GST killing SMEs, major tax regime challenges need to be fixed
For vibrant growth of SMEs and employment generation, several challenges created by the tax regime need to be addressed.
At the outset, it is believed that GST, by amalgamating several central and state taxes into a single tax, would mitigate tax escalation and facilitate free movement of goods across states, without stoppages at state borders. Yet, multiple registrations and payments, the application of IGST on self-supplies, and limitations to the refund claiming mechanism can be major drawbacks of the current GST structure.
The literature on GST has always highlighted the cost/benefit of GST during the implementation phase. It has also been argued that SMEs suffered a higher financial impact as compared to medium and large businesses at the time of GST implementation. For instance, an evidence-based study from New Zeland suggests that nearly 60% of the compliance costs of GST fell on SMEs. Moreover, SMEs only accrue the benefits of GST over a long period of time—and that, if they survive.
One positive of GST is supposed to be free movement of inter-state goods. However, examining the customer profile of SMEs from survey data, one find that SMEs sell most of their products within their states or to traders, who then move the goods outside the state. Thus, on this account, SMEs don’t directly benefit.
Any discussion on SMEs stresses their lack of access to finance with respect to working or fixed capital. Thus, GST indirectly leading to delay in receiving payments from customers, or refunds (input credit) from the government deals a serious blow to SMEs.
As per GST law, GST mentioned in any invoice needs to be deposited to a GST account, and the entity must also file returns against the same. Further, GST needs to be filed before the 20th of each month—for instance, if an invoice is raised in January, the GST needs to be deposited to GST account, and return filed on or before February 20, even if the invoice has not been cleared by the client. Therefore, a person who billed a client in January for `10 lakh is bound to pay Rs 1.80 lakh as GST payment to file the return, failing which they need to pay a penalty at the rate of 18% per annum on the GST amount due. This becomes an excess burden on SMEs, which are already financially-stressed. Moreover, since it is difficult to even log in to one’s GST account on the last two days of the GST filing window due to overcrowding, SMEs try to pay it by the 18th. The process is equally disheartening when one raises multiple invoices in a month and receives payments for all invoices except one. Even in such cases, SMEs must dip into its own sources to deposit the due GST amount for all the invoices, including the one for which no payment has been received from the client to avoid penal charges and other complications. This often means blocking a part of the SMEs working capital, of which there is always a dearth anyway. It must be noted that SMEs in India find it difficult to get finances from the formal banking sector due to lack of collateral, and even if a ban loan is taken, it incurs interest.
Timely input tax credit is the backbone of an efficient GST system, which is only possible if all in the chain honour timely compliance. Thus, to avail benefits, post submitting GST returns, an SME needs to ensure that its vendors, too, file GST returns. If a vendor doesn’t do so, an SME can’t even claim back the amount paid to said vendor. This complicated chain system penalises even those who want to fully comply with all legal norms. While this lacuna also applies to medium and large firms, it is not a serious concern for them due to their financial leverage.
Further, since the government is an important customer of all private entities in India, it is essential that it makes timely payments for purchases. Anyone familiar with the system know how many rounds one has to make to get due payment from the government. Even state governments complain about delay in payment by the union government! SMEs play a small role in this chain, but their survival is at stake when their customers do not release payments for their order as they have not received payment. And this, when SMEs are one of the most important components of employment generation in Indian industries.
In the pre-GST era, the entrepreneur was liable to pay service tax and other associated taxes only after client credited a payment towards the invoice to their account. Since no working capital was held up in this, it was a relief for SMEs.
In sum, the current system poses significant challenges to a small business owners which needs to be addressed for vibrant growth of SMEs, and, therefore, employment generation.
Source- Financial Express.
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