Impact of GST on Small and Medium Enterprises

The introduction of the GST will make Indian trade and industry more competitive both domestically as well as internationally, by offering the country an opportunity to embrace a modern consumption tax with a focus on increased efficiency, reduced cost of compliance and ease of administration along with a prospect of enhanced tax revenues.

The implementation of Goods and Services Tax (GST) is likely to cause a shift in market shares of industries across different sectors, leading to expansion of organised sectors in FY2018 at the cost of unorganised sectors. It is likely to reduce competitiveness of the unorganised sector, particularly the Small and Medium Enterprises (SME). The SME industry, which currently employs 120 million and contributes to 46% of the overall exports in the country, may face several short-term implementation challenges, including an increase in compliance costs and working capital requirements.

Though tax rates on goods will now be common across states, the multiplicity of slabs for goods and services would make tax structure complex for the SME industry. In contrast to the current regime, taxes would need to be remitted immediately upon supplying a good or service. Three returns would have to be filed monthly and an annual return would need to be filed, bringing the total number of filings to 37. Moreover, state-wise accounts would need to be maintained and various returns must match. Overall, the compliance burden would increase to an extent that may be particularly burdensome for the industry.

Under the current excise laws, no duty is required to be paid by a manufacturer having a turnover of less than ₹150 lakh. However, the threshold under GST is currently proposed to be around ₹25 lakh. An issue with this is that firms may under-report their yearly income to stay in the ₹20-50 lakh bracket so that a lower tax rate of 1-2 per cent applies to them. For instance, a family owned business worth around ₹90 lakh annual income may try to pass off as two separate businesses owned by family members, each worth ₹45 lakh, just to pay lower taxes under the GST.

Under GST, there can be a situation wherein most of the registered entities will only want to do deal with other registered entities because of reverse charge, in which the recipient of goods and services is liable to discharge tax. In case an unregistered dealer sells or supplies to a registered dealer, the registered dealer will have to pay GST on the supplied good or service. Hence, registered businesses would not want to deal with entities that are still in the informal sector.

Despite these issues, increased compliance under GST will benefit firms in the long run by providing them access to cheaper capital, lower input costs as well as regal recourse in case of disputes. As upstream compliance will improve, the number of such businesses under-reporting income will decline. Under the current regime, big corporate houses escape paying taxes on inter-state transfer and movement since they have logistics and infrastructure capabilities. Due to limited resources and infrastructure, SMEs aren’t able to do that. GST will bring parity between small players and big corporate houses as it now taxes stock transfers too.

The transition to GST will disrupt the working capital cycle of businesses in the initial phase and thus, easy liquidity in the system is essential for two to four months. Though the proposed regime holds a few concerns for SMEs in the manufacturing sector, in the light of seamless credits and resultant level-playing field in pricing vis-a-vis big corporate houses, the overall impact appears to be positive, specifically for SMEs in the B2B sector.



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