GST registration hurdles: What freelancers and small businesses should know

The next step is the online registration process–uploading the documents and submitting the application and Aadhaar authentication through OTP.

However, the process may not be as simple as it sounds. GST (goods and services tax) officers often ask for additional allied registrations, such as shops and establishment licences, MSME Udyam certificates and no-objection certificates (NOC), among other things, though these are not mandated by law.

The process becomes tricky for sole proprietor businesses, such as freelancers or those running an inventory-free e-commerce platform, as they may not even qualify for some of these certificates or licences.

The added difficulty is that the GST registration-related standard operating procedures (SOP) are not well defined, and the on-ground practices followed vary from jurisdiction to jurisdiction, says Ranjeet Mahtani, partner, Dhruva Advisors. “Consequently, the documentation requirements vary depending on the GST officer handling the case.”

This means applicants can only find out what extra paperwork is needed once the officer raises an enquiry, causing unexpected delays.

“These practical challenges often lead to confusion, delays and additional compliance burdens,” said Vijaykumar Puri, partner at VPRP & Co LLP, Chartered Accountants.

Mint lists out some of the common additional compliance requirements asked across different states during GST registration.

Also Read: When do you have to register for GST as a professional landlord?

Residential or commercial address

In most cases, the objections are related to the address where business is being conducted.

The biggest challenge for proprietor businesses is working out of a residential address. In many cities, they are asked to get the shop & establishment licence even for a residential address even though it applies to commercial properties only.

“State laws vary in their interpretation of what constitutes a ‘shop’. For example, in Maharashtra, even businesses operating from home are often required to register under the Bombay Shops and Establishments Act. The law considers any commercial activity, even from a residence, as a “shop” and mandates registration,” said Puri. “As a result, GST officers frequently ask for this licence during registration, despite having no statutory authority to reject an application solely on this basis.”

In most states with shop and establishment licence requirements, only businesses with more than nine employees have to get one mandatorily. But if asked by a GST officer, a solopreneur also has to get one solely for the purpose of GST registration.

However, the good part is that when you fall below the nine employees criteria, you only have to get shop & establishment intimation, which can be obtained through a quick online process and doesn’t have to be renewed annually.

The other commonly asked document is a notarized consent letter from the landlord if the business is operating out of a rented accommodation. “In a rented place, if a formal lease agreement is not done, the law mandates submitting a consent letter from the landlord, but GST officers insist on getting it notarized as well even though it’s not required by law,” said Sambhav Daga, founder, Zaptax Advisors. This also applies when someone is living in their parent’s house.

In case of working out of a rented home, some GST officers may also request an NOC from the landlord or the housing society, which can be a time-consuming process.

Similarly, businesses operating from co-working spaces, shared offices or virtual addresses are often asked to provide an NOC from the local authority or property owner, said Dainik Gohel, managing partner at DGNM & Associates LLP.

Experts say the reason for all this added compliance is to cross-check the legitimacy of the business to combat fake registrations.

Mahtani said GST authorities have faced bogus registrations and fake input tax credit (ITC) claims. “To mitigate this, officers often demand additional documents to ensure that the applicant is genuinely conducting business at the registered location.”

In some cases, businesses are also asked to attach photographs of business premises including signage, workstations and entry points, to confirm that the business exists at the declared address, Mahtani added.

These added requirements, while justified in some cases, can delay the registration for several months for genuine business owners.

Also Read: Indian gig workers who offer mobility services deserve GST relief

Confusion over additional certificates

The other two commonly asked certificates during GST registration are MSME Udyam certificate and professional tax (PT) registration, both of which often create confusion.

An MSME Udyam certificate gives financial incentives to businesses, such as access to government schemes and trademark fee reductions. However, it’s completely optional, and many businesses choose not to opt for it, said Puri.

“Large corporations hesitate in working with small businesses with Udyam certificates as the former is bound by law to clear the latter’s payments within 45 days. So, business owners usually don’t get it or surrender once they have availed the financial incentives. But, GST officers often inquire about this certificate during the registration process and businesses feel pressured to obtain it to avoid delays,” he said.

PT registration, on the other hand, is mandatory for all businesses, but the type of registration depends on whether the business has employees or not. Gohel said a business has to get employee-based PT registration when it hires its first employee on payroll. “Employers are responsible for withholding professional tax from employees’ salaries and submitting it to the local municipal authority. However, for a business with no employees, they just get an enrolment certificate and submit the required annual amount,” he explained.

So, while each business has a PT registration, confusion arises when GST officers request an employee-based one from a proprietor’s business.

“In some states like Maharashtra and Karnataka, GST officers have been known to request PT registration details as part of their due diligence. This creates confusion for businesses, especially those with turnover below the PT registration threshold,” said Mahtani.

In such cases, Puri advises submitting the enrolment certificate to the GST officer and providing clarification as to why you don’t qualify for PT registration.

“Fake registrations are a menace, but these additional requirements create hurdles for genuine entrepreneurs, delaying their ability to start operations,” he said.

Also Read: Government steps up fight against fake GST registrations

Dropshipping businesses face toughest road

Dropshipping businesses face the most hurdles to getting GST registration. In dropshipping or inventory-free e-commerce businesses, goods are sold online without an inventory being held. Such businesses are essentially middlemen between the manufacturer and the customer.

“Businesses engaged solely in trading through a bill-to-ship model do not require a warehouse or godown since goods are shipped directly to customers. However, GST officers have been known to cancel registrations if no storage facility is declared, even when these businesses have an admin office to manage operations,” said Gohel.

Puri added: “The department completely ignores such modern business models even though they are quite common. The application often gets rejected on the premise that goods cannot be sold from a residence.”

The only two solutions to this: Either rent a godown or get a virtual office through platforms like WeWork, Innov8, MyHQ etc.

The first option may not be feasible for a small business. The second helps in GST registration, but comes at an annual cost of ₹20,000-25,000. Of course, businesses can cancel it post the registration and don’t have to pay the fee year after year.

“Even though the business still doesn’t have a godown, showing a commercial address is accepted,” said Puri.

Of late, in Gujarat, GST officers have been cancelling applications even with virtual office addresses, said Gohel.

“Fraudsters have started using virtual office/co-working space addresses to get the GST registration. The department has become strict regarding this in the last few months. Of course, it’s a good move to combat fake registrations, but genuine dropshipping businesses are suffering,” he said.

Daga, who handles GST registration for businesses in Chhattisgarh, said GST officers often reject applications without providing specific reasons. “The department should introduce penal consequences for officers who don’t approve registration without giving a specific reason.”

Puri believes these unwritten rules should be addressed through clear policy guidelines and better training for GST officers, which can significantly ease businesses’ compliance burden.