracts only to those entities that are recognised under the GST law. Being registered increases the chances of the proprietor to work with government organisations.
3. Simplified and uninterrupted compliance: Maintenance of records and registers becomes easier and more convenient when a proprietary concern is a GST registered one, giving them transparency and integrity in their dealings. This lessens the tax burden and also reduces the compliance complexity by lowering the probability of any error in the tax filing process.
4. Input Tax Credit: The capacity to claim an input tax credit (ITC) is what every unincorporated business owner wishes for, and GST registration grants it to the sole proprietor. By claiming credit of the GST paid on procuring inputs or other business expenses, the proprietor can minimise his costs and ultimately reduce the overall tax burden.
5. E-commerce participation: Selling on e-commerce websites is impossible without a GST registration and so, to have access and explore these digital market places, registration is a must.
6. Interstate business opportunities: A sole proprietor who registers his business under GST has the freedom to supply or render goods or services from one state to another, cracking up new markets and business prospects.
7. Lawfulness and trustworthiness: When a proprietorship concern obtains a GST registration, the business of the sole proprietor gains a certain legitimacy in the minds of the parties dealing with it. Large enterprises, in particular, favour to co-operate with clients or parties or even traders who are GST compliant, since it provides them with a sense of reliability and truthfulness in transacting with them.

Summary

In summary, since sole proprietorship firms are the cheapest forms of business organisation, their GST registrations are also free of cost. Obtaining such registration will help to reduce the cost of taxation, build trust and exploit more growth opportunities. It helps to manage legal and tax compliance by providing both financial and operational advantages to boost their growth and decision making capabilities.

Sole owners who opt to register their businesses under GST law can achieve better efficiency, enhance customer satisfaction and improve business and market relations, possibly opening new vistas like government contacts or e-commerce. Therefore, in totality, GST registration is an important instrument for sustained entrepreneurial success.

Bibliography

1. www.gst.gov.in
2. www.msme.gov.in
3. www.irs.gov
4. www.startupindia.gov.in