India has an estimated five crore small and medium enterprises (SMEs) that form the backbone of the economy. How will the implementation of the goods and services tax (GST) impact the sector, which contributes 50 per cent of the industrial output and constitutes India’s 42 per cent export earnings?
“In the short-term, SMEs will face a crunch in input credit due to the implementation of GST. But once SMEs register themselves and develop a discipline in remitting GST, it will not only help them become better documented but also help them receive micro-financing more easily,” said Azgar Hussain, Finance Controller, NowFloats, a technology platform for SMEs.
Earlier, businesses having a turnover of more than Rs 5 lakh had to pay VAT registration fee. With GST, the lower ceiling will be Rs 20 lakh (Rs 10 lakh for north-eastern states), providing a huge relief to young entrepreneurs.
However, the term SME was given to businesses which had smaller revenue than Rs 1.5 crore. Now with a lower threshold limit of Rs 20 lakh, SMEs who were exempt from paying indirect taxes earlier will have to pay GST. This is likely to impact their operations and profitability.
“GST has changed the description about SMEs. Now very small enterprises are also liable to pay taxes. With this both SMEs and large corporates selling similar products will be on the same field. Besides, products like ice and candle will attract a tax of 12 per cent in the new structure. This will kill these niche industries,” said Damodar Avanoor, President, Kerala State Small Industries Association.
The advantages include better future prospects for SMEs that operate inter-state as there will be common taxation. Removing check-posts on state boarders will be another plus.
“The implementation of the new system needs a proper, disciplined approach to ensure the smooth going for GST. In the case of e-commerce it would be difficult to analyze the reversal process of the tax if sold goods are returned. But in the long run, GST will turn SMEs more competitive,” said Jimmy Kaul, MD and Co-Founder, Shopotox.com, an online shopping store.
Post July 1, SMEs need not submit excise return, VAT return and service tax separately every month and only books for GST has to be maintained. For interstate purchase, previously they had to pay two per cent CST, five per cent VAT and two per cent entry tax. States had different entry taxes, which varies from 1 to 14 per cent. But many SMEs are yet to register for the Goods and Service Tax Identification Number (GSTIN), a pre-requisite for the new tax system.
“Now SMEs have to pay a significant portion of their margins as Central sales tax to execute interstate sales. This tax is not applied to the large segment players who perform ‘stock transfer’ for their interstate movements. GST will measure both SMEs and big players against the same parameters and charge them both impartially,” said Saahil Goel, CEO & Founder, Kraftly.
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