GST Registration for Small Businesses: New Rules & How GST Works for Small Businesses

GST Registration Process for Small Businesses

Here is the step-by-step GST registration process for small businesses: 

Step-by-Step Online Registration Guide

1. Visit the GST Portal: www.gst.gov.in.
2. Start Registration: On 'Services', click on 'New Registration'.
3. Enter Basic Details: Enter PAN, state, business name, email and mobile number. You will be given a Temporary Reference Number (TRN) to be processed subsequently.
4. Detailed Application: Log in with the TRN to fill in details, including business constitution (e.g., proprietorship), principal place of business, HSN codes for goods/services and bank account details. Upload required documents in PDF format (<2MB).
5. Verification: Complete OTP-based Aadhaar authentication for the authorised signatory.
6. Submit: File using a Digital Signature Certificate (DSC, mandatory for companies/LLPs) or Electronic Verification Code (EVC) for others.
7. Acknowledgement: Receive an Application Reference Number (ARN) upon submission. GST officers verify the application, issuing a GSTIN upon approval.

Documents Required

The following are the GST registration documents to be uploaded while applying, so that verification gets done suitably.

• PAN card of the business or proprietor.
• Aadhaar card of the authorised signatory.
• Proof of business address (e.g., rent agreement, utility bill in PDF).
• Bank account proof (e.g., cancelled cheque, bank statement).
• Passport-size photograph of the authorised signatory.
• DSC for companies or LLPs.

Timelines and Acknowledgement

• Processing Time: GST registration applications are processed normally within 7 working days.
• Rejection: Where an application is faulty or incorrect, notice will be served and clarifications will be sought. Applications can be modified if required.

Note: For a small business seeking new GST registration online, there are no new GST registration fees payable as part of the procedure. The process involves submitting GST registration documents and details online, verification and approval without any cost.

Related: GST Reconciliation for Businesses

New Rules & Updates for Small Businesses

1. Threshold Limit Changes

Since 2025, threshold limits for joining compulsorily for GST have not been changed. There is stringent enforcement now so that businesses approaching the limits join punctually.

2. Relaxations in Filing Frequency

Small businesses having turnovers of less than ₹5 crore are under the scheme of Quarterly Return, Monthly Payment (QRMP) that de-interfaces quarterly filing frequency and, therefore, compliance. 

3. QRMP Scheme

This scheme allows small taxpayers to:

• File GSTR-1 quarterly and GSTR-3B monthly.
• Make monthly tax payments in instalments. It simplifies tax management for businesses with lower turnover.

4. Composition Scheme Updates

The turnover ceiling under the Composition Scheme has been raised to ₹1.5 crore (₹75 lakh in special category states). Interstate sellers, e-commerce players and all of the remaining service providers, excluding restaurants, are now ineligible under the scheme.

Composition Scheme: A Boon for Small Businesses

The Composition Scheme under Section 10 of the CGST Act, 2017, provides small businesses with a simplified tax regime. Instead of complying with standard GST rules, businesses pay a fixed rate on turnover, thus reducing administrative burdens. It has specific eligibility criteria and limitations, making it suitable for certain sectors.

Who Can Opt for It?

Eligible businesses include manufacturers (e.g., small-scale textile producers), traders (e.g., retail shops) and non-liquor restaurants. From 2019, select service providers, like works contract suppliers, are eligible if the goods supply does not exceed 10% of turnover. Interstate suppliers and e-commerce sellers (e.g., on Amazon) are ineligible.

Turnover Criteria

For a company to be eligible under the Composition Scheme, it should satisfy the following turnover requirements:

• General Criteria: A firm should have a turnover of up to ₹1.5 crore in a year.
• Special Category States: In Sikkim and Arunachal Pradesh states, the turnover limit is ₹75 lakh.
  
  

A lower turnover limit favours small firms and new firms, who can avail themselves of the scheme with the aim of easing their tax compliances.

Benefits and Limitations

Tax Rates Under Composition

For Composition Scheme companies, the rates are predetermined: manufacturers and traders are taxed at 1% of turnover, and restaurants serving non-alcoholic items are taxed at 5%. There is a composition scheme for service providers, too, with a tax rate of 6%, but with some conditions.

How GST Works for Small Businesses?

• Tax Collection and Remittance: Small businesses collect GST on taxable sales (output tax, e.g., 18% on services like consultancy) and collect GST paid on inputs purchased (input tax, e.g., 28% on cement) to calculate their GST liability, paid monthly or quarterly via returns like GSTR-3B.
  
  
• Input Tax Credit (ITC) Eligibility: Registered businesses (except composition scheme taxpayers) can utilise ITC or GST paid on inputs that are business-related, which lowers tax burdens.
  
  
• Impact on Pricing and Margins: Pricing and running expenses are determined by GST compliance. Claiming ITC can, however, help small businesses recover or improve margins by controlling tax expenditures.
  
  
• Control of Registered and Unregistered Suppliers: Procurement from registered suppliers enables companies to claim ITC. Procurement from unregistered suppliers prohibits companies from claiming ITC, incurring additional costs.

Benefits of GST for Small Businesses

The benefits of GST registration for small businesses are as follows:

• Increased Formalisation: GST registration for small businesses ensures transparency and access to the formal economy. Through auditable invoices and compliance with tax laws, small businesses can operate smoothly, improve trust with stakeholders and maintain proper financial records.
  
  
• Easy Access to Loans: GST-registered businesses demonstrate financial credibility, making them eligible for formal credit, such as ₹5 lakh working capital loans from SBI, which support expansion and operational stability.
  
  
• Competitive Advantage in B2B: GST registration allows small businesses to secure government tenders and engage in formal B2B transactions, giving them a competitive edge.
  
  
• Participation in E-Commerce Platforms: Registration under GST is made mandatory for e-commerce platforms so that small firms can sell online and reach a wider market. 

Challenges Faced by Small Businesses Under GST

The challenges faced by small businesses under GST are as follows:

• Tech Adoption and Digital Filing: Small businesses face challenges with technology access and digital literacy, thus making GST registration for small businesses online, return filing, and invoice issuance complicated. They also struggle with navigating the GST portal (like filing GSTR-3B), which increases reliance on accountants and the risk of filing errors.
  
  
• Understanding Compliance Rules: Frequent changes in GST laws and complex provisions, like place of supply rules for interstate services or reverse charge mechanisms, confuse small businesses and increase the risk of non-compliance and audits.
  
  
• Cash Flow Problems due to ITC: Delayed ITC claims, often caused by mismatched invoices, can lock up working capital. This strain on cash flow can severely affect small businesses with limited financial reserves.
  
  
• Penalties for Missed Filings: Delayed filing of returns incurs a fine of ₹100 per day, along with interest on tax payable.

Expert Tips to Simplify GST Compliance

There are multiple ways to simplify GST compliance for businesses. Some of them are follows:

• Use of Accounting Software: GST-compliant software automates invoicing, GSTR-3B filings and ITC calculations, minimising filing errors. For example, automating return filings can save hours monthly, ensuring timely compliance.
  
  

• Hiring GST Consultants: Hiring a professional GST consultant helps your company follow GST rules correctly and easily. A consultant can offer tax planning recommendations that are advantageous and make timely submissions to avoid audits and penalties.
  
  

• Staying Updated on Policy Changes: Monitoring GST Council updates and notifications (e.g. via the GST portal or newsletters) keeps businesses informed of changes like QRMP scheme relaxations. This helps prevent non-compliance due to outdated practices.
   

• Training Staff: Regular training on GST procedures and software use equips employees to handle filings efficiently. This reduces reliance on external support and strengthens in-house compliance expertise.

Related: Internal Audit vs External Audit

Importance of GST Compliance for Small Businesses

GST compliance is vital for small businesses in India, ensuring adherence to the CGST Act, 2017 and driving operational efficiency and growth. 

The following are some of the key reasons why GST registration for small businesses is required: 

• Legal Conformity: Non-conformity to GST registration or regulations involves penalty, interest and legal action. GST registration is compulsory for businesses with a turnover exceeding the notified turnover thresholds.
  
  
• Access to Input Tax Credit (ITC): GST registration facilitates businesses' claim of ITC of tax paid on purchase, thus saving total tax outgo and increasing profitability.
  
  
• Enhanced Market Credibility: GST registration enhances the business's credibility and allows interaction with formal supply chains. It facilitates B2B transactions and sales through e-commerce portals with GST registration.
  
  
• Simplified Interstate Commerce: GST eliminates the requirement for multiple state registrations for interstate supplies. This simplifies the movement of goods across the state and allows higher market penetration.
  
  
• Eligibility for Government Schemes: GST registration is typically compulsory to enjoy the advantages of various government schemes. It provides options for small enterprises to reap the benefits of economic relief and scope for development.

Who Qualifies as a Small Business Under GST?

Definition Based on Turnover

Small businesses under GST are mostly categorised based on their total annual turnover. Turnover is computed on a financial year basis across all supplies (taxable, exempt, export, interstate) under the same PAN, excluding non-GST supplies like alcohol. 

• Goods Suppliers: A business with a turnover of ₹40 lakh in general states (e.g. Gujarat, Maharashtra) or ₹20 lakh in special category states (e.g. Arunachal Pradesh, Manipur) is considered a small business for GST registration.
• Service Providers: A business providing services and having an aggregate turnover of ₹20 lakh in general category states or ₹10 lakh in special category states is a small business that should register for GST.

Sector-wise Classification (Goods vs Services)

The GST regime classifies enterprises into two categories: goods and services, both with varied taxation regimes:

• Goods Suppliers: These enterprises undertake the manufacturing, trading or supplying of goods. They have to pay GST on physical products and face higher turnover thresholds. 
• Service Providers: These entities offer intangible services such as consultancy, repair, transport, etc. The service providers' compliance will differ for the good suppliers since services are accompanied by various tax models and issues.

The variation in thresholds ensures that companies dealing with goods and services follow the appropriate tax models. Different turnover limits for each industry help determine GST registration for small businesses in India.

Differences Between Small Business and MSME Classification

Unlike GST’s turnover-based definition, the MSME Development Act, 2006 (amended in 2020) classifies enterprises by both investment and turnover. 

Small Business: Defined by annual turnover thresholds controlling GST registration and compliance. A small business under GST (e.g., ₹40 lakh turnover) may not qualify as an MSME as GST focuses solely on turnover, not investment.

MSMEs: MSMEs are classified based on both investment and turnover. For example, micro-enterprises have investments up to ₹1 crore and turnover up to ₹5 crore, while small enterprises can have ₹10 crore in investment and ₹50 crore turnover.

Though overlap is possible, a small firm under GST may or may not be an MSME and vice versa.

Related: MSME Registration in India

GST Registration Threshold for Small Businesses

Turnover Limits for Mandatory Registration

The turnover limits below set the stage for whether small businesses are required to register for GST:

• Goods Suppliers: GST turnover limit for general states is ₹40 lakh and for special category states is ₹20 lakh.

• Service Providers: In the case of service providers, the cut-off point for service providers remains ₹20 lakh for general states and ₹10 lakh for special category states.
• Interstate Suppliers: Interstate supply enterprises are compulsorily required to enrol under GST, irrespective of their turnover. This is for both goods and services.

Sellers on e-commerce platforms (e.g., Amazon, Flipkart) and casual taxable persons (e.g., festival stall vendors making temporary supplies) also require mandatory registration, irrespective of turnover.

Voluntary Registration Option

Small business firms with turnovers less than the notified thresholds are allowed to go for voluntary GST registrations. 

It has several benefits, such as:

• Input Tax Credit (ITC): They can be refunded for input taxes charged on inputs bought for business purposes.
• Good Faith Participation in B2B Transaction: By opting for a GST registration for small businesses, firms gain the right to receive formal B2B contracts, enhancing market access.
• Eligibility to Avail Formal Credit: Voluntary registration also makes businesses eligible for bank loans, improving financial credibility and growth opportunities.

State-wise Variation in Thresholds

Thresholds vary to promote economic development in hilly or less-industrialised regions. General states (e.g., Maharashtra) have higher limits (₹40 lakh for goods, ₹20 lakh for services), while special category states (e.g., Arunachal Pradesh, Sikkim) have lower limits (₹20 lakh for goods, ₹10 lakh for services), encouraging local enterprises to formalise without immediate tax burdens.

Conclusion

GST registration for small businesses is significant for success in India's formal economy. Through schemes such as QRMP and Composition, small businesses can simplify their compliance procedure, minimise tax payment anxiety, and increase competitiveness. With digital platforms, news on regulatory updates, and expert advice, small businesses can tap the full potential of GST and capitalise on growth prospects in a changing marketplace.