Being one of the pivotal growth engines of the Indian economy, Small and Medium Enterprises (SMEs) remain one of the major contributors to the total GDP of the nation through increased employment generation, exports and inclusive growth. SME business owners, even after several years of GST being implemented, are yet to figure out the nitty-gritty of “One Nation, One Tax” compliance and its potential effects on their businesses.
To make the Indian economy the world’s third largest in the next few years, special emphasis has been laid on empowering the backbone of the Indian economy – SMEs, since bigger corporates are capable enough to be powerhouses by themselves. Be it global economic windfalls due to the pandemic or recurring wars elsewhere, the Indian economy has constantly outperformed its expectations, all thanks to SMEs punching above their weight.
Only 1.34 crore out of an estimated 6.3 crore SMEs have registered themselves under GST till date. SMEs are evaluated based on the annual turnover with changes to the brackets, where small enterprises shall have an investment of Rs.10 crores to Rs.50 crores and in the case of medium enterprises, it shall be Rs.50 crores to Rs.250 crores. Understanding the peculiarities of GST can hence drive SMEs on the path of unlimited optimization and pathbreaking growth.
Ensuring the Basics are in Order.
Required facilities and robust infrastructure are what SMEs need in the first place to get their fundamentals right. The replacement of a dozen indirect taxes with a single GST regime has put the house in order and has inspired more SME entrepreneurs to venture into business activities. The GST regime has enhanced transparency, minimized processes and simplified compliance burdens for SMEs.
The implementation of the GST regime has led to an increase in credit provision by formal lenders to significantly expand their businesses since more SMEs than ever have registered themselves under GST. A fully online GST infrastructure has vastly benefitted smaller entities by simplifying an erstwhile complex indirect tax regime.
It has brought all businesses – big or small under a single regulation to ensure better tax compliance. Although minimum threshold limits have been increased for registration requirements, an increasing number of SMEs get themselves registered to avail themselves of the various benefits the new GST regime has to offer. Understanding the GST regime and its applications can be a valuable opportunity for SMEs for compliance, optimisation and growth – all at the same time.
The availability of GST filing data seamlessly around the clock has helped various entities such as sellers & buyers streamline their core operations with the central database. The Government has already provided an interest subvention of 2% for SMEs registered under the GST network. Since larger entities prefer dealing with only registered entities to mitigate several business risks, most SMEs nowadays have resorted to getting themselves duly registered.
What Has Got Better: The Sunnier Part
The previous indirect tax regimes required any business to get themselves registered under VAT with each respective state’s sales tax departments. Add to that different set of rules and laws in force in each state and you have a complex cobweb of compliance burdens for every state that the business chooses to operate in.
All of that has been eliminated in GST with the requirement to obtain a single registration number – GSTIN. By levying a single common GST across the entire nation, the previous problem of cascading taxation caused by the overlapping of multiple state taxes has been eliminated now. This subsequently means dealing with significantly lesser legal compliances and facing tax sleuths on a much-reduced frequency.
The previous regimes required the calculation of VAT at every stage of production, thus earning the name ‘Value Added Tax’. GST made it easier for SMEs and other businesses to calculate tax on the final value of the product, thus ensuring easier availing of input tax credit (ITC) as well.
Logistically speaking, the introduction of e-way bills under the GST regime has facilitated the easy movement of goods across state boundaries too. Removal of state border check posts under the Octroi regime has resulted in saving fuel/labour costs, enabled faster movement of commodities and reduced hindrances for SMEs dealing with transportation.
The Not-So-Brighter Part: Challenges
Although minimized, regular compliances remain a part of SMEs wanting to conduct business. Monthly returns require monthly adjustment of books and failure to do the same on time shall result in non-availability of ITC and penalties on a per-day basis.
SMEs wanting to venture out into the e-commerce space are mandatorily required to register in every state irrespective of the turnover amount. They also shall be ineligible to avail the benefits of the composition scheme or threshold limits in every state. There are times when larger important businesses delay payments to SMEs which eventually forces them to pay GST from their own pockets, thus squeezing further already scantier working capital of SMEs.
Lack of clarity persists amongst many SMEs who lack the expertise to grasp the nuances of GST compliance. Outsourcing of compliance procedures to tax professionals, besides increasing costs for businesses, also creates a lag between them and SMEs for data retrieval, challan payments and filing of returns on time.
Since refunds availed are largely dependent on successful exports, SMEs are burdened more than ever to rely upon the supply chain for availing ITC, hence creating greater interdependence between SMEs and their supply chains. Variation in demand-supply due to increased raw material costs shall cause SMEs to jack up the end product prices which shall drive inflation rates up.
Key Takeaways for SMEs – Things to Note
SMEs must ensure compliance with GST most promptly and accurately as possible to avoid any form of monetary penalties or interest levies. The most imperative way in which SMEs can ensure the same is to file returns on time. Remainders can be set on accounting or filing software so that crucial filing dates are not missed. Rules for eligibility to avail ITC on various inputs and purchases must be thoroughly studied so that eligible and non-eligible items can be demarcated separately and accordingly, data is fed in the monthly returns filed.
Raw data that helps in filing returns and claiming valid ITC shall be maintained accurately such as sales/purchase invoices, debit/credit notes, etc. using modern & easy-to-use accounting software. Proper training must be provided to competent staff who will be dealing with the everyday nuances of GST and periodic return filing.
Where expertise and time are in limited supply, outsourcing GST compliance to a qualified chartered accountant or an experienced GST practitioner shall be imperative in ensuring timely compliance.
SMEs must take care to prioritize transacting with GST-registered businesses to best utilise ITC. This reduces their overall tax liability as well as helps in forging better business relations with reliable parties in the market. Inventory levels must be kept at minimum required optimum levels to reduce tax paid remaining stuck in unsold inventory. Similarly, planning purchase schedules and adjusting them according to the current market demand allows for better optimization of GST.
Several tax-saving measures that can additionally be pursued include increasing sales of products with lower tax rates, opting for composition scheme and paying taxes at fixed rates (applicable only for SMEs whose turnover < Rs. 1.5 Crore), and claiming valid ITC on other business expenses to reduce the overall GST outgo.
To Conclude With
GST has created a seamless & simple transition from the older & much more complex indirect tax regimes, thus making it obligatory for SMEs and other businesses to grasp it to usher in a much more nuanced and refined business atmosphere. GST also brings in additional benefits for SMEs to reduce their tax outgo effectively within the boundaries of the law.
However, the government must also ensure to not tighten the noose and keep legislation relatively simpler for SMEs since such smaller entities cannot afford to have a full-time ‘government affairs’ team to cater to every small interference from the authorities. A conducive business environment must be guaranteed by the higher authorities so that more SMEs can board the GST train and can focus better on business growth rather than merely on compliance.
Larger business organizations possess a significantly larger edge and it has become all the more important for SMEs to leverage the best benefits it can make when it comes to indirect taxation. Hence, for SMEs to match their abilities or perhaps even gain a competitive edge, studying the pitch and batting accordingly shall be of utmost importance in terms of GST. Professional guidance sought from qualified & competent professionals and staying updated on various changes & improvements shall go a long way in SMEs establishing themselves as the engines of Naya Bharat 2047!
