How the introduction of GST in India led to the classification of MSMEs?

Classification of MSMEs after the implementation of GST in India

GST Keeper
9th Mar 2018
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The phenomenon of the MSMEs getting troubled from the Goods and Services Tax Act has changed its progress status. The government has been taking some serious steps in order to blow away the entire suppression cloud that has covered the MSMEs in the past. Initially, these businesses were worried about the hectic process that comes with the GST registration and return filing. Then, the trouble of destination-related processes and tax calculations started chasing them.

However, the government has now made some major developments in the regime to reduce the burden on the small businesses. Here are few major ones:

1. The Exemption- Most of the small and micro businesses were exempted from the regime after the destructive effects of GST were being witnessed. Majorly, the businesses related to agriculture sector were affected. India being the agriculture hub has several people associated with the practice of farming to earn two times of bread a day. For such people, complying with the tediousness of the regime was becoming difficult. Hence, in the end, the government decided to make few sectors GST-relieved.

2. The postponement of loan repayment- Due to the sudden implementation of the Goods and Services Tax, the strain of complying with the regime made most of the MSMEs unable to repay the loan. This not only affected the businesses but also the banks which were supposed to collect the payment. The double-pressure made the government understand the criticality of the situation. Thus, the Reserve Bank of India finally decided to allow a breather period. During this period the MSMEs are supposed to get register under the new regime and effectively start the repayment of loan amount.

In addition to providing relief to the MSMEs, the government has also come up with a plan to further segregate the relief procedures. Since the introduction of GST in India, it is for the first time that the government has taken a step to categorize the businesses for the ease of taxation. Recently, the council announced that the MSMEs would now be classified on the basis of their annual turnover.

The classification

The government has set up various turnover categories according to which the nature of the business will be classified. The earlier classification of the small, micro and medium enterprises was based on the investment made by the business in machinery and equipment for the company. Due to this, various companies were making huge profits by showing only minimal of their investments on the machinery. But now everything will be streamlined.

Microenterprises

The enterprises having a turnover of INR 50 million will now be put under the category of microenterprises. Earlier, the companies dealing in goods with investment up to INR 2.5 million were put under micro. And similarly, the companies dealing in services with an investment of INR 1 million in the equipment were under micro.

Small enterprises

The enterprises having a turnover of INR 50 million to INR 750 million will now be put under the category of small enterprises. Earlier, the companies dealing in goods with investment in the machinery up to INR 250 million to INR 500 million were put under small. And similarly, the companies dealing in services with an investment of INR 1 million to INR 20 million in the equipment were under micro.

Medium enterprises

The enterprises having a turnover of INR 50 million to INR 2.5 billion will now be put under the category of medium enterprises. Earlier, the companies dealing in goods with the investment in the machinery of up to INR 250 million to 500 million were put under medium. And similarly, the companies dealing in services with an investment of INR 1 million to 20 million in the equipment were under micro.

To summarize

With the apt classification of enterprises as small, medium, and micro businesses, the taxation will become aligned. And in the same way, these businesses will also begin complying with the Goods and Services Tax with ease. It will ultimately add up to the growth of the tax revenues. However, the entire process is time-consuming but since the introduction of GST in India, the government’s urge to comfort MSMEs has been the best effort. 

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