Small businesses are an important growth engine for the Indian economy. Across India, there are around 5 crore small and medium-sized businesses providing employment to 11 crore people contributing a third to India’s GDP (according to the 2016-17 annual report of the Ministry of Small and Medium Enterprises). Also, many small businesses are concerned about the sweeping nature of reforms that the ambitious tax regime seeks to bring in.
Therefore, it was worthwhile to bring to you a brief analysis of the impact of GST on small businesses.
- Businesses with a turnover of less than ₹20 lakh/₹10 lakh for North East states are kept outside the purview of GST, i.e., they need not register under the GST regime (other than those businesses making inter-state supplies or supplying via e-commerce).
- The GST Council addressed the concerns of small businesses by increasing the threshold of turnover for entities that can opt for the composition scheme to ₹75 lakh from ₹50 lakh proposed earlier. Now traders, manufacturers and restaurant owners with turnover below Rs. 75 lakh can opt for the composition scheme and pay taxes at 1, 2, and 5 percent rates, respectively. The composition scheme seeks to relieve small businesses from the complexity of GST. Instead of GST, they pay a percentage of their turnover as the tax.
- GST could propel the growth of Indian SME’s by promoting government led “Make in India” initiative. The multiple Central and State taxes like Excise Duty, Service Tax, VAT, CST will get subsumed under the GST regime, making it easier to do business in India.
- GST does not discriminate between goods and services and would tax both at a single flat rate, thereby making compliance easier. This will be a respite for businesses like restaurants, which fall under both sales and service taxation.
- The GST will be collected at each stage and computed using the input tax credit method, according to which taxes paid on the purchase of goods and services in other states could be claimed. This would allow GST-registered enterprises to cut costs as they would be able to claim their inter-state expenditure during the usual course of business.
- There will be an undisrupted interstate transfer of goods as the GST regime is all set to absorb octroi and entry tax in different states.
- Under the current tax scenario, inter-state or intra-state stock transfers are subject to levying of Excise Duty on the removal of goods and the same is not subject to VAT/ CST. This leaves the small businesses at a disadvantage as they lack the infrastructure to open branches in different states and rely on inter-state sales and purchases (rather than stock transfers) paying central sales tax. GST will create a level playing field between the small businesses and the big corporate enterprises by levying taxes on stock transfers as well.
- The exemption for small businesses with a turnover of less than ₹20 lakh is not all rosy. Registering under GST allows one to claim input tax credit, i.e, at the time of paying the GST collected on sales, one can offset the GST paid on inputs used for business. If a small business is unregistered, the businesses it supplies to will have to do compliance on its behalf. Some buyers may eventually switch to vendors who are registered under GST. Thus, it is advised that even the small businesses not exceeding the GST turnover threshold should get themselves registered.
- Opting for composition scheme will break the chain of seamless input tax credit as a composition dealer cannot levy and collect tax from customers and will not get any input tax credit on the tax paid by him on the inputs.
- Under the existing tax regime, no excise duty is paid by a manufacturer having a turnover of less than ₹1.50 crore. But post GST implementation, this exemption limit will get significantly lowered to ₹20 lakhs /₹10 lakhs for North East states mandating such earlier exempt manufacturers to come under the tax net.
- GST mandates technology intensive compliance. GST returns will have to be filed online, details of every B2B invoice will have to be submitted to GSTN, invoices must also be prepared in the format prescribed under GST rules. Additionally, the process of tax payment, tax credit, and refund of GST would be carried out electronically.The main problem here is that most of the small businesses have not invested in software and hardware. They still run the show on mental calculations and small account books. Many of them dread taking the digital leap. Digitizing transactions, connecting with the GSTN database, training employees or hiring an accountant will increase the compliance costs initially.
- The refund claims under the GST regime will also be processed on a merit basis, i.e, on the GST compliance rating of the registered taxpayer. The compliance score may be used to assess the credibility of a business. This can endanger the small businesses that face cash flow problems and delay payments. Since their problems will now be directly monitored by public, its buyers may play safe and avoid the specific company leading to further payment delays. This will require the small and medium taxpayers to spend a greater chunk of their revenue to deploy a dedicated resource to ensure timely GST compliance.
Small businesses may face some compliance issues initially but over time these problems will get ironed out. There will be more transparency in tax compliance in the times to come. In the long run, GST is expected to increase the efficiency and competitiveness among small businesses.
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