July 1, 2017, was a once-in-a-lifetime day for the Indian economy. That’s the day the Goods and Services Tax (GST) came into effect across the country, with a lot of speculation on the impact it would have on individuals, businesses, and the overall Indian economic landscape. The vision was big. GST aimed at collecting all indirect taxes in a transparent and fair manner through the value chain. But has it been carried through? What really has been the impact on small business owners and the customers they serve all across India?
GST is all about collecting indirect taxes across the value chain in a fair and transparent manner, with ‘One Nation-One Tax’ being the underlying principle that the Modi Government has tried to follow. Earlier, goods and services were taxed separately by different government departments. For example, the Central Government levied taxes on manufacturing while states levied taxes on the basis of sales, such as entry tax. Such multi-level taxation involved a lot of paperwork and often allowed tax evaders to find loopholes in between government bureaucracies to avoid paying their fair share.
The taxation system wasn’t just complicated for the taxpayers – many tax administrators found it confusing as well. Also, the multiple layers of taxes resulted in an unjustified tax burden being passed on to end consumers, often again because of tax evasion by producers/service providers.
GST has tried to streamline and consolidate the elaborate (and complicated) indirect taxation process and made it easier to administer.
The Small and Medium Enterprise (SME) sector is referred to as the backbone of the Indian economy, and rightly so! Accounting for about 45 percent of the country’s total manufacturing output, and employing 40 percent of the total workforce, the impact that Indian SMEs have on our economy is tremendous. While GST implementation received mixed reviews in the past year, the move has proved to be a good one on the whole for the SME sector. Let’s walk through some of the highlights:
Previously entrepreneurs wishing to launch a new small business had to face hardships in the form of multiple hurdles such as complying with various laws of the state they were planning to operate the business in. For example, there was a different kind of VAT registration under the applicable law in each state. Now, with GST in effect, all procedures are centralised. Taxes are streamlined, and entrepreneurs can start their new business or expand an existing one with fewer strings attached.
The web of indirect taxes levied by state and central governments have been replaced with a unified tax code, which has not only brought down the startup cost for a new business but also helps entrepreneurs stay focused on business growth rather than worrying about the vagaries of taxation.
GST has abolished multiple entry taxes that were levied at interstate toll booths. This has cut down the cost of transporting goods between different states in India. The serpentine queues at state borders are a thing of the past. Goods now move quicker, which is good for business. Businesses can deliver products to their customers faster and at reduced total cost.
Before GST came into effect, businesses with a turnover of more than Rs 5 lakhs had to face several taxes at various stages in the supply chain. There were a slew of taxes – Service Tax, Entertainment Tax, Excise, Surcharges, and Octroi, to name a few. Now, with GST, the exemption limit has been raised to Rs 20 lakhs, which has come as a great respite to SMEs. Also, GST brings the whole range of previous multiple taxes under a single tax regime.
Under the previous tax regime, SMEs had only a little ability to reach potential consumers across the country. For example, a trader dealing in brassware might only have had access to a limited market around Western Uttar Pradesh. In case he/she wanted to send raw material or finished products to other states, the CST on inter-state sales came into the picture. Input credit on this CST was not available to the customer, raising the purchase cost for them if they chose to buy from this small business entrepreneur. This problem has been overcome with GST and new markets have become even more accessible to small traders with the less-complicated tax structure.
Reducing human intervention is one of the highlights of GST. The online taxation process does away with the need for multiple interactions with different department officers for tax compliance. Earlier, filing taxes would take a lot of time away from business owners, making their productivity suffer.
On the other hand, under GST, all compliance procedures have been moved online. Registration, payments, refunds, as well as returns, all are done online. Online registration ensures that traders get registration certificates on time, and it side-lines unnecessary bureaucracy. Payments are timely, transparent, and have reduced compliance costs. Refunds take place faster and lead to greater liquidity for business owners. Returns have become faster and simpler with input tax credit and tax liability adjustments.
For all of these reasons, we can say that post-GST, a greater number of Indian SMEs are looking to expand their horizons. Enhanced reporting of their business transactions and being under the tax net will also add to their credit-worthiness in the market, which will be an important asset for business owners in the future. Business expansion comes with capital requirements, and a more detailed credit history will help them get access to that capital more easily. Online lending in particular is sure to help many SMEs get over their startup growing pains now that GST is here to stay.
Rohit Arora is the Co-founder and CEO of Biz2Credit.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)