Budget 2020: Why GST continues to be the top concern for MSMEs and small businesses

Leading up to Finance Minister Nirmala Sitharaman’s second Union Budget speech on February 1, 2020, Indian micro, small, and medium enterprises (MSMEs) are not shying away from voicing their expectations.

The rationalisation of Goods and Services Tax (GST) is the top issue for the MSME sector, a segment that forms the backbone of the Indian economy and contributes 29 percent of the country’s GDP.

The GST was implemented in July 2017 in an attempt to simplify the return filing process for businesses and boost transparency and accountability. Soon, accounting and compliance became complicated and expensive for small businesses and MSMEs. And, today, manufacturing and service MSMEs continue to be worried.

Rationalising GST slabs

“During the initial phases, MSMEs and small businesses always have a major challenge in smooth cash flow management and working capital management. If the Union Budget softens the GST rates or gives GST tax holidays, it will definitely help emerging businesses,” says Mayur Tekwani, Co-founder of digital marketing and production firm Think Tree Media.

When GST was implemented, it was introduced at variable rates on variable items. The government tinkered with the GST slabs, and at the 37th GST Council Meeting, the GST rates were revised on multiple items.

The GST on items like biodegradable plates and cups, outdoor catering, diamond job work, hotels, semi-precious stones, etc was reduced. Previous GST Council meetings had lowered the rate on a range of other items.

While presenting the Interim Budget 2019, Commerce Minister Piyush Goyal said daily-use items would be in the zero-to-five percent GST category. This would mean lower shelf prices only for the range of products considered daily-use items and a boost in sales for businesses manufacturing them.

However, other manufacturing and service segments had to grapple with high GST rates of up to 18 percent, and they still continue to do. As a result, rationalising GST rates remains a major concern for MSMEs and small businesses.

"Being in the sanitary industry, we are expecting the Union Budget to provide for reduction in taxation of sanitaryware products from 18 percent to 12 percent. This will not only help the development of society but also the real estate market, which is witnessing a slow period,” says Vinay Jain, Founder and CEO of Graf doer, a Delhi-based bath fittings and sanitaryware manufacturer.

High GST rates affects not only the manufacturing industry but also the services segment, which has similar concerns.

“Some ideas that the Union Budget 2020 could introduce are reduction of GST for marketing investments, subsidised training programmes and occupational insurance for workers in hazardous jobs,” says Satya Prabhakar, CEO and Founder of Sulekha.com, a digital platform for local service businesses.

There are concerns in the restaurant space too. "In the Union Budget, the restaurant industry should be given the option to either charge five percent GST (without input credit) or 12 percent (with input tax credit), as the lack of taking input credit on GST has increased the cost of business and made several establishments unviable,” says Siddharth Goenka, Founder, Aiosell Technologies, an automated revenue management system for hotels.

The high GST slab of 18 percent in the online education sector is proving problematic. As enterprises increasingly invest in bringing educational material online, the GST rate adds to the cost of the online product and deters buyers.

“I want the Union Budget to seriously reconsider this GST slab by keeping in mind the socio-economic benefits of providing quality education to the masses. I want to see a reduction in GST on online courses,” says Achin Bhattacharyya, Founder and CEO of Notebook, an Indian after-school app.

GST refunds plague the MSME sector even though the government in August 2019 said all pending GST refunds would be paid within one month from the date of announcement. Nirmala Sitharaman also promised all GST refunds would be paid within 60 days from the date of application.

“Despite this, the GST refund system has not been implemented, which significantly impacts the cash flow for MSMEs. This is a huge pain point as it affects the working capital available to operate the business,” says Yashas Alur, Founder of designer handbag brand Everpret.

Zubair Rahman, who runs fashion ecommerce company The Fashion Factory, agrees. “I wish to see faster processing of GST refunds since ecommerce sellers are affected due to tax collected at source (TCS). All online sellers expect the Union Budget to provide for faster processing of TCS refunds from the GST portal,” he says.

Addressing export problems

Over the past two years, GST implementation also hit MSME exports due to delays in refund of upfront GST and input tax credit. This in turn affected cash-driven working capital requirements.

Industry experts believe better marketing assistance can help improve the situation to a marginal degree and boost MSME exports.

“I expect the Union budget to provide more funds for schemes such as the Market Access Initiative. This is because the current level of funds is disproportionate to the number of active exporters. We also expect some measures to improve the competitiveness of MSME exporters through revaluation of the schemes for obtaining foreign licenses, international certification etc,” says Arun Singh, Chief Economist at commercial data and analytics firm Dun and Bradstreet India.

Players in the Indian IT sectors are also calling for a holistic environment for local production and development, and for boosting exports. 

“Incentivising organisations building software intellectual property through tax exemption on IT exports is something I wish to see in the Union Budget. I also expect the government to take steps to reduce regulatory compliance and create a holistic environment for the ease of doing business,” says Diwakar Nigam, Chairman and Managing Director at enterprise software solutions company Newgen Software.

To address similar issues, Union MSME Minister Nitin Gadkari in November 2019 said the government is working on two policies to increase MSME exports and bring down imports by encouraging local production. 

The MSME and small businesses sector will watch with bated breath if the Union Budget will introduce policies to boost exports and address GST woes. The Union Budget could also address the lack of access to credit to the sector through a large Rs 10,000 crore fund. It could also unveil the new definition of MSMEs, which classifies them on the basis of turnover. 

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