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Impact Of GST On Small And Medium Businesses - Benefits And Challenges

  • Highlights

  • GST has eased the process of starting a business and consequent expansion

  • GST has reduced the tax burden on over 60% of small dealers and traders

  • Under GST, there will be no entry tax on goods sold in any part of India

Implementation of the Goods and Services Tax (GST) will go down in history as the most defining tax reform celebrated in the Parliament. On the stroke of midnight on 1st July 2017, India Inc. got rid of multiple taxation systems.

SMEs, contributing to 50% of industrial output, waited anxiously for the new tax regime. Let's see the benefits and challenges GST has brought for SMEs in the country.

Positive Impact

1. Ease of Starting Business

SMEs having operations in various states of India required VAT registration. Different tax rules prevailing in different states only added to the complications. With a centralized registration, GST has eased the process of starting a business and consequent expansion. With GST easing the process of starting a business, we can see a spike in SME loans in India from an alternate class of lenders such as NBFCs.

2. Low Tax Burden and Ease in Filing Process

Prior GST, SMEs had to deal with multiple taxation systems prevailing in the country. With GST wiping out all the cascading taxes, it has reduced the tax burden on over 60% of small dealers and traders.

In its latest meeting, the GST Council hiked the threshold turnover for the composition scheme from Rs. 75 lakh to Rs. 1 crore. The scheme allows SMEs to pay 1-5% tax without going through the cumbersome and tedious formalities.

With the Government easing the processing of filing for SMEs with a turnover of Rs. 1.5 crore from monthly to quarterly, it would provide the much-needed relief to the sector.

Additional Read: How to file GST Returns

3. Improved Logistics

Under GST, there will be no entry tax on goods sold in any part of India. This will expedite movement of goods across the nation, thereby improving logistics. According to CRISIL, this will reduce logistics costs by approximately 20%.

With GST in place today, small business owners don't need to pay octroi taxes while sending goods from one state to another. This has expedited movement of goods manifold.

4. No Distinction Between Goods and Services

While earlier, businesses providing goods and services had to calculate VAT and service taxes individually, GST has eased the process by eliminating the ambiguity between the two.

This is one of the major benefits of the new tax regime as this will simplify proceedings related to packaged products. With no distinction the two, it will go a long way in reducing tax evasions. SMEs need to calculate tax only on the final product that will lead to simpler invoicing.

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1. Technological Difficulties


Not all SMEs in the country are technologically adept to handle the online GST mechanism. They are not aware of the practical details of GST filing online and have to outsource it. This will add to their registration cost.
Additionally, SMEs with an annual turnover of Rs. 20 lakh or more must GST registration in every state where they have business activities.

Lack of technological prudence on the part of most SMEs is bound to create some bottlenecks, in these cases.

2. Blockage of Working Capital

This is another challenge SMEs are facing with GST implementation. While in the previous indirect tax regime, exporters enjoyed upfront exemption of tax on exported goods, this is not available in the current regime. Tax refund delays has blocked funds affecting competitiveness.

Blockage of working capital can create liquidity crunch for SMEs. To overcome this, they need to apply for business loans to ensure their running costs aren’t impacted.

With the GST council monitoring the prevailing situation, any conclusion must take into consideration the impact on the Indian economy.

Additional Read: What SMEs need to know about GST

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