Implication of GST on SMEs in India

The Micro, Small and Medium Enterprises (MSMEs) sector in India are the backbone of the Indian Economy and are important for financial growth of the country, as they contribute largely to the country’s Gross Domestic Product (GDP), Employment Generation, and Exports. The sector represents about 40% of exports and contributes about 1/3rd to India's GDP. About 90% of the total industrial units of the country are from the above sector which is providing employment to around 8 crore people. Today, there are more than 90 million MSMEs in the country out of which around 15 million MSMEs are under Goods & Services Tax (GST).

Although GST has wiped out the cascading taxes and has thus become widely popular, however, small businesses struggle with ignorance of online systems and compliances pertaining to GST. Post-independence, it is the biggest tax reform and although there are challenges for businesses on some aspects but it can offer many positive impacts if understood and implemented in the right context.

Reasons why small businesses are struggling to cope with the compliances

Financial Limitations – It is no secret that small businesses do not have enough money to spend on accounting resources. If you have a small business, make sure you have the right accounting systems or you might accidentally make mistakes and end up paying more in taxes.

Lack of professional expertise - The lack of professional expertise on the part of small businesses in their respective fields means that they have difficulty complying with GST regulations. To seek expertise, they require funds which they do not have and as a result, GST becomes much more difficult for small companies to cope up with.

Impact of GST compliance

Single registration - With a single GST registration, you are exempt from registering separately for applicable taxes. In addition to eliminating paperwork, businesses need only be registered for one tax system instead of different systems across states. However, if annual turnover of the small enterprise exceeds the prescribed limit, then GST registration is required in every state where it has business activity.

Access to a common national market - Small businesses will have a more level playing field with larger businesses under the new taxes. This new tax system will be a boon for small companies and businesses who want to expand their national foothold with minimal investment. The GST regime has resulted in creation of seamless markets across India.

Exemption to very small business owners - The GST Council has set a threshold limit of Rs.20 lakhs per annum turnover enterprises who need registration under the GST system, making it less burdensome on small businesses. Certain exceptions apply - such as inter-state supplies and service providers, who are not subject to the threshold limit.

Benefit under composite scheme – Composite Scheme is a scheme whereby businesses pay GST at a fixed rate of turnover. For small businesses with an annual turnover of up to Rs.1.5 crore (Rs.75 lakhs in Special Category States), the GST Council has offered an alternative in the form of the Composite Scheme. Under this scheme, businesses can register for a flat tax of 1-5%, regardless of their annual turnover. The scheme has benefits of limited tax liability and lesser compliance in terms of returns, maintenance of books etc.

GST Registration can bestow tremendous benefits on Small enterprises viz. securing loans and making overall operations hassle-free and progressive. Loan portals have been setup whereby easy access to credit for MSMEs is available. In-principle approval of loans up to Rs. 1 crore through the portal is granted. Portal link is through GST portal. Micro, Small and Medium Enterprises (MSMEs) having valid GSTN number and Udyog Aadhar Number will get easier access to finance at reduced cost by these measures.