Library / Goods and Services Tax: The Professional's Master Guide

33. MSMEs, Professionals and Startups

Small businesses face the same law as large ones with fewer people to handle it. The choices that matter most for them are registration, the return scheme, reverse charge on professional fees, and cash flow.

33.1 Registration, QRMP and composition

The registration threshold is tested on aggregate turnover of all registrations under the same PAN across India, including exempt supplies and exports but excluding inward supplies under reverse charge. A service provider with turnover up to Rs. 20 lakh need not register even if it makes inter-State supplies. Once registered, a person with aggregate turnover up to Rs. 5 crore can opt for the QRMP scheme: quarterly GSTR-1 and GSTR-3B with monthly tax payment through PMT-06. Service providers with turnover up to Rs. 50 lakh may opt for composition under section 10(2A) at 6%, but lose ITC and cannot charge tax to B2B customers, which rarely suits a consultant with business clients.

33.2 Professional fees and reverse charge

Chartered accountants, company secretaries, consultants and architects charge 18% under forward charge. Legal services by an individual advocate or a firm of advocates to a business entity are under reverse charge: the business entity pays 18%. Business entities with turnover up to the registration threshold in the preceding year are exempt from this, as are individuals and non-business clients.

Illustration 170: Professional fees in a small company

Kiran Foods Pvt. Ltd. (turnover Rs. 3 crore) pays a law firm Rs. 1,50,000 for a recovery suit and a chartered accountant firm Rs. 2,00,000 for audit and tax work.

Step 1: Legal fees: reverse charge at 18% = Rs. 27,000, paid in cash by Kiran Foods; credit taken in the same return.

Step 2: CA fees: the firm charges 18% = Rs. 36,000 on its invoice; Kiran Foods takes ITC once it appears in GSTR-2B.

Step 3: Cash outflow on tax in the month = Rs. 63,000, with credit of the same amount. The reverse charge amount cannot be paid out of ITC.

33.3 Freelancers and exporters of services

A freelancer designing for foreign clients exports services if the conditions of section 2(6) of the IGST Act are met: supplier in India, recipient outside India, place of supply outside India, payment received in convertible foreign exchange or in Indian rupees where permitted by the RBI (for example, through special rupee vostro accounts), and supplier and recipient not merely establishments of the same person. Exports are zero-rated. Under a Letter of Undertaking (LUT, filed in RFD-11 each year) no tax is paid, and unused ITC is refunded under rule 89(4). The e-BRC or FIRC from the bank is the proof of realisation.

Illustration 171: A freelance designer

Rohan, a UI designer in Pune, earns Rs. 30,00,000 from clients in the USA and Rs. 4,00,000 from Indian companies in FY 2025-26. He buys a laptop for Rs. 1,50,000 plus GST.

Step 1: Aggregate turnover = Rs. 34,00,000, which exceeds Rs. 20 lakh. Exports count, so Rohan must register.

Step 2: Exports under LUT: no tax. Domestic fees: 18% = Rs. 72,000.

Step 3: ITC on laptop = Rs. 27,000. Net tax on domestic fees = Rs. 45,000. If ITC exceeded domestic tax, the balance could be claimed as refund under rule 89(4).

Free trials of software or services are not supplies to unrelated customers because there is no consideration. Where a startup gives free services to a related company, Schedule I may apply, and the value falls under rule 28.

33.4 Cash flow and vendor risk

Rule 37 requires a buyer to reverse ITC if the supplier is not paid within 180 days of the invoice date, with interest if the credit was used; credit comes back on payment. Rule 86B requires registered persons with monthly taxable supplies above Rs. 50 lakh to pay at least 1% of output tax in cash, with exceptions such as where the proprietor or directors paid income tax above Rs. 1 lakh in each of the last two years. On the income-tax side, section 37 of the Income-tax Act, 2025 (carrying forward section 43B(h) of the 1961 Act) allows a deduction for dues to micro and small enterprises only on payment, where payment is made beyond 45 days (15 days where there is no written agreement); the companion guide on the Income-tax Act, 2025 covers it.

Illustration 172: The 180-day rule

Tara Traders buys goods on an invoice dated 1 January 2025 for Rs. 5,00,000 plus GST of Rs. 90,000 and takes ITC in January 2025. It pays the supplier only on 15 September 2025.

Step 1: 180 days from 1 January 2025 end on 30 June 2025. ITC of Rs. 90,000 is added to output tax in the GSTR-3B for July 2025, the tax period immediately following the 180 days (rule 37(2)), with interest at 18% under section 50(3) from the date of utilisation if it had been used.

Step 2: On payment on 15 September 2025, ITC of Rs. 90,000 is re-availed in the September 2025 return. No time limit under section 16(4) applies to re-availment.

Judicial view: Buyer's credit when the supplier defaults

Bhandari Scrap Traders v. Union of India (Supreme Court, 2026): the Court dismissed the challenge to section 16(2)(c) on 24 July 2026 and affirmed the Gujarat High Court. ITC can be denied to a buyer where the supplier has not paid the tax, and restored when the supplier pays. Earlier rulings that read the provision down (such as the Calcutta High Court in Suncraft Energy) must be read subject to this. For MSMEs the lesson is vendor checks: GSTIN status, return filing history on the portal, IRN validity of e-invoices, and clauses allowing the buyer to withhold tax until the invoice appears in GSTR-2B.

Chapter summary

• Threshold is tested on all-India aggregate turnover under one PAN, including exports and exempt supplies.

• Legal fees to business entities are under reverse charge; CA and consultancy fees are under forward charge at 18%.

• Export of services under LUT is zero-rated; payment in foreign exchange or permitted INR; refund of unused ITC under rule 89(4).

• Pay suppliers within 180 days to keep ITC; rule 86B requires 1% cash payment for larger businesses.

• After Bhandari Scrap Traders, vendor compliance checks are the buyer's only protection.