With the implementation of Goods & Services Tax (GST), multiple VAT registrations are no longer required in India. The standardized single registration procedure required under GST improves ease of starting and doing business in India.SMEs enjoy certain tax advantages under GST. This gives them some relief considering their competition with much bigger firms.
Entrepreneurs, who were hesitant to start a business due to the complications involved in operations, can now rethink and establish SMEs considering the benefits that small firms receive under GST.
Benefits of GST for SME
- Simpler tax compliance procedures: Earlier, businesses had to pay multiple taxes such as excise duties, VAT, CST and service tax at central and state levels. Now, under GST, the simplified and centralized tax system makes business operations less complicated. Man-hours can be reduced followed by lesser payouts. GST accounts and procedures can even be handled at the workplace without having to depend on consultants. This reduction in compliance cost will be a relief to SMEs that have to operate on a smaller budget
- Lower GST registration threshold: GST registration is not required in the case of businesses with an aggregate turnover of up to Rs 20 Lakhs per financial year if business transactions take place only within a state. Such businesses can be easily established and run by people who wish to be self-employed.
- Composition Scheme: Manufacturers, restaurants, and traders with an annual turnover not exceeding Rs 1.5 crore can opt for this scheme. In this case, only 1% GST on its taxable supplies is applicable. Also, they need to file returns every quarter only, compared to regular taxpayers who need to file monthly returns. Record keeping is also relaxed in this case when compared to regular taxpayers. SMEs can take advantage of this scheme for smooth and easier compliances.
- Faster logistics and delivery: Earlier, vehicles transporting goods to other states had to stop and wait at state borders for review of documents and imposition of state tax. Now, check posts are no longer required due to the removal of multiple taxes. Movement of goods within states has become easy and hassle-free with GST and the new E-Way Bill. Small business owners will not need to worry about the unnecessary delay at borders between states. Bureaucratic complications in this regard were one of the biggest problems faced by SMEs.
- Reduction in tax burden: Supply and service of exempted goods will reduce tax expenses, thus increasing profits of SMEs that depend on smaller savings to increase profits.
- Online transactions: Under GST, online registration and filing of returns are compulsory. As a result, tedious visits to tax offices are no longer required. This saves time and effort leading to efficient use of manpower in more productive activities.
- The single tax bill for goods and services: Earlier, since goods and services were taxed separately, calculations had to be separate while billing customers of businesses such as restaurants that provide both goods and services. Since GST covers both supplies, this complication can be avoided leading to less confusion and queries from customers of such SMEs.
- ITC for inter-state sale leading to wider market reach: Previously, input tax credit was not available in the case of CST on the interstate sale of goods. This increased the purchase cost of goods. Small businesses found it difficult to sell to consumers in other states due to this while larger businesses could afford to open small storehouses or shops and find a way around this issue. Now that complete input tax credit is available to all irrespective of the point of sale or purchase, SMEs do not need to worry about cost increase due to location and instead, confidently compete with larger firms on the same level. Existing SMEs can take advantage of this to increase their reach within India. New businesses can see the potential for further growth and the wider market.
- Reduced cost due to ITC: The Economic Survey 2017-18 reveals that 32% of GST returns are filed by firms with annual turnover below the threshold of Rs 20 Lakhs. They are registered as normal taxpayers. Only 0.9% of the total tax collected can be attributed to them. In spite of not being required to register for GST, they are doing it to benefit from input tax credit on buying goods and services from larger suppliers. This reduction in cost can be passed on to the consumers. SMEs who have not yet registered can follow their example.
- More creditworthiness: With GST, compliances and reporting are compulsory. Tax evasion will prove difficult. Returns for a period cannot be filed without filing returns of the previous period. This will make SMEs more creditworthy, which is required for obtaining loans for expansion. Existing businesses can keep this in mind when considering capital requirements.
Although there are many advantages to SMEs as a result of GST, there are a few disadvantages such as:
- Some SMEs may not have the technical expertise to deal with online systems. They might need intermediaries to register and file returns for them. This will add to their cost.
- Relevant returns have to be filed first before refunds can be claimed. Processing of refund also depends on compliances of supplier and supplier rating.
- Every registered taxpayer has to file minimum thirty-seven returns during a financial year, which might seem tedious to small business owners.
Tax payment is a major issue for small firms struggling to survive. Lower threshold for taxation and simpler compliances make it easier for such firms to establish their businesses firmly and then expand further.