GST and SMEs: Implications of a game changing tax reform
The Goods and Services Tax (GST) has been hailed as a game changer for the Indian economy. Based on the “one nation, one market, one tax rate” principle, it aims to simplify the present complex and confusing elements of indirect tax laws and integrate most of them under the GST umbrella. Businesses today deal with almost a dozen variations of indirect taxes between the centre and the states (sales tax, VAT, excise duty, service tax, octroi, etc.), each with different authorities and different compliance requirements. Due to a silo’ed approach, businesses pay tax on taxes. Rather than encourage free trade seamlessly across the nation, the current system often forces businesses to restrict themselves to limited regional markets based on tax implications
The GST replaces this fragmented approach with a comprehensive system that covers the manufacture, sale and consumptions of goods and services uniformly across the country. Businesses will deal with no more than 4 forms of indirect tax: central, state and integrated GST, and traditional customs duty for any imports. The tax would be applicable at each stage of purchase/sale and tax credit can be claimed for GST already paid. A centralised reporting portal will reduce complexity and paperwork and eliminate double taxation. Implementation details of the new GST regime are still being worked on, and as the July 1st rollout approaches, there is confusion about its impact on various industries and services providers in India.
Impact of GST on SMEs/MSMEs
All businesses, regardless of size, will deal with initial changes in compliance and costs in switching to an all-digital GST model. MSMEs using paper-based accounting will have to invest in technology and systems as well as the expertise to help them get established in a new and evolving system. Business and book-keeping tools are being updated to help with GST compliant entries, but none of them are integrated directly with the GST portal so far. The compliance curve will be steepest for small sellers, specifically craftspeople in rural areas, who may have hitherto not been included under the tax scanner. However, any initial disruption is bound to ease up in a matter of months, and the effort will pay off in the long run by streamlining paperwork and bureaucratic overhead.
Tax exemption thresholds will change under GST depending on the sector. Pre-GST, SMEs in the manufacturing sector had an exemption threshold of 1.5 crores for excise duty. Under GST, there is a common and much lower threshold of 20 lakh (10 lakhs in some states) across the board. However, this may not be a cause for worry as experts suggest that after accounting for all the limitations of the earlier larger exemption, the net outcome under GST would be positive, especially in view of the fact that the simpler tax compliance would help them expand their markets nationwide.
The textile industry is waiting for further clarity on the impact of GST. Many textile products like handloom, sarees and natural fabrics that enjoyed tax exemption so far, will now come under the GST scanner. On the plus side, the textile industry expects the playing field to get levelled between the organised and un-organised sub sectors which will be beneficial on the whole.
The e-commerce industry in general will certainly enjoy the same benefits as other industries — ease and reduced cost of doing business across state boundaries. However, in an effort to ensure compliance and tracking, the GST draft includes a TCS (tax collected at source) clause which mandates that e-commerce marketplaces (where multiple sellers and buyers do business) have to withhold a percentage of each online transaction (recently capped at 2%) and pay it immediately as tax on behalf of the seller. For sellers used to paying taxes monthly or even quarterly, this negatively affects their working capital. The situation is further worsened by the fact that almost 25% of online purchases are returned. In case of sellers dealing with low margin products, there would be a build-up of TCS credit, which would need to be claimed as refund from the government. Online marketplaces like Amazon, Snapdeal and Flipkart have been pressing the government to reconsider this clause, pointing out that marketplaces can report transactions in real time to the government to help with monitoring and compliance without resorting to withholding at source.
So while there is apprehension about the churn that such a massive tax overhaul is bound to bring, it is a long overdue move that will help India enable its business community and foster development and growth. The online ecosystem is gearing up to provide expertise and knowledge to the MSME community, especially the micro/small sellers and traders during the initial stages as they grapple with technology and compliance requirements, but thereafter, all of India will be their seamless marketplace without any artificial tax-imposed boundaries.