Goods and Service Tax (GST), a broad indirect taxation regime, is only a few days away from its rollout, and Small and Medium Enterprises (SME) will be the ones most directly impacted by GST implementation. Its impact will be constructive as well as unfavourable in ways more than one. It will bring with itself a sea change in the way we file taxes, and also how we conduct business. Many have called it a ‘behavioural change’ more than a tax change because its successful implementation depends largely on how quickly businesses adapt to the digital format of taxation.
SME owners will find the following benefits from GST:
Ease in starting new business: Any business with operations running in different states of the country requires VAT registration under the state laws and regulations. Different taxation rules in different states only increases complications and high procedural fees requirements. Under GST, there will be a centralised registration and it will make doing business simpler, easier and the resulting expansion will be beneficial to SMEs.
Faster logistics and delivery: There will be no entry tax (generally charged on goods manufactured or sold) under the GST regime resulting in faster delivery of goods and services through various interstate points and toll check posts. As per an estimate made by CRISIL, the logistics cost of bulk goods manufacturer' will reduce by nearly 20%. Quicker delivery would also result in a boost to Indian e-commerce industries.
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Boosting Make-in-India: GST would improve demand and competitiveness of ‘Made in India’ products. It is most likely that the burden of indirect tax will reduce both for the producer of goods and the ultimate end user except in some cases, as the producer or manufacturer of goods will get the advantage of input tax credits (ITC) and the consumer will have to bear only the indirect tax charged by the last retailer or dealer in the supply chain.
Reduction in tax burden: As per the existing indirect tax regime, businesses with an annual turnover of over Rs. 5 lakh (Rs. 10 lakh in some states) are required to pay a 'Value Added Tax' (VAT) registration fee. This basic exemption limit has been increased to Rs. 20 lakh by the Central Government, a 75% relaxation in limit for SMEs.
Alongside benefits, there are also some concerns for SMEs that needs to be highlighted
Costly Compliance: SMEs will have to opt for electronic compliance system, starting from registering to filing online returns. This will primarily cause teething problems and will also increase the cost of compliance.
Higher Interest: Under the Goods and Service Tax system, self-supplies or interstate stock transfer will fall under the scanner of GST. This will have a certain impact on the working capital requirements resulting in higher interest cost and eventually impact pricing policies.
Information Technology Hassles: To bring Information Technology systems in line with new processes could be a massive task and a test to pass, along with understanding of the nitty-gritty involved with GST laws.
No drawbacks and duty-benefits: Under the current central excise tax, no duty on excise is to be paid by a manufacturer of goods if the annual turnover is less than Rs.1.50 crores. But, post GST, the basic exemption limit will get reduced significantly. Consequently, there will be an obligation on a large number of SMEs to pay a major chunk of incomes towards tax under GST.
Unarguably, implementation of Goods and Service Tax will open up a can of worms and the impact on Small and Medium Enterprises across different industries will vary greatly.(Archit Gupta, the author is the Founder & CEO at ClearTax, a tax preparation and e-filing platform.)