The recent introduction of Goods and Services Tax (GST) is significant step in the area of taxation reforms in India. Having recently received the assent of the President, the GST is set to be implemented across the country in accordance with its proposed deadline of 1 April 2017. By amalgamating several central and state levies, the GST proposes to greatly simplify the taxation system and enhance the ease of doing business for Indian businesses. This technology leveraged unified indirect tax regime will address the cascading effect of the extant tax system and have far reaching benefits for all stakeholders such as lower transaction and logistics costs, simplified compliance, digitization and simplification of processes, a common market throughout the country and enhanced global competitiveness.

The Indian MSME sector is critical for the growth and development of the nation. The contribution of Indian MSMEs to the national output, employment generation, exports and industrial output is enormous. But a complicated compliance system and a rigid taxation regime place added limits on the growth potential of these enterprises. The Indian MSME sector will gain tremendously form the GST and the implementation of this taxation regime has been a recurring policy recommendation by various stakeholders engaged in initiatives for the amelioration of the SME sector in India. But with the launch of the Model GST Law in public domain, the initial euphoria around the GST has given way to some areas of concern regarding its various clauses and processes. Uncertainty about claiming the Input Tax Credit (ITC), multiple registrations and returns, transference of tax liability, complex procedures, etc. are some of the problem areas for MSMEs.

 In order to analyse the potential impact of the GST on the MSME sector, enhance the preparedness of the MSME sector to efficiently adapt to this new tax regime as well as discuss measures and recommendations to address various concerns of the MSME sector, CII organized a Policy Dialogue Session on The Impact of GST on MSMEs in India on 28 September 2016 in New Delhi. The Session was addressed by eminent government officials and industry leaders such as Mr S N Tripathi, Additional Secretary and Development Commissioner, Ministry of MSME; Mr Neeraj Prasad, Additional Commissioner (GST), Central Board of Excise & Customs; Mr Vishal Pratap Singh, Deputy Commissioner (GST), Central Board of Excise & Customs; Mr Vashishtha Chaudhary, Senior Vice President Goods and Services Tax Network (GSTN); Mr Bharat Goenka, Managing Director Tally Solutions and Mr Naveen Rajpurohit, Partner from BDO LLP, and had the participation of more than 60 MSMEs from across all regions of the country.

Expressing enthusiasm over the launch of GST, Mr S N Tripathi pledged the support of his Ministry to enhance the technological upgradation and technical literacy of MSMEs to make the most optimal use of the technology enabled platform for GST. He also said that the Ministry will work with CII in order to enhance awareness on GST and its provisions amongst MSMEs. Speaking at the Session, Mr Neeraj Prasad stated that the government is forging ahead with historic speed in order to launch the GST in a timely manner and areas such as the ITC and simplification of processes form the core of the discussions ongoing to finalize the GST model. In the first meeting of the GST Council promulgated recently the threshold exemption limit was decided to be set at Rs. 20 lakhs, as against an earlier proposed limit of Rs. 10 lakhs, which bodes well for SMEs as many of these enterprises will be saved from undertaking GST compliances. In another attempt to ease the compliance burden for small traders, the government has announced the Composition/Compounding Scheme. A consensus on the scheme was arrived at the GST Council meeting where it was decided that traders with gross turnover cut-off of Rs 50 lakh will pay 1-2% which is much lower than the GST rate. The government has also set up the GST Network (GSTN) for the online administration of the dealer registration process, tax payment and tax return filing and refund to tax payers with respect to GST. According to Mr Vashishtha Chaudhary, this is a paradigm shift in the taxation system existing in India hitherto and will result in a simplified and transparent tax regime which is easier to administer and monitor. He informed that taxpayers registered under VAT, Service Tax, Central excise Duty, etc. will be automatically migrated to the GSTN. 

Speaking at the Session, Mr Bharat Goenka, Co-Founder and Managing Director, Tally Solutions stated that in the event of the difficulty of compliance being more than the difficulty of tax evasion without detection, a taxpayer will choose to evade taxes. In his opinion, there is a need to complement this simplified tax regime with simple procedures and minimize the compliance requirements. He stressed upon delinking the supplier’s tax payment from the recipient’s input tax credit.

Mr Naveen Rajpurohit, Head, Indirect Taxes, BDO India LLP regarded GST as a major tax reform in the country. He pointed out some concern areas the most significant out of which relates to the transference of responsibility and liability of tax remittance to the customers of a supplier. The law postulates that if a particular supplier has failed to comply with the law correctly, either by furnishing incorrect returns and/or defaulting on the correct, the customers of such a supplier will not be able to avail the input credit. In his opinion, this scenario makes the purchaser wholly liable for the tax payment of his supplier. This will have a huge impact on working capital for the SMEs and has the potential to kill the SME industry, he added.

According to the discussions during the Session, the benefits of this revolutionary tax regime will be lost on the Indian industry if it is not accompanied by a set of simple procedures to reduce the compliance burden on businesses, especially MSMEs. The government must also take sustained initiatives in order to educate MSMEs about the various provisions and compliance requirements under GST for MSMEs through seminars, conferences, training sessions, etc. This will go a long way in enhancing their preparedness for swiftly transitioning to this new tax regime and avail of its various benefits on the Indian industry.