(The author is a Practicing Chartered Accountant and a renowned Trainer with an exposure in Direct and Indirect Taxes. She has delivered several presentations at ICAI, ICSI and other professional forums on topics pertaining to GST. Author can be reached at firstname.lastname@example.org or 8109825451)
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Small and Medium Enterprises (SMEs) have been considered as the primary growth driver of the Indian economy for decades. A Medium Small and Minor Enterprise contribute approximately 38% of our Nations GDP. The implementation of GST is certainly going to affect this sector. Any negative implication of GST on this sector can directly knock off the player from the competitive business market. This article tries to put forth various issues that this industry could face due upon passage GST.
1) Low Basic Exemption Limit:
Under the present excise laws, the SSI’s enjoy the basic exemption limit up to Rs. 1.5 crore. Under Service Tax laws threshold exemption scheme is available for small service providers having aggregate value of Rs. 10 lakh in the preceding financial year. Under Vat laws such exemption varies from State to State. Therefore currently small scale providers enjoy a basic exemption from Central Excise, Service Tax and VAT levy, if they fall under the threshold limit. But under GST regime, the exemption limit comes down to Rs. 20 lakh and Rs. 10 lakh for North Eastern States. This reduction will significantly impact the SMEs working capital.
2) Return filling:
Under the current system, VAT or excise returns have to be filed once in three months. Under GST, returns (sales, purchase) have to be filed thrice in a month (on the 10th, 15th and the 20th). Also one annual return has to be filed i.e. minimum of thirty-seven returns are required to be filed by every registered taxpayer during a financial year. Thus SMEs will have to deploy additional resources and eventually cost of compliance will increase.
Under GST regime every person who is liable to be registered under the Act, shall have to apply for State-wise registration for supply of goods / services from different States. There is no concept of single centralized registration under GST regime as is presently done. Small traders & retailers may opt for different registrations state wise in case of multiple branches or business verticals if they are engaged in supply of goods or services from such place or have different verticals.
4) Taxation on Stock Transfers:
Presently, a stock transfer of goods/services is not liable to tax except in case of central excise. However, no such system is prevalent in state VAT laws. Under GST regime, stock transfer of goods/services is made liable to tax. This step shall lead to blockage of working capital apart from high compliance burden. SMEs do not have adequate capacities, technology, manpower and cash flows to comply with this complex requirement of the law.
5) Input Tax Credit:
Under the current regime, the value of input credit availed is not dependent on the ‘real time’ acceptance of the tax liability by the supplier. However, under GST, input tax credit will be dependent on your supplier’s compliance i.e. your supplier should file the return declaring the outward supplies along with the tax payment. If your supplier does not comply, it will cause a major dent to your cash outflow. For some reason, if your supplier fails to furnish the valid return, the input tax credit claimed by you will be reversed and you will be asked discharge it along with interest.
6) Taxability of Advances:
Under GST, on receipt of advance against supply of goods or service at a later date, tax needs to be paid on the date of receipt of advance. Currently, the concept of paying tax on advance receipt exists only in Service Tax. This extended provision on goods in GST will impact the cash outflow of businesses engaged in supply of goods. This is because, all this while, as a manufacturer or trader of goods, there was no obligation to pay a part of advance as tax, but in GST, you have to pay.
7) Availability of Composition Levy:
SMEs can also opt for Composition Scheme if there aggregate turnover during preceding financial year does not exceed Rs. 50 lakh. But those who are supplying specified services or making any supply of goods which are not leviable to tax under the Act or if any inter-state supply is made they cannot opt for composition scheme. Further, small suppliers making few of the supplies not chargeable to tax while majority of supplies are taxable may find this provision an unnecessary burden on them.
8) High Compliance Burden:
Accounting needs to be timely updated and the same needs to be maintained state-wise to reconcile the taxation with accounts at state level. GST computations, liability calculation, credit availment etc. has to be done on monthly basis. In a small and medium sector, the accounting and taxation would not be very strong, stable and streamlined as compared to the larger sectors. Sometimes, there is no separate division of accounting and the proprietor himself manages the additional task of accounting and book-keeping which is very common in any start-up and growing business.
“Small business isn’t for the faint of heart. It’s for the brave, the patient and the persistent.” No doubt that GST is aimed to increase the taxpayer base by including SMEs into its scope and thereby putting it under the burden of various compliances and increased working capital requirements. But in the long run, GST will turn these SMEs more competitive with a level playing field between them & large enterprises.