What can MSMEs do to stay ahead in the age of dual GST?

What can MSMEs do to stay ahead in the age of dual GST?

The MSME (Micro, Small and Medium Enterprises) sector in India has been formidably shaken with the ripples caused by demonetization. While the sector, tottering at 6-8% growth versus the earlier projected 14-16% growth (source: https://www.thehindubusinessline.com/opinion/how-will-gst-impact-msmes/article9702208.ece) continued to recover, it received another shocker- the introduction of the Goods and Service Tax (GST). This new system of tax replaced the old Value Added Tax (VAT) and the cascading taxes levied at various levels. With a twin tax system (called CGST and SGST for center and state respectively) replacing every tax out there, it was intended to unify the system of taxation and bring uniformity in business transactions. However, it was immediately perceived as a measure that wouldn’t augur well for the small business sector. But is that really true? A deeper analysis done by the financial analysts at www.prestloans.com reveals that there are indeed two sides to the coin.

Impact of GST on tax evasion- MSMEs must stay tax compliant to continue smooth operations

The MSME sector in India is famously unorganized which includes copious attempts to evade taxes. These attempts include understating the number of employees or fudging turnover numbers or running different ventures under different names to not reach the tax thresholds. Under the provision of GST, the compliance is a three-way aspect with scrutiny, audit and anti-evasion being included in it. The whole process of registration is also digitized. This means that the evasion that enabled MSMEs to price their products and services more competitively won’t be in effect anymore. This will level the playing field and force the players to consolidate their ventures into a single GSTIN number. The threshold for goods providers has also been reduced from the former INR 1.5 crores to INR 20 lakh which is intended to bring the smaller players into the tax fold.

Impact of GST on ease of doing business- MSMEs can utilize input tax credit to reduce GST and get ahead of the competition

With dual GST and the associated digitization in place the procedure for registering a business is easier than ever. The process of reporting tax is also much easier than before, where it is clearly demarcated that goods providers beyond the INR 1.5 crores threshold deal with the State while the smaller ones deal with the center. Additionally, there is no entry tax for good sold at any part of India. Varying state entry taxes has discouraged goods’ mobility in the past but this won’t happen anymore. There is also no differentiation between goods and services when it comes to compliance. This helps businesses work with less confusion and difficulty, since the legal framework can be more easily applied. With GST, businesses can utilize the concept of input tax credit (the amount of GST on the original price of the goods will be subtracted from the total GST) to reduce the GST paid if they are GST-compliant. By hiring a tax consultant to figure out input tax credit and other aspects, businesses will stand to reduce taxes in the GST era.

Impact of GST on digitization- MSMEs need to invest in technology and understanding it to stay ahead in the era of dual GST

GST is obviously big on digitization. This entire move is intended to bring businesses and the data about their operations into a single, searchable archive. The digitization process also includes invoice matching, where businesses must have GST-compliant invoices to claim the benefits offered under GST. MSMEs must invest in understanding technology or hire the necessary personnel to do so. It would also be prudent to invest in a compliance software that can take care of many tax-tracking processes in a seamless manner.       

Impact of GST on lending

It is also worth-noting that most lenders whether banks, old NBFCs or new age online lending NBFCs like www.prestloans.com assign importance and weightage to businesses who are GST compliant. GST compliant MSME and small business would surely get better credit scores and hence access to credit on better terms.

Conclusion and summary

It is rather difficult to gauge the impact of GST without giving it fair time. But at the outset, the dual GST policy will improve tax compliance, ease the process of starting a business and press on the need for tax literacy and technology. To summarize, we would quote Mr. Bibek Debroy, the author of 'On the Trail of the Black: Tracking Corruption’ on GST, ‘Here we have to have a dual GST. So sitting in this position of uncertainty, I take some decisions and sitting in the same position, you might take a few different ones. In hindsight you always realise you could have taken better decisions whether it is I sitting in this chair or you sitting in this chair." (Source:  //economictimes.indiatimes.com/articleshow/61876194.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst).