GST for SMEs A mixed Verdict
While GST is a Welcome Change and in-principle Looks Attractive, SMEs Are Cautiously Optimistic About It… Though It Will Throw Up Many Opportunities, It Will Require More Compliance as Well.
Small and Medium Enterprises (SMEs) are the primary growth drivers of the Indian economy with more than three million SMEs operating in India, contributing to almost 50 percent of the industrial output and 42 percent of India’s total exports. A leading employment-generating sector, SMEs have provided balanced development across sectors. This has led the government to take several initiatives to help the sector to improve quality of manufacturing and gain a foothold in the international market; and the passing of the GST bill in one such move in this direction. More here.
GST: Advantage SMEs
- GREATER RELIEF FOR SMALLER BUSINESSES: As per the current tax structure, businesses with an annual turnover of over Rs 5 lakh need to pay a VAT registration fee. But with the basic exemption limit under GST being raised to Rs 20 lakh and Rs 10 lakh for special states, it will offer much relief to a large number of small dealers and traders.
- CLAIM ON EXPORTS: GST will also help boosting Indian exports in the international market, improving the balance of payments position. Exporters with clean record will be awarded immediate refund of 90 per cent of their claims arising on accounts of exports, within a week period of time.
- EASE OF STARTING BUSINESS: The elimination of multiple levies and creation of a single market with fewer tax rates and fewer tax exemptions will improve the ease of doing business. GST enables a centralised registration which could support new businesses by allowing them to register themselves on record.
- MARKET EXPANSION: SMEs had to limit their customers within states as they had to bear the ultimate burden of tax on interstate sales, thus reducing their customer base. GST will ease transfer of goods across states, irrespective of the location of the buyer and seller as it will cut down multiple taxes imposed by state and central government. This will allow startups, SMEs and MSMEs to expand their reach across borders.
- REDUCTION OF TAX BURDEN ON NEW BUSINESSES: Since GST is a destination-based tax, all imported goods will be charged integrated tax (IGST) which is equivalent to Central GST + State GST. This will bring equality with taxation on local products and imported goods, encouraging companies to reach out to local units.
- ELIMINATION OF DISTINCTION BETWEEN GOODS AND SERVICES: GST ensures that there is no ambiguity about what constitutes goods and services. This will simplify various legal proceedings related to packaged products. As a result, there will no longer be a distinction between the material and the service component, which will greatly reduce tax evasion.
- IMPROVED LOGISTICS AND FASTER DELIVERY OF SERVICES: Under the GST bill, no entry tax will be charged for goods manufactured or sold in any part of India. As a result, delivery of goods at interstate points and toll check posts will be expedited. According to a CRISIL estimate, the logistical cost for companies manufacturing bulk goods will be reduced by around 20%. Such costs can be crucial for the survival of SMEs.
THE FINAL VERDICT
Unarguably, GST impact on SMEs across various industries will vary greatly, given a scenario where not more than 30 percent of SMEs are ready for GST. It is quite apparent that the strategies of sourcing, warehousing and other decision-making that are currently based on minimising taxes would give way to ones that lay emphasis on quality and convenience. As a consequence, we can foresee shortened delivery time spans as well as reduced overall spend on operational expenditures. While real time issues will surface only on implementation, certain aspects that would need more thought include handling of refunds, input-tax credit, smooth implementation, and facilities to educate users, especially on the technology front. The government has to put in place a robust digital infrastructure and the SMEs on their part have no option but to consider the different challenges and tackle them early on.
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