Introduction
For an investor, whether a venture capital firm, an investor, or a private equity fund, the goal is simple: maximize the returns on an investment while controlling for legal and financial risk. Every decision that the investor makes regarding funding and operational strategy must be consistent with this goal.
Unfortunately, new GST Registrations are generally viewed by an investor as a compliance requirement, and not as a strategic layer of protection that adds value to the new investment. As a result of this perception, many founders are hesitant to get their GST Registration done, do not complete the required steps, or use informal methods of achieving compliance, which poses additional risk to the business and the investors.
The GST registration is a vital step for enhancing financial, operational, and legal credibility and for providing long-term stability through the establishment of a company’s legitimacy. GST-compliant entities will ensure that investors view their businesses positively as compliant, responsible, and able to conduct transactions under the law as expected. Businesses just starting or operating remotely can be GST compliant using a virtual office for GST registration as a point of reference.
Financial De-risking Through Verified Data
Verified evidence of financial performance will provide investors with the necessary confidence to invest in a company, while GST-related financial information provides clarity for all future financial reporting to investors.
A. Revenue Validation and Integrity
Risk Mitigation:
The filing requirements for GST, such as GSTR-1 and GSTR-3B, create a method for documenting sales made by a business through the use of verified sales records created by the government. By documenting sales in the form of tax returns, businesses will have access to actual, documented records of all their business activities, making it impossible for businesses to misrepresent their financial performance. As soon as a business completes its initial GST registration and has a regular filing schedule, each invoice, transaction, and revenue entry will become a part of the official filing system and will be auditable.
Investor Benefit:
By providing a level of transparency that will dramatically cut down the possibility that inflated, fabricated or inconsistent revenue claims will be made, it greatly reduces the overall risk to investors performing diligence on an investment opportunity. By having access to GST data that investors can cross-reference against pitch decks and financial statements, they can more accurately validate the growth of the business and identify any irregularities or discrepancies, thus establishing the credibility of the business. This transparency also creates an environment where VCs and investors have confidence in the reliability of the underlying financials and allows them to make informed decisions about whether to invest in the company.
B. Input Tax Credit (ITC) Maximization
Taxation efficiency is a key indicator of good financial practices, and the availability of the Input Tax Credit will instil confidence in investors that the business is maximising its expenses from inception.
Risk Mitigation:
Companies that complete the GST registration procedure become eligible to claim the Input Tax Credit on key operational expenses such as software tools, office rent, professional services and marketing activities. This will eliminate tax leakage that would have otherwise occurred and ensure that the financial records of the business remain in compliance with applicable regulations.
Investor Benefit:
The company’s net profit hass increased and returns on capital invested have improved to make it more attractive to long-term focused investors looking for growth and financial stability.
C. Clean Accounting Records
Compliance with GST ensures that every transaction is recorded and can be traced, therefore ensuring compliance with regulatory authorities and establishing a framework for maintaining the company’s financial data.
Risk Mitigation:
By filing regularly under GST, the company will be required to have accurate books of accounts that limit the possibility of mismatched invoices, missing liabilities and unreported transactions, providing a reliable financial history that represents true value and is compliant with legal requirements.
Investor Benefit:
An investor will be able to perform their due diligence in a timely, clear and less risky manner due to the clean audit-ready records that are maintained, and therefore, the greater potential for the long-term value of the company.
Operational and Scalability Risk Reduction
To scale a business successfully, you must have solid operating systems in place, while GST compliance helps mitigate many of the avoidable risk elements associated with operating a business. Completing your new GST registration gives your company a strong foundation of transparency and structure in which to model growth, establish clear financial statements, and build investor confidence.
With the completion of your GST registration, Inter-State Trading Readiness is much easier, so any company can now operate in multiple states without incurring additional taxes and other barriers to operating in those states. This eliminates the potential for delays or disputes regarding invoicing and ensures smooth movement of product or service as the company expands.
Becoming GST-registered significantly expands your credibility and access to B2B customers because most companies and procurement departments will only work with a vendor who is GST-compliant, thereby providing a pathway to access larger contracts, establish long-term partnerships, and better-organised vendor ecosystems.
E-commerce compliance also happens with GST registration when using e-commerce platforms, as these platforms require their sellers to go through a GST verification before listing products for sale, processing orders, and receiving payment. It is through these types of platforms that businesses can enter the larger e-commerce marketplace confidently and grow without interruption from operations.
Legal and Statutory Compliance Shield
One of the major benefits of compliance with GST is the strong legal base in which an investor-backed business operates. Essentially, having completed the GST registration process provides the owner with a protective umbrella that shields them. Additionally, completing the GST registration process early helps establish a structure for businesses to accurately comply with their regulatory requirements and avoid future complications regarding compliance.
Avoiding litigation and penalties will be much less cumbersome, as businesses that file timely GST returns can avoid incurring interest charges, receiving show-cause notices, or experiencing tax disputes. This will help protect the company from unnecessary litigation and also keep the business insulated from disruptions related to non-compliance.
The simplification of due diligence will be greatly enhanced due to the ability to quickly verify an investor’s financial transaction data through GST information, which makes it much easier for auditors, venture capitalists (VCs), and legal teams to cross-check the records of a business and avoid risk, thereby speeding up their funding decisions.
A business that is compliant with GST and maintains a clean record will enhance the readiness of its exit strategy, as the exit process (mergers, acquisitions, and share transfers) will be done in a very seamless manner since the business will not have any hidden liabilities or outstanding statutory issues. Therefore, an investor will be confident that the business will be able to finalize exits without any complications.
Conclusion
The essence of obtaining a new GST registration is not just limited to compliance; it’s a representation that a business has been formalised (i.e., through registration), it has its finances accurately managed, and it has been prepared for growth by creating an environment for investment to occur. Moreover, when investors have confidence that the business has a solid structure and reliability, they can better assess whether or not to invest in the business and what to expect when operating under a transparent regulatory structure.
The practical and real value of GST compliance comes from three things that de-risk a potential investment in the business: (1) verified financial statements that contain government-supported and reliable data, (2) streamlined operations that allow for seamless growth and expansion between businesses (B2B), between states, and into the e-assessments, and (3) legislative protections that mitigate the risks of incurring penalties, disputes, or experienced operational setbacks resulting from non-compliance with the law.
In conclusion, these three components provide a safety net for investors evaluating the long-term potential and financial strength of the business being registered for GST.
