GST for small businesses: A mixed bag

“Our strength lies in small businesses, and they will feel more secure with GST.”
 Shri. Narendra Modi, Hon’ble Prime Minister

The backbone of the country, Indian Small and Medium Enterprises (“SME”) have emerged as a highly vibrant and dynamic sector of the Indian economy over the last five decades. The SME sector consists of approximately 36 million units and contributes about 8 percent to GDP through more than 6,000 products. It also contributes 45 percent to the country’s total manufacturing output and 40 percent to exports.

Flourishing amidst a challenging environment, the SME sector of India is in a state of flux over the impending Goods and Services Tax (“GST”), the first-of-its-kind mammoth indirect tax reform. GST, which will consolidate multiple layers of indirect taxation, is going to be one of the most significant indirect tax reforms in the fiscal history of India. The implementation of GST will help to create a common national market by removing interstate barriers and reducing the cascading effect of taxes on the cost and price of goods and services.

GST will bring a bouquet of benefits to the country as a whole. At the same time, it raises concerns for the Micro, Small and Medium enterprises (MSME) sector, specifically with respect to the importance of IT to GST compliance, and the much-discussed lower thresholds and minimal exemptions.

• Multiplicity of taxes will go away under the GST regime, making it easier to do business in India. With the major 17 indirect taxes, , excise duty, service tax, VAT, CST, luxury tax, entry tax, etc., getting subsumed in GST, compliance requirements should certainly decrease. Thus, the reluctance of businesses to register and deal with states’ varying provisions should fade away with GST.
• GST should eliminate time-consuming border tax procedures and toll check posts. This will reduce logistics costs and encourage the supply of goods across borders.
• Comparatively, the flow of input tax credits throughout the supply chain should be seamless, subject as it is to the periodical compliance by the supplier in filling of returns, payment of tax, etc.
• GST will allow flexibility in the transfer of goods between states. The existing cascading effect of VAT/Excise that’s calculated on non-cenvatable Excise & CST would be eliminated. Thus, MSMEs that take the brunt of the Excise and CST burden on interstate sales — owing to lack of infrastructure to open branches in different states — should benefit from cost savings and gain a much desired competitive edge.
• GST will help bring transparency to the tax collection system, so evading taxes will be tougher. This will help create a level playing field for organized and unorganized sectors by curbing the scope of various tax evasion practices.

• A lower threshold limit seems to a major concern for the SME & MSME sectors, especially the manufacturers. The threshold limits for registration under GST are INR 20 lakhs for states other than North Eastern States, which include Sikkim, and INR 10 lakhs for North Eastern States (including Sikkim). But remember, the SME Manufacturers with a turnover up to Rs. 1.5 crore who claim an excise exemption are subject VAT/CST under the various state laws.
• The proposed structure of the Composition Scheme under GST, as per Section 8 of Model GST Law, covers only a narrow base of taxpayers, and services suppliers, the interstate outward supply of goods, and reverse charge liabilities are specifically excluded. Furthermore, the threshold limit for the composition scheme is INR 50 lakhs, which is based on aggregate turnover and includes all sorts of supply, i.e., taxable, exempt supplies, exports, etc., that will be calculated on a PAN India basis.
• SME & MSMEs will have to adapt to an electronic compliance system, registering and filing returns online. This will initially cause teething problems and enhance the compliance cost.
• Under the GST regime, interstate stock transfer or self supplies will be subject to GST; this will impact the working capital requirement, which will increase the interest cost and ultimately impact pricing policies.
• Aligning IT systems with new processes could be another challenge, along with understanding nitty-gritties of GST Law.

Mr. N.R. Narayana Murthy aptly stated, “Every country has to recognize its competitive advantage and liberate its strengths to be a partner in trade and that’s the only way you can survive and succeed. India is expected to emerge as one of the leading economies in the world over the next decade in the light of a positive political and economic scenario. The SME & MSME segment is expected to play a significant role in the emergence of the Indian economy, and has the potential to emerge as a backbone for this economy and act as an engine for growth, given the right set of support and enabling framework.”

Undoubtedly, positive and negatives are part and parcel of every tax reform. But, considering the wide extended base of SME & MSMEs in the country, finalizing Model GST Law and ensuring proper training to the sector will be crucial.

Thanks to CA Bimal Jain for this blog contribution.

For GST readiness of your SME or MSME, please fill Avalara’s contact us form here https://www.avalara.com/in/products/gst-returns-filing/

Disclaimer: This blog is made available by Avalara for educational purposes only as well as to give you general information, not to provide specific legal or tax advice. The blog should not be used as a substitute for competent legal or tax advice from a licensed professional in your state or country.