When the unified Indian tax regime, Goods and Services Tax (GST), came into existence it created a lot of buzz around the possible positive and negative impacts on the businesses. The country was divided into two groups: the first group led by the government and its supporters were doing everything to explain the benefits of GST while the other group, the opposition along with the critics were vehemently opposing GST by highlighting its demerits. While the jury is still out on the advantages and disadvantages of GST, the fact is that it has already been in force since July 2017. In the initial few months there was chaos among the business community since the decades old tax regime was replaced with a new one that was more technology-based.
GST has a wide ranging impact not only on the common masses but the small and medium enterprises (SMEs). In India, the small and medium businesses are the main growth drivers of the economy. It contributes nearly 30% to the GDP and 40% to the overall exports. The health of SMEs is the primary marker of the Indian economy. Therefore, it is topical and relevant to assess the impact of GST on SMEs especially from a long-term perspective as the four-plus years are still not good enough time to understand everything concerning the new tax regime.
Before delving deep into the impacts of GST on SMEs, first take a look at GST per se. GST has replaced the old indirect tax regime that include many different types of taxes, including central excise duty, duties of excise, cess, State VAT, central sales tax, purchase tax, luxury tax, and entertainment tax. Apart from these taxes there were some other indirect taxes in the form of additional duties of excise, additional duties of customs and special additional duties of customs.
GST Act was passed on March 29, 2017 and came into force on July 1, 2017. It replaced the old tax regime that levied many different indirect taxes that were eventually borne by the end consumers. GST is levied on the goods sold and services provided. It is a single tax law framed for the entire country. Clear Tax, a well-known tax service provider in India, explains GST as “Goods and Services Tax Law in India is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.” It explains the key terms, like ‘multi-stage’ and ‘destination-based’ to further elaborate GST. Multi-stage refers to all the stages that a product goes through before reaching in the hands of end consumers. The stages include, purchase of raw materials, production, warehousing of the finished goods, selling to the wholesalers, sale of products from wholesalers to retailers and from the retailers to the consumer. The GST is levied at all these stages, thus, making it multi-stage. Destination-based refers to the tax levied at the destination where the product is consumed. For instance, if a product is manufactured in Maharashtra and ended in the hands of someone in Karnataka. Since the GST is levied at the point of consumption the total tax will go to Karnataka instead of Maharashtra. Due to its simpler tax structure, GST has removed the cascading effects of old tax regime. In place of the different types of indirect taxes, GST has only three components, which are CGST, SGST and IGST. CGST or Central GST is the tax collected by the Central Government on sale within a state, for instance, transaction taking place within Rajasthan. SGST or State GST is collected by the state government on sale within a state, for instance, transaction taking place within Rajasthan. IGST or Inter-state GST is the tax collected by the Central Government on an inter-state sale, for instance, Rajasthan to Gujarat.
Impact of GST on SMEs
GST has both positive and negative impacts on SMEs. Let’s take a look at the pros and cons of GST for the SMEs.
A. Positive Impacts:
1. Ease in Launching New Business
Launching a new business has become easier with the new tax regime. In the previous tax regime, businesses had to register with the sales tax department of each state where they intended to do business. Since each state had separate tax rules, it made the process very complicated and tedious. The companies had to shell out money at different stages of VAT registration. With GST in place, the rules are same for all the states across the country. Now, businesses only have to acquire a GSTIN (GST Identification Number).
2. Concessions to Small Businesses
Under GST, smaller companies get concessions from the government. Companies with an annual turnover of less than 20 lakhs and operating within the state are not required to register for the GST.
3. Simpler Taxation Process
GST has made the taxation process simpler by removing the cascading effects of the old tax regime. It reduces the complications to companies due to the overlap of several taxes under the state and central governments in the previous tax regime. Since GST levies taxes on goods and services uniformly across India, the other indirect taxes are now subsumed under one tax law. Also, filing of returns and paying taxes under GST has become easier because of a dedicated GSTN portal.
4. Reduction of Bureaucratic Hassles
Under the previous taxation system, companies had to deal with authorities at multiple levels in accordance with the nature of their business. With the implementation of GST, companies now know that the relevant authorities are either the state or the Centre.
5. Protection from Fraud Due to Online Filing System
Filing returns is an online process under GST. This has reduced the hassles of manual filing under the previous tax system. Since the process is online now, it has drastically reduced the chances of fraud. Irregularities can be easily identified because of the increased accountability and transparency in the new taxation system.
6. Cost Reduction in Logistics and Supply
Under the old taxation system, businesses had to face a lot of hurdles in the logistics and transportation of goods. At interstate borders, vehicles had to wait in long queues for clearance. A lot of paperwork had to be done and paying of taxes at border checkpoints further added to the delay in transportation of goods. Under the new tax regime, a combined tax called IGST has replaced the Central Sales Tax (CST). IGST consists of CGST and SGST, and it is collected by the Central Government. The share of the tax proceeds are later issued to the state by the Central Government. Hence, this removed the need for taxing at the state entry points. This ensured faster movement of goods between states and increased the prospects of interstate business.
B. Negative Impacts:
1. Monthly Filing of Returns
GST has complicated the filing of returns. As many as 36 returns will have to be filed in a fiscal year. Under the new tax regime, GST returns will require a company to close its books every month which takes a lot of time. Any mistake in the filing of returns will result in accrual of steep penalty. If companies do not file the returns, they cannot claim refunds. If any returns filing is missed, companies will be charged Rs.100 per day. It will also dent the company’s compliance rating on the GSTN portal.
2. Multiple Registrations
Under GST, if the companies wish to sell their products in different states they will have to register online for GST in respective states. For instance, if a company wants to sell its product in 10 different states, it will have to register in all 10 states for doing business there. It poses a challenge to small enterprises that are not very receptive to working online. This change for such companies is significantly tricky and cumbersome.
3. Mandatory Registration for E-commerce Suppliers
Ecommerce businesses should obtain a GSTIN regardless of the annual turnover levels. Ecommerce businesses are not eligible for exemption of the threshold annual turnover. It also exempts the ecommerce from other benefits, such as Composition Scheme, available to companies engaged in offline businesses. Moreover, the ecommerce companies have to register for GST in every state for supplying goods.
GST has impacted SMEs in many different ways; some are positive and some are negative impacts. Since the tax regime is still fairly new, companies will take time to come to terms with the intricacies of it. GST is likely to increase the competition among the SMEs which is a good sign for the future of Indian economy. Competition will result in better product and services quality, innovation in marketing and sales, generation of new business ideas and overall change in the business environment. SMEs should learn to adapt to the new taxation system if they have to reduce the negative impacts of GST on their business. Conforming to the rules of the game is a smart thing to do rather than waiting for some drastic change in the future. When more and more businesses will adapt to the new playing conditions it will have an overall positive impact on the SMEs and will benefit the Indian economy immensely in the years to come.