Considering SMEs in India are largely promoter-driven, entrepreneurs fear they will be spending valuable resources on compliance.
The Goods and Services Tax (GST), also touted as the “Good and Simple Tax” is an indirect, destination-based tax, applicable throughout India, thereby simplifying a complex tax system.
In the pre-GST era, multiple points of tax arbitrage existed, for both SMEs and large corporations. Consequently, firms found themselves optimizing tax, instead of optimising production; adversely impacting capacity utilization and economic growth.
The advent of GST was aimed at establishing an efficient tax monitoring system and increasing the tax payer base. But it has intimidated several Small and Medium Enterprises (SMEs) after the first filing itself.
The new Compliance Cost
One of the immediate consequences of GST is the increase in compliance cost for SMEs. SMEs bear disproportionate regulatory burden, compared to their large counterparts, primarily because tax compliance is largely a fixed cost, which does not increase in direct proportion with scale of operations. As a result, tax compliance cost per unit sales is much higher for small firms (European Commission, 2007).
GST mandates three-monthly filings. To make matters worse, these deadlines are within close proximity i.e. 10th, 15th, and 20th of every month. Considering SMEs in India are largely promoter-driven, (90 percent of MSMEs in India are proprietorships or partnerships), entrepreneurs fear they will be spending valuable resources on compliance, which could have otherwise been invested in business operations.
To solve such compliance-related issues, policymakers should contemplate restructuring GST for SMEs in two ways:
- One, the three monthly filings should be combined into a single return.
- Two, the frequency of filing for SMEs in particular, should be reduced from monthly to once in two months.
Tax Payment of Supplier is Linked to Input Credit for Buyer
As per the CGST Bill, an enterprise will not have access to input credit, if the corresponding supplier/vendor fails to make the requisite tax payments.
This clause has three domineering implications:
- One, the firm faces indeterminate consequence of a transaction till the return cycle is completed, to know if it is even eligible for input tax credit.
- Two, any payments made by the vendor after the filing date, will push the input tax credit for the customer even further, blocking working capital.
- Third, large customers will be hesitant to do business with small enterprises with limited track record, for the fear of fiduciary loss.
This provision should be amended for SMEs, as the system creates avoidable dependencies between value chain members of a particular supply chain. The policy should identify the miscreant on its own, rather than making a participant liable for behaviour of others. Moreover, line-by-line invoice matching is already embedded in GST for the same purpose.
Cost of Entering New Markets
Prior to the GST roll-out, companies optimised supply chains by procuring goods from SMEs in their vicinity. This caused SMEs to have a limited customer base, within the periphery of their state of operations.
As tax boundaries fade away with GST, SMEs can now expand their realms to other states, as tax credit will be transferred irrespective of the location of the buyer and seller. Unfortunately, the business needs to register itself in every state and Union Territory. Such daunting demands are bound to receive a cold response from SMEs.
Single registration using Udyog Aadhaar will go a long way in motivating SMEs to increase domestic footprint and explore new markets. Since GST is fully automated, there is little challenge in adopting a “single registration – multiple location” model.
It is worth mentioning that GST by design ensures that little or no human intervention is required in the entire lifecycle of tax payment (Registration, Payments, Refunds and Returns). This will not only save the SMEs from spending resources consumed during interaction, it will also help alleviate corruption.
However, 50 percent of SMEs do not have access to technology. Against this backdrop, it will help if the government can set up GST filing kiosks at strategic locations like banks, mandis, wholesale markets etc. These should not be mere helpdesks, but should enable promoters to get their returns filed, without investing their resources in training themselves or bringing in dedicated personnel for tax compliance.
There is no denying that GST is a policy masterstroke. However, like any other reform, this too will be iterative, characterised by repeated modifications emanating from empirical data and feedback. Both, the government and industry will need to be patient and engage in constant dialogue to improve the implementation. Only then will India be able to eventually realise a coherent and eminent tax regime.