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The implication of GST under MSMEs: Positive and Negative Factors

Sonal Pruthi

| Updated: Jan 20, 2021 | Category: GST, MSME

The implication of GST for MSME

This article speaks about the increasing implication of GST under MSMEs for positive and negative factors. GST for MSME has not been a challenge but can look from different positive and negative aspects. We are here to examine the impact of GST for MSME that is Micro, Small, and Medium Enterprises. In the country like India, with its demographic diversity, SME’s have always grown and become the leading employment sectors.

Before applying GST, we have seen that SMEs are a major contribution to the society. We can broadly say that the government intention behind GST for MSME’s is to increase the taxpayer base, but not to increase the burden over the individual taxpayer or assessee.

Historical Significance

A few decades ago, we can efficiently compute that, a manufacturer with a turnover of Rupees 1.5 Crores, or less was not required to comply with the excise duty rules. With, the merger of all, State and Central level taxes, into the ambit of GST, any manufacturer with a turnover of Rupees 20 Lakhs in other states, or Rupees 10 Lakhs in other particular states, will have to comply with the GST procedures. There is an online portal which takes care of GST for MSME registration, payments, and refunds.

Current scenario

Today, from the records of the financial year 2020, we have more than 63 Million MSMEs registered in India. MSMEs were found more in rural areas when compared to the urban areas.

Contribution by MSME

According to Directorate General of Commercial Intelligence and Statistics[1], the share of MSME related products in total exports from India, from 2018 to 2019 is 48.10%. As per the exports policy, in consideration, MSME contributes around 40% to overall export policy. This sector contributes to 8% of the country’s GDP, including 45 % to the manufactured output and 40% of the country’s exports.

Eligibility Condition to become MSME

MSME in Manufacturing Sectors:

S.No.

Particulars- Enterprises

Investment in Plant & Machinery

1.      

Micro Enterprises

Does not exceed 25 Lakhs

2.      

Small Enterprises

It is more than 25 Lakhs but not more than 5 Crores

3.      

Medium Enterprise

It is more than 5 crores but does not exceed 10 Crores

MSME IN Service Sectors:

S.No.

Particulars-

Investment in Equipment

1.      

Micro Enterprises

Does not exceed 10 Lakhs Rupees

2.      

Small Enterprises

More than 10 Lakhs but does not exceed 2 Crores

3.      

Medium Enterprises

It is more than 2 Crores but does not exceed 5 Crore Rupees

Implementation of GST for MSME

Some applauded the coming of GST for MSME; we have to look at the positive and negative sides of the GST.

A. Positive Factors of GST for MSME

Positive Factors of GST for MSME
  1. Establishing New Business is Easier-

The uniform GST process has standardised the procedures of registration, payment and refund policy for MSMEs. The reason is that, in the previous taxation system of VAT, where the sales department had the slab rates for the registration under VAT. The small businessman in case of multi-states operation had to follow the tax rules of different states. This increases the cost of procedures on the assessee.

  1. Improved Market Expansion

In the current market situation, big companies procure the goods based on the MSME locality to reduce their overheads. The MSME limit their customers within their state, as they will bear the ultimate tax burden on interstate sales, reducing their customer base. With the implementation of GST, this will be nullified, as tax credit will be transferred irrespective of the location of buyer and seller. This allows the MSME sellers to expand their reach across the globe.

  1. Reduction of Logistical Overheads

The GST is one tax for one nation- it is neutral tax policy, which aims to eliminate the time-consuming state borders taxes and encourages the cross border transaction within the states and outside the states. This reduces the cost of logistics where the goods are encouraged to be produced in bulk. This has improved the bulk production facility and survival of MSMEs.

  1. No difference in sales and services

The current GST for MSME helps you not to discriminate between sales and services. This is a significant relief for the business houses which follow both the types of sales and service model in their businesses.

This helps to calculate those taxes easily.

  1. One Unified Market

There is a free movement of goods which is allowed across the states, subsequently reduces the cost of doing business. The impact is that it will reduce the multiple taxes imposed by central and state government.

  1. Reduction of the tax burden on new business

The business with a turnover of 5 Lakhs Rupees needs to pay VAT registration fees. The government under the GST for MSME, the exemption limit of 25 lakhs has been given, which covers 60% of the dealers.

  1. Faster Delivery of Service

The advantage of the GST for MSME is that there is no entry tax for the goods manufactured or sold in any part of India. This will reduce the logistics cost for the MSME up to 20%.

B. Negative Factors of GST for MSME

Negative Factors of GST for MSME
  1. The burden of the lower tax threshold

The current tax system has reduced the tax limit of 9 Lakhs Rupees, to increase the tax net to Rupees 41 lakhs following North-Eastern states. In the current central excise tax, the threshold limit is 1.5 Crores. This will impact the working capital for MSME.

  1. No differentiation on luxury products and services

The drawback of GST is that it is not differentiating the tax on luxury goods and services. This is not ideal for MSMEs that competes against big business houses.

  1. The burden of the higher tax rate on the service provider

The GST rate is 18%, and the service tax rate in the previous system was 15%. The companies will have to bear the excessive tax rate due to doing away of central registration of the units under GST. The service provided by one branch of the company to the other team of the company is both taxable.

  1. Excess Working Capital Requirement

Taxation of stock transfer will impact the working capital requirements. This increases the cost of the finished goods as the cost of input, and raw materials are growing.

  1. Purchase and Supply Chain Management

The GST Credit will not be available, to the compliant company, if the vendor is from MSME purchasing goods, which does not show the same in his return. The GST for MSME is a big failure in case of taking the input credit.

Conclusion

It can be concluded that GST for MSMEs has both advantages and disadvantages. Every reform has some obstacles which is debatable. However on the larger side, the GST system has brought multiple advantages like single taxation, simple procedures and no cascading effect.
The advantage to MSME registration is that it brings the tax neutrality for them. The long term effects of GST for MSME is helping to boost our economy and giving a boost to our make in India.

Read our article:A Sigh Of Relief For MSMEs: GST Exemption Limit Increased By The Council

Sonal Pruthi

She is B.Com (H), LL.B LLM, Cs (Module 2) And Certification In Cyber Law From ILI Qualified. She has Been A Legal Teacher In The Previous Organization. My Strength Is My Expertise Knowledge In Civil Laws, Corporate Law And Tax Laws. I Have Been Legal Teacher And Legal Trainer In The Past Organization. Her Knowledge About The Subjects Have Expanded Due To Teaching Number Students From Various Universities All Over India.

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