Impact of GST On Small Business Enterprises

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Impact of GST On Small Business Enterprises

We are stepping into the sixth year as the implementation of Goods and Service Tax (GST) was on 01st July 2017. 

Since its inception, small and medium business enterprises (SMEs) have been engrossed in understanding the potential effects of GST on their business. The small business owners had gone through a lot in this span of five years, from the struggle of adapting to the new GST tax regime to handle the unexpected pandemic lockdowns and their aftermath effects. It wasn't a smooth journey for many in the industry.

However, the difficulties MSMEs face in adapting to the new GST regime have withered over time.

MSME is a primary driver of India's economic progress. There are more than 6.3 lakh formal and informal Indian MSMEs that contribute to 50% of our exports, 30% of our GDP, almost 45% of manufacturing output, and employment opportunities for around 12 crore skilled and semi-skilled people across urban and rural demographics. 

It won't even be an exaggeration, even if we address the small business owners as the chief development driver of the country.

Even though MSMEs propel economic growth through entrepreneurship, employment opportunities, and revenue collection. It is also the most vulnerable sector in the economy. So, it is important to examine and understand the impact of the GST regime on small and medium enterprises (SMEs). 

In this article, we will understand the positive and negative impact of GST on this sector.

Before we get started, let us clarify the MSMEs'classifications.

Classification of MSMEs:

  • Business Type
  • Investment Capital
  • Gross Turnover
  • Micro Enterprise
  • Up to 1 crore
  • Up to 5 crores
  • Small Enterprise
  • Above 1 crore and up to  10 crores
  • Above 5 crores and up to 50 crores
  • Medium Enterprise 
  • Above 10 crores and up to 50 crores
  • Above 50 crores and up to 250 crores

Now that the business classification is out of our way, let's dive into the impact of GST on small business enterprises.

Positive Impact of GST on SMEs:

Simple & Straightforward Taxation Process
GST addresses the cascading effect of multiple taxes under the erstwhile system. It eliminated the complications of overlap between central taxes and state taxes. Now, the taxation for goods and services is uniform across the country.

Earlier, we used indirect taxes like service tax, central excise duty, value-added tax (VAT), luxury tax, octroi, etc. But, now the GST is a single tax that will subsume all the other indirect taxes. It will be levied at every step of the production-distribution chain. It means that GST will eliminate the cascading effect of multiple taxes. The final consumer will bear only the GST charged by the last dealer in the supply chain.

Starting A Business Become Easier
Unlike the previous tax system, GST enables uniform indirect tax across all the states. Business owners in multiple states can apply online and easily obtain a GST Identification Number (GSTIN). No need to visit any government office to complete the registration process.

In the previous tax regime, a business owner had to get VAT registration in each state and a different tax system based on the turnover limit. Keeping a tab on different taxation of each state is a difficult task for any business, especially in the case of SMEs. It creates excess complications in running a business and pushing for expansion.

More than that, it also adds to the procedural fees that heavily burden business owners. It indirectly discourages entrepreneurship and inter-state business expansion.

These issues are addressed in the current GST regime and enable businesses to easily access a wider customer base.

Increased Threshold Limit For Businesses

Considering the demands of the MSME sector, the 32nd GST council had increased the threshold limit for GST registration.

Currently, for the normal category states, the new threshold limit for GST registration on the sale of goods is above Rs.40 lakhs. 
For the special category states, the new threshold limit for GST registration on the sale of goods is above Rs.20 lakhs.

It's applicable from 01st April 2019.

This increase in threshold limit will relieve the small business owners from the stress of tax burden and the compliance procedures that accompany it.

Most importantly, the MSMEs will have more working capital to grow their business instead of paying a chunk of their earnings towards tax in the future.

No change in the threshold limit for the service providers. If you are a service provider, get GST registration if the aggregate turnover exceeds Rs.20 lakh and Rs. 10 lakh for normal and special category states, respectively.

Elimination of distinction between goods and services

In the previous tax system, there was a distinction between both goods and services. So, the business owners had to calculate VAT and service taxes individually. It is very much a burden to work on the tax compliance requirement.

The GST has eliminated the distinction and made sure tax will be calculated at the final total, not at the individual product or service basis. 

GST makes invoicing simpler and more business-friendly. 

Improved MSME Market Expansion 

In the earlier tax regime, when big corporations and other businesses wanted to be a business partnership and procure goods from the MSMEs, they had to do it within the locality to reduce the overhead costs. 
It limits the MSMEs potential to reach and acquire new customers. It hampers their growth tremendously because they would need to bear the interstate sales tax burden if they want to do the business. 

With the implementation of GST, the MSME can transfer irrespective of the location of the buyer and seller. It will allow MSMEs to expand and reach across the borders.

Lower Logistics Cost

Logistics being a key component of any business, hassle-free transportation is a must to facilitate the faster movement of goods.
The GST regime enables hassle-free transportation between states by eliminating border checkpoints, paperwork, and entry taxes at inter-state borders.

Under the GST, logistics operators must fill IGST, a combination of CGST and SGST, with the central government. 

With the new GST, the borders between the states blur, reducing the logistics cost and delays in the transportation of goods.

Negative Impact of GST on MSMEs:

Multiple registrations for Pan-India businesses
Though the GST taxation is digitized for convenience and promises a greater good to the economy, the small business owners who aren't used to working online may still find difficulty in adapting to the transition from the old tax regime to the GST. 
File GST Returns On Time:
Under the new GST, the periodic compliance requirement is high. A regular business supplying goods and services must file two monthly returns (GSTR-1 and GSTR-3B) and one return (GSTR-9) annually.

Businesses will also be penalized for the fine of Rs.50/day for late filing of GSTR-3B (In case of Nil Return, Rs.20/day), and compliance rating will get affected in the GSTN portal.

Mandatory GST Registration for e-commerce suppliers and operators
Any business carrying out trade related to e-commerce should register under the GST network, irrespective of their annual turnover. 

It is to be noted that there is no threshold limit exemption for the e-commerce business. 

The major critical point here is the difference in approach towards offline and online businesses. 

Every online business should adhere to mandatory GST registration hampers the SMEs from stepping into the digital business space.

As mentioned above, GST simplifies the business tax filing. It also increases the competition between SMEs by making it a level playing field for all businesses. 

The pain point for the SMEs is not paying taxes; they need to use their working capital to ensure compliance. The big businesses can easily form a team to look after their GST compliance, but it isn't possible with the MSMEs.

We assist you in registering for GST and filing your returns. Our tax experts understand the GST system inside out, so you can be assured that your company is in safe hands.

Contact us today to get started!

Author : Dharani

Date     : 12-Jul-2022