GST Impact: How Enforcing Input Tax Credit Can Hurt SME Economy?

ITC effect on SME Economy

One tax for one nation is what the GST is created to do for the entire country of India. It is an indirect tax, which will channel and streamline the tax for the whole country as opposed to a central or state tax. This will make it easier for the people to understand the taxation, which is to be paid for the goods and services and would make it simpler for understanding the tax slabs.

The Goods and Services Tax will be applied to all the goods and services that are sold in the country and would make it beneficial for the consumers to pay only one form of tax, as opposed to what was happening throughout the years up until now. There are different types of GST slabs for different industries, products, and services, and everyone should know the amount of tax that will become payable on the day to day objects as well. In this blog, we will specifically discuss how ITC effect on SME Economy under GST.

Impact of ITC on SME

While GST is said to benefit most of the industries and companies, it could also have an adverse impact on some of them. Many believe that enforcing GST will hurt the SME’s because of the input tax credit system. There will be adverse ITC effect on SME Economy under GST, many analysts have analyzed the impact that it would create and how it could hurt the SME economy.

Under the new GST laws, the business can reduce the tax already paid on the inputs at the time of paying tax on the outputs. This is referred to as Input Tax Credit and is going to be made available under the new GST regime. This credit system is going to have a negative impact on the SME economy.

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By enforcing input tax credit under the new GST law, the SME economy can be hurt in the following ways:

 input tax credit under the new GST law
  • Higher Tax Burden in Manufacturing SME

Since the businesses with 40 lakhs or higher turnover have to register under the new GST laws, this will increase the cost in the small and medium enterprises as the tax burden will increase, which will cause the other costs and prices to go up as well.

  • Increase in Operation Cost

One of the major ITC effects on SME Economy is that it will increase the operating cost as the ITC will not generate more cash inflow in the economy, and hence the tax burdens will be higher on the SME’s. Therefore, they would face an increased cost of operation due to the tax burden.

  • New Business Software

The GST will have new business software in place for many wholesalers and retailers, which they would have to spend the time to learn and operate. This will be done to track the inventory and tax flow of the particular enterprise, and the business will have to spend money on obtaining and learning the new software.

  • Complications of New GST Rules

As the GST was implemented in the middle of the year, the calculations become more complicated for SME’s, and they will have to spend an ample amount of time in learning and training employees who will be able to pay the tax online and as specified under the new GST slabs and regime.

  • E-Commerce Sector will be Affected
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The e-commerce sector under GST would be immensely affected as they would have to pay taxes on the stock being held in the inventory and many such factors and would have to re-think their entire business strategy. Although they will benefit from the ITC, they would still have a higher tax burden to comply and will have to come up with new strategies to tackle the higher taxes under GST.

  • Increase in Tax can Increase Prices

The increased tax slabs under GST can also cause an increase in prices of the products and services for the final consumer and could increase the standard of living in the country.

  • Recording all Transactions

SME’s will have to spend time and money in recording all the transactions they have with every supplier and customer to benefit from the ITC scheme under the new GST laws. This activity will be very time consuming and would increase the manual labour cost of the business.

  • Hiring a Professional Accountant

Smaller shops may find it difficult to maintain every transaction and understand the tax behind their business and the tax slab they fall under with the new GST laws[1]. Therefore, they would have to spend money on hiring a professional accountant who can understand the GSTs working and help them make their tax claims, ITC claims, and help them understand the working of their business under the new GST laws.

Small and medium enterprises would have to devote a lot of time understanding the new GST terms and draft their taxation accordingly. The anti-profiteering provision will give a lot of power to the taxmen and bigger corporate companies would be the primary target. Therefore, everyone would have to maintain their books of accounts up to date in order to pay only the tax amount that falls under GST.

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Small traders who have less than 40 lakhs of aggregate turnover for the sale of goods and for special category states the limit is 20 lakhs, are also exempted from GST Registration requirement and this is an advantage to them as they do not have to spend the money from their small margins of profits in order to pay the increased tax slabs of the new GST laws.

Under the Composition scheme, small traders with a turnover of fewer than 1.5 Crore will have to register, but do not have to pay all the taxes listed under GST and can learn about the category of slabs that they fall under as and when they expand their business.


I hope this helped you understand the ITC effect on SME Economy in India. For GST Registration in India or any other GST related queries, contact Enterslice.

Read our article:Compliance Deadlines for Composition Taxpayers Relaxed

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