GOODS AND SERVICES TAX, A BANE OR A BOON?: UNDERSTANDING ITS IMPACT FROM THE PERSPECTIVE OF MSMEs

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THIS ARTICLE WAS WRITTEN BY SANJANA BANERJEE, A STUDENT OF NUALS.

ABSTRACT

The highly anticipated Goods and Services Tax was finally rolled out on the 1^st of July 2017. Dubbed as one of the greatest reforms Indian markets have been subjected to ever since the Liberalization Policy, the new indirect tax system has received a lukewarm response after its implication from consumers and business alike. The idea behind imposing a single rate of taxation and to make India a common market has been touted since the Union Budget of 2006-2007. With the 122^nd Amendment to the Constitution, the Draft GST bill was finally approved by both the Houses as well as ratified by the States. The Amendment saw the insertion of Article 246A which gave ample powers to the Legislatures for making laws with respect to GST imposed by the Union or such State. Furthermore, Article 269A was also inserted for the apportionment of taxes between the Federal and State Governments. The Indian Economy has heavily depended on the MSME sector as its primary growth driver for decades. The above statement can be ratified on the fact that that there are around 3 million SMEs in India contributing almost 50% of the industrial output and around 42% of total exports. With a paradigm shift in the structure of indirect taxation, Small and Medium Enterprises (SMEs) like many other businesses have been monumentally affected as they now have to adhere to stricter compliance mechanisms and bear the burden of associated costs. This essay seeks to examine this ‘monumental impact’ GST will have on SMEs and conclude as to whether this reform has actually been a boon or a bane.

ON THE NEGATIVE IMPACT

In the previously existing regime, the threshold limit which was set for payment of CENVAT was set at 1.5 crores – an important measure aimed at relieving the SMEs from onerous compliance measures.[1] The abovementioned exemption threshold was set keeping in mind the semi-skilled staff and the sole entrepreneur of these ventures and their inability to cope up with the enormous burden placed upon them.[2] However, this SSI Exemption (as is popularly called) is no longer in existence with the onset of GST. The new system has stipulated that the threshold limit be reduced to 20 lakhs. So far unorganised MSMEs had grown faster than their organised counterparts due to not having to pay social security, lower cost structure and being exempted of excise duties till a turnover of 1.5 crore.[3] This reduction in the exemption limit could only mean that the lawmakers intended to bring in the entire unorganised sector within the GST net. This unfavourable move has been criticised by many especially those with regards to service providers.[4] With the antagonizing effect of demonetization still languishing upon service providers in the SSI sector, the additional burden imposed by implementing GST is nothing more than a difficult roadblock towards growth and expansion. As statistics would state, the expected growth rate for the preceding fiscal year centered  between 14% to 16% only to plummet down to 6% to 8% as demonetization became an upsetting reality.[5]

Textile and food processing industries being the core constituents of MSMEs in the country have been apprehensive regarding the 18% rate fixed for different segments in the production chain.[6] In an interview conducted with the owners of three different textile enterprises namely – Tirupur Exporters Association, CBC Fashions Asia Pvt. Ltd. and South Indian Hosiery Manufacturers Association, a relevant factor which is now taking a toll on these producers is the different stages of textile production which starts from knitting, stitching, dyeing and calendaring to adding distinct intricacies such as glasswork, ARI work and thread work.[7] The problem does not stop there. Textile industries especially those in the hosiery sector depend to a great extent upon outsourcing their work, and in most situations smaller cottage units who are absolutely ignorant about complicated tax filing are the ones to whom this task of ‘production’ is delegated by the main manufacturing units.[8] It needs no expert to point out that the rate of 18% will put these cottage industries into jeopardy and filing tax returns within the first seven days of every month will prove to be more cumbersome as returns from vendors are due only within sixty to ninety days. Such a high tax levy coupled with rigorous compliance mechanisms will be unbearable for these cottage units and will inevitably lead to a working capital burden which these small industries will fail to cope up with.

The food processing industry was also hit hard with the 20 lakh exemption limit and interestingly enough; the Government’s effort to bridge the gap between the service and the manufacturing sector was met with rampant criticism and disapproval. A small example of this would be food processing units set up in smaller towns such as Aurangabad. With the inclusion of processed food within the category of ‘luxury items’ has inflicted a heavy set back upon the newly established food processing units in Aurangabad.[9] Ripples have been felt of the same by food processing units based out of smaller towns. The clash between the manufacturing and services sector has been rightly pointed out by the President of All India Food Processors Association in an interview with FnB News.[10] In his opinion, the manufacturing economy inevitably carries with itself the value of the raw materials used quite opposed to the service sector which do not require incorporating ‘raw material’ as such.[11] The 18% rate which was applicable in both manufacturing and the service sector has undoubtedly caused disruption in the smooth working of the food processing sector. Inspite of MSMEs being considered to be ‘tax neutral’ in concept, in form this tax neutrality has been done away with. The unfairness of GST towards MSMEs in this sector is manifold in 2 ways:

(i) Products manufactured by the food processing sector fall under ‘luxury items’ as previously mentioned and under the previously existing regime, luxury items attracted a higher rate of taxation from both the Central and State Governments. However, in order to ‘unify’ the taxing structure GST imposes the same rate for normal goods as well as luxury items therefore, further contributing to the gap between the rich and the poor. Such a measure has left the small food processing units flabbergasted considering 18% has to be eked out from their meagre income and limited resources.[12]

(ii) Quite contrary to ‘unification’ of taxes as intended by the GST regime, the presence of three different taxes – Central GST (CGST), State GST (SGST) and Integrated GST (IGST) has raised serious doubts about the kind of unity of taxes GST seeks to achieve. The burden imposed upon MSMEs is magnified considering the rates of all three will be different with SGST either 2% above or below the rate set by the Central Government.[13] Also considering that there are 5 different rates imposed – 0%, 5%, 12%, 18% and 28% GST fails to deliver on its main aim which is –one Nation one Tax.

With ‘Make in India’ currently the buzz word of the Modi Government, the impact of GST on small and medium scale start-ups cannot be ignored. The reduction of the threshold limit to 20 lakhs has raised a hue and cry amongst the start-ups on the premise that differential treatment is being meted out to them.[14] The principle of equality had been completely disregarded by the lawmakers in setting up a threshold for start-ups and giant corporate houses alike.[15] A crucial factor in tax filing to be considered is ‘how technologically challenged are you?’ This varies from sector to sector. MSMEs involved in handicrafts, ancillary industries, food processing and artisan work cannot be generally expected to take advantage of the online DIY GST filing. However, start-ups in more urbanized sectors such as IT and services will probably find this method more convenient as it relieves them from hiring tax professionals within their limited resources to do the same.[16]

It seems that the Act is trying to do everything in its power to bring each and every enterprise in the SME sector within its purview not only as potential tax payers but also as registered tax payers. Reverse charges in the manner introduced by the Act states that when goods are sold by an unregistered person to a registered person, GST has to be paid by the registered person as a ‘recipient under reverse charges’[17] This will undoubtedly have a negative impact on those small businesses which fall under the threshold of the 20 lakhs exemption limit as reverse charges need to be paid by the registered supplier purchasing goods and services from such businesses. Hence, we seen even after having an exemption limit, small businesses are being penalised. The only expected reaction to such a provision would be registering these small businesses which would inexplicably mean adhering to strict compliance measures.  Compliance mechanism will be a major factor which micro and cottage industries in rural areas will fail to deal with. Considering the already existing cyber backlog in such areas, expecting a timely compliance from such industries is absolutely moronic. We must understand that the kind of high compliance demanded by GST law is not really feasible for cottage industries and other SMEs to comply with since, accounting and taxation is not very strong, streamlined or stable as compared to the larger sectors.[18]

Some of the compliance mechanisms as envisaged under GST would include[19]:

(i) No centralised registration but State wise registration coupled with filing two returns and one statement per month resulting in a negative impact on many small businesses especially in the service sector as they are used to filing only two returns statements in an entire year under the previously existing regime.

(ii) Accounts need to be updated timely and the same needs to be maintained State-wise alongside timely GST computation, liability calculation and credit availment (all of which needs to be done on a month to month basis).

For most small businesses, this is a hassle which they cannot avoid. In the case of sole proprietorships especially, the entrepreneur himself is bogged down with the responsibility of filing GST returns and making updated statements every month. Also considering the entire process is to be done online, for those without any knowledge in computers failure to comply will resound a death knell for their businesses. The obnoxious compliance mechanism cannot be overlooked when balancing out the benefits of GST to its negatives. Another major factor which is becoming a cause for concern especially for e-commerce start-ups and such industries is stock transfer. Stock transfers between distinguished persons have been made liable to tax which absolutely undermines the idea of free flow of goods under GST regime and puts these start-ups at an extremely disadvantageous position.[20] E-commerce players are also in a fix since COD (Cash on Delivery) sales account for two-thirds of the transactions which takes place through these portals and cash is remitted only 7-15 days later. This will undoubtedly be a burdening factor when seeking a refund for returned/cancelled orders coupled with the fact that an e-commerce start-up will have to pay GST during stock transfers from the vendor to the warehouse or from one warehouse to another.[21]

ON THE POSITIVE IMPACT

A study conducted by ASSOCHAM emphasized that the larger tax net will ensure competitiveness and will set an equal level playing field for MSMEs.[22] In a Conference report titled ‘Bankers Borrowers Business Meet – 2017’ it was heralded that GST will ensure market MSME market expansion, will reduce costs on logistical overheads, will make it easier for new ventures to start their businesses efficiently and will also help MSMEs in dealing with sales and services and in purchasing capital goods.[23] Elaborating further on this point, the same conference report emphasized on the fact that no tax would be imposed on perishable commodities such as meat, flour, bread, sweets, salt, printed books, stamps and judicial papers and on certain selective handloom industries.[24] Furthermore, the 18% rate has removed for textile MSMEs and has been cut down to 5% which came off as major relief but stringent compliance procedures remained intact.[25] Inspite of the strict compliance reforms it has been touted that the main intention of incorporating the unorganised sector within the ambit of GST was to ensure online registration which would ensure transparency and will free the taxing system from the shackles of bureaucracy. The main advantage of the entire system going online would be easier adjustment of tax liability alongside tax credit.[26]

Many researchers and tax experts have vouched for the fact that during the Excise era one can find an up and coming venture intertwined in the complications of VAT registration, Service Tax registration and Company registration which is no longer the case now and undoubtedly MSMEs will benefit from it.[27] MSMEs will benefit greatly from logistics as GST has done away with filing separate paperwork for each State.[28] Not to mention, no entry tax will be charged on goods sold or manufactured in any part of the country which will only expedite efficient delivery of goods at interstate points. Furthermore, considering that inter State sales has previously attracted a heavy tax levy, GST will help MSMEs expand their customer base by having a uniform IGST rate and thereby, facilitating cross-border sales.[29]

Talking about start-ups and the plausible positive impact GST will have on them one cannot miss out on mentioning that simpler taxation will ensure more efficiency. Unlike what was the case previously, start-ups working on a tight budget will be relieved from registering under VAT, CST and Service Tax which will not only help them to maximise their resources but will remove unnecessary complications with regards to filing and returns.[30] As many would expect, GST is expected to bring about more transparency as the entire process is done through an online platform. The fact that taxing stock transfers will ensure a level playing field between giant corporate houses and SMEs has also been the unequivocal opinion of many tax gurus. In the previous era stock transfers has been a popular mechanism of multinationals and other big corporate houses to escape inter-State tax levies by transferring stock from one warehouse to another located in two or more States.[31]

It is to be understood that GST as what is intended by the Government is only to enhance the tax payer base and not to enhance the tax burden. The difference between a ‘good’ and a ‘service’ has been done away which has reduced a great deal of confusion. For example, a restaurant can partly be a good and partly be a service and depending upon the nature a different tax would be attracted (as what was the scenario previously). However, with that no longer the primary consideration GST has actually made it easier for SMEs by reducing the cascading effect and multiplicity of taxation.

CONCLUSION

GST has been a mixed bag of surprises – some which are ugly and some of not so ugly. With India staggering to cope up with this new era in taxation, the Government has sought to ensure that no one suffers incidental harm to the business undertaken by them. Understanding the above statement, MSMEs have only two options available in this new era – (i) stand ground and expand business or (ii) fail the ‘compliance test’ and wrap up. What happens to be the unfortunate circumstance is that technological backwardness and lack of understanding of GST is a primary factor as to why rural SMEs are outside the purview of ‘Make in India’. It is understandable that the Government’s viewpoint on ‘equality’ would be creating a level field for one and all businesses. However, in this perseverance, the government has unfortunately failed to consider the sheer infrastructure overhaul the rural MSME sector needs right now. Not to forget the debt ridden sick industries who will not be able to cope up with timely payment of tax nor file returns. What uneducated and technologically challenged artisans and textile merchants need right now is a major infrastructure overhaul, special exemptions and no burden on working capital as a method to revive them and then slowly bring them under the GST net. Although handloom and some other cottage industries (especially those dealing in agriculture) have been given favourable treatment one must not forget that even the industrial sector especially the sick ones have been in dire need of favouritism over decades. Equality must be ensured in both sectors to unify them and this is exactly what GST intends and hope to do. Only after ensuring the necessary infrastructure is in place can a competitive level playing field among the MSMEs can be created under GST.

[1] GST: A Boon for MSMEs, MSME World, https://msmeworld.wordpress.com/2015/06/16/gst-a-boon-for-msmes/ last seen on 10/08/2017.

[2] Shelley Singh, Mugdha Variyar and Kunal Talgeri, GST Impact: How enforcing input tax credit can hurt the SME economy, Economic Times (11/04/2017), available at http://economictimes.indiatimes.com/small-biz/sme-sector/how-enforcing-input-tax-credit-can-hurt-the-sme-economy/articleshow/58118341.cms , last seen on 10/08/2017.

[3] R Vasudevan, How will GST impact MSMEs? The Hindu Business Line (16/05/2017), available at  http://www.thehindubusinessline.com/opinion/how-will-gst-impact-msmes/article9702208.ece, last seen on 10/08/2017

[4] Ibid.

[5] Ibid.

[6] T.E Narasimhan, GST blues: Tamil Nadu textile hub fears 20-30% MSMEs may shut shop, Business Standard (09/07/2017), available at http://www.business-standard.com/article/economy-policy/gst-blues-tamil-nadu-textile-hub-fears-20-30-msmes-may-shut-shop-117060900427_1.html, lase seen on 11/08/2017.

[7] Ibid.

[8] Ibid.

[9] Ashwani Maindola, MSMEs in food processing industry express concerns over impact of GST, FnB News (29/12/2016), available at http://www.fnbnews.com/Top-News/msmes-in-food-processing-industry-express-concerns-about-impact-of-gst-39976, last seen on 12/08/2017.

[10] Ibid.

[11] Ibid.

[12] Impact of GST on MSMEs, Confederation of Indian Industry, available at http://www.dcmsme.gov.in/CII.pdf, last seen on 12/08/2017.

[13] Subodh Kumawat, MSMEs food processing sector concerned over GST impact, SAG Infotech Official Blog, available at http://blog.saginfotech.com/msmes-food-processing-sector-concerned-over-gst-impact, last seen on 12/08/2017.

[14] Muqbil Ahmar, How the GST bill will impact start-ups, Firstpost (29/07/2017), available at http://www.firstpost.com/tech/how-the-gst-bill-will-impact-startups-3726063.html, last seen on 12/08/2017.

[15] Ibid.

[16] Ibid.

[17] Indirect Tax Department, Institute of Chartered Accountants of India, available at http://idtc-icai.s3.amazonaws.com/download/knowledgeShare17-18/GST_Impact_in_MSME_Sector.pdf, last seen on 13/08/2017.

[18] Ibid.

[19] Ibid.

[20] Ibid.

[21] Shweta Modgil, GST is Coming: How GST Will Impact The Startup Ecosystem From July 1, Inc42 (30/06/2017), available at https://inc42.com/buzz/gst-startups-tax/, last seen on 15/08/2017.

[22] Jaldeep Shenoy, GST will boost competitiveness of MSMEs: Study, The Times of India Business (09/07/2017), available at http://timesofindia.indiatimes.com/business/india-business/gst-will-boost-competitiveness-of-msmes-study/articleshow/59511977.cms, last seen on 13/08/2017.

[23] ASSOCHAM and APA, Bankers-Borrowers Business Meet 2017: 10 Emerging Mantras, 89, Associated Chambers of Commerce and Industry (2017).

[24] Ibid at 90.

[25] Dilip Kumar Jha, GST cut on merchant services to 5%; relief for textile, apparel workers, Business Standard (12/07/2017), available at http://www.business-standard.com/article/economy-policy/gst-cut-on-merchant-services-to-5-relief-for-textile-apparel-workers-117061100636_1.html, last seen on 15/08/2017.

[26] Supra at 22 at 92.

[27] Supra at 21.

[28] Ibid.

[29] Alok Patnia, Waking up to a new GST era, and its impact on small businesses in India, Your Story (01/07/2017), available at https://yourstory.com/2017/07/impact-gst-small-businesses-india-tax-finance-arun-jaitley/, last seen on 15/08/2017.

[30] Impact of GST on Start-ups: Start-ups stand to be benefitted by GST, ClearTax (10/06/2017), available at https://cleartax.in/s/start-ups-benefit-under-gst, last seen on 18/07/2017.

[31] Rajath Kumar, Implications of GST on SMEs, Capital Float (20/06/2017), available at https://blog.capitalfloat.com/implications-gst-smes/, last seen on 15/08/2017.