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How GST has become a Turning Point for SMEs in India?

30 Jul 2019

India, one of the biggest economies of the world is well-supported by the Small and Medium Enterprises that have strongly emerged as the primary growth drivers of the economy and major contributors to the country’s GDP.

Until a few years back, goods and services were taxed separately by different government departments which had complicated the taxation system not only for the taxpayers but also for tax administrators. Multiple layers of taxes had resulted in an unjustified tax burden that was being passed on to the end consumers. This also involved a lot of paperwork which made it easier for tax evaders to find loopholes and avoid paying their fair share.

In July 2017, after almost a decade long parliamentary hold-up, the Goods and Service Tax (GST) was implemented with the underlying principle of ‘One Nation-One Tax’ and with an intent of collecting indirect taxes across the value chain in a fair and transparent manner. 

The GST was introduced amidst a lot of speculation on the impact it would have on individuals, businesses, and on the Indian economic landscape. While it was welcomed by many, a few were not convinced by GST.

 Let’s understand the impact of GST on Small and Medium Enterprises.

Positive Impact of GST on Small Business in India

  • Reduced tax burden. One of the most obvious benefits of GST has been the cut-down in a slew of indirect taxes such as Service Tax, Excise, Entertainment Tax, Surcharge, Octroi, etc. With an exemption of GST for SMEs with turnover less than Rs. 20 lakhs, it has in-turn boosted the growth of SMEs in India.
  • Unifying the market. SMEs were majorly confined to their own state as previously CST was implemented on inter-state sales which raised the price of any locally manufactured good that was being sold in other states. GST with its ‘one nation, one tax’ structure has made it easier for SMEs to expand their customer base now as they can sell raw materials and finished products without having to worry about taxation and pricing.
  • Reduced logistical cost. GST has a veritable positive effect on logistics in the country with the abolishment of multiple entry taxes (that caused long queues at interstate toll booths) that has been instrumental in drastically reducing the transportation time, thus saving money for transporters and manufacturers alike. It also gave rise to a domino effect – as goods move quicker, they sell quicker, and hence increases the demand for new stock, thus boosting manufacturing.
  • Enhanced compliance. Simplification of taxation and regulatory measures has increased tax compliance in India by legitimizing enterprises and helping them gain benefits from access to new markets, increase in sales and revenues, improved credit rating, acquiring small business loans, etc. Furthermore, digitization of the taxation system has also reduced a primary detriment of the previous system – human intervention. Automation of GST certificates has brought transparency to the system and reduced instances of bureaucratic harassment.
  • Ease of starting new businesses. By doing away with different kinds of VAT registrations and varying taxation policies of states and centralizing the whole system GST has spurred the growth of start-ups and new businesses, ensuring fast execution and lower costs for starting a new venture. This, in turn, has freed up money for small business owners which can now be utilized for setting up and expanding their business.


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  • An upsurge in SME finance. Opening of new markets and new growth opportunities for small and medium businesses has led to a wider acceptance of alternative financing options from NBFCs. With customized business finance solutions, lower interest rates, quick turnaround time, quick disbursal of the loan amount, and digitization of services in tandem with GST, has spurred financial activity thus allowing small and medium enterprises to expand their business with ease.


Negative Impact of GST on Small Business in India

  • Credit system. Even though businesses worth less than Rs 20 lakh don’t require GST numbers, however, many companies do not want to deal with them as they cannot gain credits. A lot of small business lose out to big enterprises due to this. Moreover, one cannot claim the tax credit for the goods bought until relevant returns are filed. A delay causes penalty and reduces the compliance rating on the GSTN portal.
  • Filing GST returns is time-consuming. In addition to plummeting sales, business owners also need to file tax returns thrice every month which accounts to 36 returns in a fiscal year under GST. This requires taking a closer look at the books on a monthly basis which is arduous. The same time can be productively utilized for developing business and acquiring new clients.
  • Effect on working capital. Filing 36 returns every year has quadrupled the tax business needs to pay, but it has also triggered a jump in working capital needs as companies get GST input from their customers after a 90-day credit period. Businesses have therefore turned to taking loans to avoid defaulting on tax payments.
  • Multiple registrations for pan India businesses. A business is required to register online for GST in every state involved in its sales process, which means that if the business delivers good across 3 states, then they will have to register for GST in those 3 states to carry out business activities. Small business owners not used to working on computers find the transition uncomfortable as the entire registration process takes place online.
  • Need for technical expertise. GST requires one to periodically reconciling all transactions, upload invoices regularly, and file returns thrice every month, which has given rise to the need of an accountant well versed with GST. This adds to the burden of hiring another person for the job. Furthermore, separate books need to be maintained for every state involved in the supply of goods/services while also assessing the records of various entities involved in every single transaction. This makes it a tedious process.
  • Mandatory registration for eCommerce companies. Irrespective of the annual turnover, eCommerce companies should register under GST. Also, they are not eligible for threshold exemptions nor for the Composition Scheme.


GST: A perfect tool for SME Growth

Implementation of GST and the follow-up post that by the Indian government speaks volumes about their commitment to reform the Indian economy and regularize the financial system. Enhanced reporting and being under the tax net has added to the business’s credit-worthiness in the market, making GST an important asset for business owners. 

As the system matures and updations are made to improvise it, GST is here to revolutionize the way Indian SME industry operates, marking it as a definite turning point for them.

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