Impact of GST on small and medium enterprises (SME)

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

SMEs, contributing to 50% of industrial output, waited anxiously for the new tax regime. Let us see the benefits and challenges GST has brought for SMEs in the country. To precisely gauge the impact of GST on their operations, SMEs can leverage tools such as a GST Calculator.

Positive impact

1. Ease of starting a business.

SMEs have operations in various states of India that require VAT registration. Different tax rules prevailing in other states added to the complications. With centralised registration, GST has eased the process of starting a business and consequent expansion. With GST reducing the process of creating 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 the filing process.

Before GST, SMEs had to deal with the multiple taxation systems prevailing in the country. GST wiping out all the cascading taxes, the tax burden has been reduced to 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 cumbersome and tedious formalities.

With the government easing the processing of filing for SMEs with a turnover of Rs. 1.5 crores from monthly to quarterly, it would provide 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 the movement of goods across the nation, improving logistics. According to CRISIL, this will reduce logistic costs by approximately 20%.

With GST in place today, small business owners do not need to pay octroi taxes while sending goods from one state to another. This has expedited the 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 significant benefits of the new tax regime as this will simplify proceedings related to packaged products. With no distinction between 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 more straightforward invoicing.

Challenges

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 in 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 exporters enjoyed an upfront tax exemption on exported goods, this is not available in the current administration in the previous direct regime. Tax refund delays have blocked funds affecting competitiveness.

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

With the GST council monitoring the prevailing situation, any conclusion must consider the impact on the Indian economy. To comply with GST regulations and facilitate the seamless movement of goods, businesses need to generate eway bill.

Additional read: What SMEs need to know about GST