GST: A Host of Opportunities and Challenges for SMEs

GST is an indirect tax based on the destination principle which is applied at multiple stages of the production and distribution process. It will subsume a multitude of current indirect taxes such as VAT, central excise duty, central sales tax, luxury tax, entertainment tax to name a few. The primary idea behind implementation of GST is expansion of the taxpayer base and to not magnify the incidence of tax burden on businesses and individual taxpayers.

Industry experts are of the opinion that SMEs would benefit from implementation of GST in a number of ways. Let us elucidate a few of those benefits here:

Simplification of procedures needed to start a business: In the present economic environment, a business operating in multiple states of the country must comply with different VAT rates as it varies from state to state. Furthermore, having multitude of taxes such as central excise duty, service tax, sales tax, VAT, etc. makes conducting business a complex affair. However, under GST, due to centralisation of registration procedures, running a business would become simpler and easier, thereby, benefiting SMEs.

Lesser tax burden on a startup/new business: In the current tax regime, businesses with a turnover of Rs. 5 lakhs (Rs. 10 lakhs in certain states) must pay a VAT registration fee. Post GST, this limit would be raised to Rs. 20 lakhs (Rs. 10 lakhs in northeast Indian states)  

Savings on logistics and quicker delivery of goods: Entry tax would be subsumed under GST regime, which would directly affect the delivery times of goods as trucks would not have to wait in long queues at check posts and inter-state borders. As per CRISIL estimate, firms would save 20 per cent on their logistics cost thereby, giving a significant boost to trade and commerce in the country.  

Manufacturers can avail input tax credit: Post GST implementation, the tax burden for both manufacturers and final consumers would fall as the former would be able to avail input tax credit. The customers would also profit as the goods would become cheaper.

Elimination of ambiguity between goods and services: Both goods and services would be governed by GST which would remove any uncertainties and simplifying legal proceedings with respect to various goods and services. Furthermore, GST would also help lower tax evasion since all invoices would be filed electronically.

However, GST also presents challenges for SMEs such as SME manufacturers (having an annual taxable turnover of up to Rs. 1.5 crores) do not have to pay any duty though, post July 1, they would be liable to pay the full GST rate. Moreover, a large number of SMEs would fall under GST ambit, as the exemption limit for SME manufacturers would be lowered to Rs. 20 lakhs.

To conclude, GST present both opportunities and challenges for SMEs and it is still too early to declare whether GST will prove to be a boon or bane for them. However, it is hoped that the pros would outweigh the cons of GST and the new tax regime would boost economic growth and harbor conditions of economic prosperity in the country.