May 22, 2018

One year of GST and its impact on the MSME sector

This July 1st being the first anniversary of the Goods and Service Tax (GST) has been declared as annual ‘GST Day’ by the government. After the initial teething troubles, things are now settling down with lesser downtime on GSTN system and broad improvement in general.

The completion of one year of GST was marked by some very interesting numbers released by the government.

  • Monthly GST collections have now breached the Rs 1 lakh crore mark showing improved overall tax collections

  • GST registration base now stands at 1.12 crore GST registered taxpayers as compared to 63.76 lakhs being pre-GST combined taxpayer base under Excise, Service Tax and VAT. Up by 48.38 lakhs or 75%, showing significant improvement in the overall tax base in the first year of implementation itself, signaling formalisation of the economy

  • As many as 12 crore returns have been filed and 380 invoices have been processed through the GST network

  • The number of e-way bills generated till date has crossed 10 crores, marking a significant dent in the unorganized trade activity in India

In the light of the above, we would like to analyse the impact of GST on the Micro, Small and Medium Enterprises (MSME), which contributes approximately 37% of India’s GDP and considered to be the backbone of the Indian economy. After agriculture, the MSME sector is the second largest employment-generation sector in India.

Positive impacts

  • One India-one tax – Union Minister Piyush Goyal recently tweeted that earlier tax system was a complicated system with 17 different types of taxes and GST is a boon for businesses with one tax. Earlier, MSMEs had to undergo compliances under Excise, Service Tax and VAT. Every state had different VAT laws and doing business in multiple states involved adhering to different VAT laws, compliance through different portals and answering to different authorities. All that has been unified into a single robust online system. Despite several returns under GST and separate state-specific registrations and compliances, the unification is evident, and this has now started showing benefits to the MSMEs too. This is helping MSMEs dealing in different taxes earlier. GST is also aiding persons being covered under dual taxes. For instance, restaurants were covered under both VAT and Service Tax, printers were covered under Excise, VAT and Service tax.

  • Formalisation leading to benefits to MSMEs – More and more businesses moving in the formal economy is evident from the significant increase in the GST taxpayer base. Moving to the formal economy will bring in more visibility and hence more opportunities for MSMEs. For instance, new GST registrations have also increased MSMEs credit uptake. The number of MSMEs seeking credit for the first time increased significantly to about four lakhs in July-December 2017, as compared to January-June 2017.

  • Border glitches and delays have come down significantly – Due to different VAT laws in different states and rampant Inspector Raj at borders, inter-state transactions were a pain for MSMEs. CST charged on inter-state transactions were an additional cost with no input-credit available and thousands of productive hours were wasted at state border crossings. A complete online system under GST and removal of border barriers is saving a lot of time and money both for MSMEs and transporters. Cost and time of doing inter-state transactions have come down significantly.

  • State-specific MSMEs have access to larger markets – With significant issues with inter-state transactions, many MSMEs were limited to the local market. Large procurements were also localised to fulfill local demand only. Now, MSMEs are able to supply goods across state borders easily. Things have also been simplified for e-commerce suppliers and given them larger market access.

  • Starting up becomes easy - Starting up has become simple with one-stop online GST registration for MSMEs wanting to do business anywhere in the country.

  • Seamless input credit and avoidance of double taxes – Earlier input of excise was not available for service providers. The VAT of different states was also not available for input credit. The input of CST was not available. For capital goods, only 50% credit was available in the first year. Now, all these issues have been done away with giving more benefits to MSMEs at large.

Negative impacts

  • Impact of lower threshold limit – Threshold limit for excise registrations for small manufacturer was Rs 1.5 crore and for Service Tax it was Rs 9 lakhs and for most VAT registrations the limit was in the range of Rs 5-15 lakhs. GST registration threshold of Rs 20 lakhs have benefitted many but have also impacted small manufacturers.

  • Multiple returns and compliance cost – The initial GST returns and comprehensive requirements to be reported in the return, makes accounting and compliance complicated for MSMEs and has increased their compliance cost and time. However, a trade-off between increased compliance cost and benefit accruing from being part of formal economy and banking system must be analysed on a long-term perspective. Benefits of available credit lines, the scope of expansion, and a larger available market cannot be totally agreed.

Way forward

As stated by Finance Secretary Hasmukh Adhia in recent interviews on the completion of one year of GST, the focus of the government is now to make better GST user interface, simplification of returns and compliances, and with time reducing the number of tax rates (currently GST has five different rates). This should be the overall goal and objective of the government.

The government has taken steps like deferment of GSTR 2 & 3, deferment of GST under reverse charge on supplies from unregistered dealers etc, for ease of users and small and medium enterprises and taxpayers. However, more must be done here and implementation on the ground is the key in the short term.

On the longer run, the idea should be to make GST flawless. With the federal constitutional structure wherein state governments and central government have right to tax and collect revenue on different items, GST still has the Central GST, State GST, and Integrated GST component.

Things like petrol, diesel, potable alcohol, and real estate registrations are still out of GST and are being double taxed. Input tax credits are not seamless across state taxes. These need more work from the policy perspective and creating a consensus among the central government and all the state governments.

Alok Patnia

Alok Patnia is the Managing Partner and Founder at Taxmantra Global Network Firms. Taxmantra is a global tax and legal firm with its presence in India, Singapore, and USA involved in setting up business, cross border tax and legal compliance with fund raise assistance.
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