Is GST gamechanger for MSMEs?

[Asha Latha]

Introduction-5 years of GST 

On 1st July 2017, the Government launched the Goods and Service Tax 2017 with a slogan “One Nation-One Tax”. GST has subsumed many indirect taxes such as Service Tax, Excise Duty and VAT etc with an intention to remove the cascading effect.

As every coin has two sides, even the GST has both Pros and Cons which has impacted many industries which includes Micro Small and Medium Enterprises even. The positives include the removal of cascading effect, elimination of compliance under different laws, transparency in the tax department, technology-based tax ecosystem. The negatives include the adoption of the new tax overnight as the government has not given sufficient time for the businesses to get ready, increased compliance for availing input tax credit, high cost of compliance.  

Various reforms of the Governments have resulted in consist growth of the Country in the past few years. Once of the major industries which has been the backbone of the accelerated growth are Micro Small and Medium Enterprises which are supporting the Multi-National Companies in achieving their desired results. The aim of this presentation is to give overview of MSME’s, the Pros and Cons of GST to MSME.

How MSMEs are defined? 

In India, the enterprises have been classified broadly into two categories:

1. Manufacturing entity and
2. Services providers

The present ceiling on investment in Plant, Machinery or Equipment* for classification is as under w.e.f. 01-07-2020:

Classification	Investment	Annual turnover
Micro	Not more than 1 Cr	Not more than 5 Cr
Small	Not more than 10 Cr	Not more than 50 Cr
Medium	Not more than 50 Cr	Not more than 250 Cr

* Fixed costs are obviously higher.

MSMEs are the essential constituents for the development of the Indian economy and are providing employment opportunities to around 100 million peoples. As of March 27, 2022, 79.27 lakh MSMEs had registered on the portal, of which 75.41 lakh were micro enterprises, 3.50 lakh were small enterprises, and 35,773 were medium businesses.

Measures taken for MSME sector under GST 

The Government has implemented various measures under GST for the development of MSMEs few of which are as follows:

• Increase in threshold limit for registration for supplier engaged exclusively in the supply of goods, from Rs. 20 Lakh to Rs.40 Lakh.
• Condition for payment within 180 days by the recipient for ITC availement helps the MSME suppliers for better working capital management.
• Composition scheme:

• Eligibility: A registered person having aggregate turnover in the preceding PY not exceeding Rs. 50 Lakhs.
• Increase in turnover threshold limit from Rs. 1 Crore to Rs.1.5 Crore.
• Supply of services-

• up to a value not exceeding 10% of turnover in the preceding FY, or Rs. 5 lakhs, whichever is higher can be supplied.
• by way of extending deposits, loans, or advances in so far as the consideration is represented by way of interest or discount, would not become ineligible supplies.

• Persons engaged in manufacture of Tobacco, Pan-Masala, Ice cream cannot opt for this scheme.
• Cannot collect any tax on the goods/services supplied by him and not eligible to avail ITC.

• Reduced rates: Goods predominantly manufactured and/or used in the unorganized MSME sector have been kept at lower rates or are exempt.

Products	Rate reduction
Electrical switches and wires, pipeline, plastic products, etc.	28%	18%
Jute and coir like handbags, ropes etc,	12%	5%
Fishing hooks	12%	5%

Positive impacts of GST on MSMEs 

• Simplified process for obtaining registration: Robust online registration process under GST ensures timely issuance of a certificate of registration and minimal interference with the department. It has enabled the honest way of doing business by way of E-way bill, E- invoice, online filing of returns, etc., which has discouraged bogus transactions and has helped honest MSMEs to survive.
• Improved accounting systems: Under GST, all enterprises must adopt digital ways to maintain accounting records, which improve the efficiency of MSME by maintaining proper accounting records which will also benefit customers, vendors, and financial institutions to grant loans.
• Reduction in logistic cost and time: There is no entry tax for transporting goods from one part to another part of the country. As a result, there is a faster movement of goods across the country without waiting at check posts, which has resulted in saving thousands of hours being wasted. According to a report by CRISIL, the logistics cost after GST had reduced by 20% approx. It is expected to boost ecommerce across the nation.

 Pitfalls for MSMEs 

• Denial of ITC to recipient due to default of supplier: Sec 16(2)(c) / Rule 36(4) disallows ITC to recipient of goods or services when the supplier fails to pay GST to the Government. The principle of “Nemo Punitur Pro Alieno Delicto” holds importance here, as law should not penalize someone for the fault of some other person. These provisions are to be liberalized in consonance with CENVAT Credit Rules, 2004 wherein credit can be taken immediately on receipt of any goods/invoice.
• Tax on advances: The time of supply of services mandates the payment of tax on receipt of advances. The provisions for ToS of service for small service providers should be amended so that GST in respect of advance money received by the service provider is taxed only at the time of providers and improve their working capital.
• Non-availability of composition scheme:

• Inter-State supplies are ineligible for the scheme.
• It is suggested that eligibility for composition scheme be based on the turnover during a particular financial year and be made available uniformly to all suppliers whether supplying goods or services or both anywhere in India.
• Alternatively, Sector specific composition schemes may be designed to cater to need of different sectors.

• Lack of centralized registration:

• The Finance Act, 1994 allowed the taxpayer to register from all over the country via central authority. However, taxpayers have to register under GST from their states and pay the central tax.
• Accounting needs to be maintained state-wise to reconcile taxation with accounts at state level.

• Tax on stock transfers and deemed supplies between distinct persons:

• MSME’s do not have adequate capacities, technology, manpower and cash flows to comply with this complex requirement of the law.
• Since GST is a destination-based consumption tax, it is suggested to consider at-least postponement of the taxation on stock transfers till they are actually sold or provide for refund of excess unutilized credit of stock transfer similar to exports. It will ease working capital and ease of tracking and payment of tax.

• Time limit for the return of Goods sent on sale or return basis is 6 months:

• If not approved within 6 months, then the invoice needs to be issued and the goods shall be deemed to have been supplied since ToS would arise.
• In various small-scale industries like ready-made garment industry, the norm is to send goods to Consignment Sales Agents (CSA) and customers on a “sale or return” basis and goods will be returned after the season is over.
• It is suggested to remove this provision and continue with the present practice of paying GST only once the actual supply takes place.

• Revision of returns not possible: Bonafide mistakes or errors cannot be rectified by the taxpayers by filing revised returns.
• Frequent changes in law: Starting from implementation of GST, the Government have issued more than 1000+ Notifications, 175+Circulars, 200+ amendments in Rules, 100+ amendments act. Updating with all the amendments and complying with the same has become next to impossible.     
• Irrelevant automated online notices without verification of facts: The tax department has been issuing notices merely based on the amounts reported in different returns without verification of actual facts which is leading to unnecessary litigation which can be avoided.
• Inward and outward reconciliation: The required reconciliation of outward and inward supplies by the prescribed due dates creates immense compliance burden for the small taxpayers, who have limited resources.
• Increased compliance: Two returns to be filed in each month for every state which requires the furnishing of details HSN code wise. Further, returns must be filed for TDS, ISD (if applicable). Also, one annual return with reconciliation statement is required on every registration number wise.

Way forward changes in GST for MSMEs

• Composition scheme-

• Inter-state supplies should be allowed
• ITC to be allowed to the composition dealer to the extent of output tax payable by him
• The rates of composition scheme should be rationalized to have a single rate of tax.

• Extending time limit for availing ITC:

• Credit can be claimed in respect of an invoice/debit note on or before 30^th November of succeeding year or before furnishing the relevant annual return, whichever is earlier.
• Imposing such a time limit may hamper the claim of credit in some genuine cases (e.g., delay in receipt of invoices).

• ITC relaxation: To provide relief, small businesses with a turnover of up to Rs 5 crore should be allowed to avail credit based on the invoices received. At a minimum, this relief may be provided for intra-state supply of goods and services.
• Job Work: The time limit for return of inputs and capital sent on job work can be extended.
• Refund by monthly provisional returns: The law provides relief to small taxpayers by allowing them to file quarterly returns. However, that taxpayers making zero-rated supplies such as exporters or suppliers to SEZ waiting for quarter- end to claim a refund of accumulated ITC. The delay in refund results in the blockage of working capital for small taxpayers. To help such taxpayers, small suppliers filing quarterly returns should be allowed to claim provisional refunds monthly.
• E-Way bills rules should be amended as-

• Exemption for small taxpayers with a turnover of up to Rs 1.5 crore or to taxpayers who are issuing E-invoices.
  • Alternatively, it should be restricted only to the inter-state supply of goods and services or

• Returns: A single quarterly return can be introduced so that the compliance burden would be reduced thereby the focus of the entrepreneur would be on business development and growth, instead of compliance aspects.
• A separate technical helpdesk can be introduced as it helps taxpayers to get the clarifications they require.
• Quality of service by GST portal to taxpayers:

• Due to software glitches, a delay in the crediting of input tax has been recorded which will affect the liquidity of the enterprises adversely.
• The technical problems need to be addressed.
• Service quality of government staff was identified as a key factor in determining the efficiency in tax collection, which leads to taxpayer satisfaction and compliance.
• The quality of services must satisfy taxpayers to encourage compliances made by them.

Conclusion

MSMEs are the engines of Indian economic development. They can foster entrepreneurship and generate more substantial employment opportunities at a low cost of capital. MSMEs also act as ancillary industries to large industries by contributing significantly to the inclusive industrial development of the country. One of the factors which will influence their growth is the taxation policy of a nation. To make Indian MSMEs more competitive in the globalized world, the need for taxation reforms is crucial.

The growth of a digitized economy would not be feasible without the engagement of MSMEs. Considering ecommerce has the potential to change smaller businesses via the use of technology, the government should take measures to minimize any compliance-related impediments.

As MSMEs become accustomed to a larger compliance climate, a better level of preparedness and discipline in conducting business will gradually be a part of their operation. With the Government’s commitment to strengthen MSMEs on all fronts including GST, it is expected that the current challenges will be stabilized, and the industry will gradually take a positive turn to fulfill the nation’s visions.

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Asha Latha Tasupalli

CA Semiqualified