Small and Medium Enterprises (SMEs) have been considered as the primary growth driver of the Indian economy for decades. It is further evident from the fact that today we have around 3 million SMEs in India contributing almost 50% of the industrial output and 42% of India’s total export. For a developing country like India and its demographic diversity, SMEs have emerged as the leading employment-generating sector and has provided balanced development across sectors
Opportunities and challenges for SMEs:
- GST is going to widen the taxpayer base: Earlier, any manufacturer with a turnover of Rs 1.5 crore or less was not required to comply with the rules of excise duty. However, with the merging of all State and Central level taxes into the ambit of GST, any manufacturer with a turnover of Rs 20 lakh (others) /10Lakh (North Eastern States) or more will have to comply with GST and its procedures.
- All the compliance procedures through online: Registration, Payments, Refunds and Returns will now be carried out through online portals only and thus SMEs need not worry about interacting with department officers for carrying out these compliances, which are considered as a headache in the current tax regime.
Positive Impact of GST on SMEs:
- Reduction of the tax burden on new business: As per the present indirect tax structure, businesses with a turnover of over 5 lakh rupees (10 lakh in some states) need to pay a VAT registration fee. The central government has increased the basic exemption limit to 20 lakhs, which is a 75 percent relaxation in limit for small traders and manufacturers.
- Improved logistics and faster delivery of services: Under the GST bill, no entry tax will be charged for goods manufactured or sold in any part of India. As a result, delivery of goods at interstate points and toll check posts will be expedited. According to an estimate, the logistics cost for manufacturers of bulk goods will get reduced significantly by about 20%. This is expected to boost ecommerce across the nation.
- Elimination of distinction between goods and services: GST ensures that there is no ambiguity between goods and services. This will simplify various legal proceedings related to the packaged products. As a result, there will no longer be a distinction between the material and the service component, which will greatly reduce tax evasion.
- Ease of starting business: A business having operations across different state needs VAT registration. Different tax rules in different states only add to the complications and incur high procedural fees. GST enables a centralized registration that will make starting a business easier and the consequent expansion an added advantage for SMEs
Challenges for SMEs:
- No tax differentiation for luxury items and services: The tax neutrality will not differentiate luxury goods and normal goods. Currently the state and central government levy higher taxes on luxury goods and services. Under GST implementation, all goods and services will have to pay the same tax which will lead to rich becoming richer and poor becoming poorer. It is not an ideal situation for MSMEs competing against large businesses.
- Selective tax levying: GST will not be applicable to Alcoholic liquor for human consumption and Petroleum based businesses, which creates further gap and does not support the ‘unified market’ ideology of GST.
- The burden of higher tax rate for Service Provider: Presently Service Tax rate is 15%. GST rate will be around 18%. The scenario in the service sector will further be impacted as the concept of Centralized Registration has been done away with and each unit in different states will have to take separate registration.
- Excess Working Capital Requirement: Taxation of stock transfer will primarily impact the working capital requirements. The quantum of impact will vary depending on stock turnaround time at warehouse, credit cycle to customer, quantum of stock transfer, etc. Higher amount of Capital Requirement will increase interest cost which ultimately will increase the price of Finished Goods.
- Realignment of Purchase and Supply Chain: Under GST credit will be not be available to a compliant company if the vendor from whom MSME is purchasing goods does not show the same in his return. Thus sourcing strategies will change on account of GST credit mechanism. Also there will be re-consideration of Supply Chain on account of taxation of Stock Transfers.
- Decrease in duty limits: Under the present excise tax regime, no duty is paid by a manufacturer with a gross turnover of less than Rs 1.50 crores. However, after GST implementation, this exemption limit would get considerably lowered to Rs 20 lakhs. Consequently, a large number of SMEs and start-ups would come under the purview of the GST
⇒ Increase in tax rate for small scale service from 15% to 18 to 20%.
⇒ Reduction of tax burden on new business.
⇒ Improved logistics and faster delivery of service.
⇒ Classification between services and good eliminated.
⇒ Working capital requirements increase.