While the date of GST rollout is fast approaching, the impact of GST on various sectors of the country has become a never ending debate. While it’s too early to comprehend and speculate, yet the known impact has been a mixed bag of opportunities and challenges especially for the Small and Medium Enterprises (SMEs). The impact of GST on SMEs might result in affecting the profitability of these enterprises in the short run.
It’s been estimated that there are around five crore small and medium enterprises that form the backbone of the Indian economy. This sector further contributes to around 50% of the industrial output and around 42% of export earnings.
Even though the rates for Goods and Services have been declared yet the GST regime might take some quarter of months to stabilize.
A recent survey by CRISIL showed that a quarter of the SMEs has not yet registered for the GSTIN which is a mandatory requirement for GST Registration. This has been found mostly in the semi-urban and rural areas which could be due to a lack of GST awareness.
Impact of GST on SMEs – the Good Part
1) Ease of Starting Up – Any business that is operating in various states of the country needs to have a VAT registration under the state laws. With different indirect state laws prevalent in the country, it becomes a tedious and a complicated affair for any small business to start up. Also being compliant with all the necessary rules and regulations adds up being expensive too.
This scenario will change after GST implementation. The ease of doing business will increase due to a centralized registration under GST thus proving beneficial for SMEs.
2) Ease in Logistics – The GST regime would ensure timely delivery of goods and services through the various interstate checkpoints and toll booths. This is due to the elimination of entry tax that’s being charged in the current regime for the goods that are manufactured and sold.
3) Reduce in taxes – As per the existing norm of the indirect tax regime, businesses that have an annual turnover of more than Rs. 5 lakh ( Rs. 10 lakh for some states) have to pay for the registration fees towards ‘Value Added Tax’ (VAT). Under the GST regime, the above limit has been increased to Rs. 20 lakh thus providing a relief to the SMEs.
4) Make in India – In the present tax regime, only 50% of the input tax credit against the purchase of Capital Goods is available in the year of purchase and the balance amount in subsequent years. Under GST regime, the entire amount of input tax credit can be availed in the year of purchase itself. This will support “Make in India” campaign.
Impact of GST on SMEs – the Bad Part
1) Manufacturer woes – One of the major negative impact of GST on SMEs is the reduction in duty limits. As per the present tax regime, any manufacturer having a gross turnover of less than Rs. 1.50 crores are not required to pay any duty whereas, after GST rollout, this limit of exemption will be decreased to Rs. 20 lakhs.
As a result of this, a lot of startups and small businesses will come under the GST tax radar.
2) Production slowdown – The uncertainty of the tax compliances and transition in the initial stages of GST rollout could affect the supply chain and thus affect the profitability of the SMEs.
Another situation that could affect the profitability of SMEs is when the existing inventory is being sold at lesser prices before the GST rollout so as to prevent the stock from being stuck during the transition period.
3) Non-compliance – The small and medium enterprises might have to bear the burden of non-compliance by their unorganized sector i.e the suppliers. They might have to bear the additional brunt of input tax credit cost.
4) Cost of compliance – Under the GST regime, every taxpayer has to file a minimum of 37 returns in a financial year. This would result in adding up the costs for SMEs as they would need to deploy more resources in order to be compliant with the various tax laws and processes.
5) Selective tax levying – GST will not be applicable to Alcoholic liquor for human consumption and Petroleum based businesses, which creates a further gap and does not support the ‘unified market’ ideology of GST.
All in all, it’s too early to speculate and confirm the above-mentioned impacts of GST on SMEs. Any major change in law and processes will need some time to adjust and normalize. Overall it’s being expected that the positive aspects of the GST regime will offset the negative ones in the long run. Stay tuned to our blogs for more updates on the Goods and Services Tax.