IMPACT OF GST ON SMALL AND MEDIUM ENTERPRISES

Businesses in India are booming yearly, every sector is growing by the day, and the government is implementing reforms and programs to create a successful environment for these businesses. The Goods and Service Tax bill (commonly known as GST) is going to be implemented by the government from 1st of July’17. This will be the biggest indirect tax reform in our country since independence. However, complying with this tax reform may be a bit complex at first for small and medium businesses. But in the long run, it will benefit both consumers and the businessmen.

POSITIVE IMPACTS

Like every reform GST too has its pro’s and cons. Let us review the pros of GST for small and medium businesses.

1.It will be easier to start new businesses:

At present, the Sales Tax Department has many turnover slabs which require VAT registration. A lot of businesses operate in multiple states, and this complicates their tax burden. This is because different states follow different tax rules. Complying with these rules and also payment of procedural fees burdens Small Businesses. It affects their cash flow and prevents growth. With GST there will be uniform procedures, uniform payment of fees, and a smooth and uniform tax structure in all states, thus easing out the process to start a business in multiple states.

2.SME’s will be able to expand their business :

Currently, small enterprises limit themselves to intra-state trade only because they will have to bear taxes in case of inter-state trade, and this will increase costs for customers ultimately reducing their customer base. With GST this will be eliminated as tax credit can be transferred irrespective of the location of buyer and seller. As a result, SME’s will be able to expand their business across borders.

3.Businesses will have a lesser tax burden:

GST will eliminate the cascading effect of various state and central taxes. State taxes that will be subsumed within the GST are VAT, entertainment tax, entry tax, and luxury tax, tax on betting and gambling. Various central taxes that will be subsumed are Central Excise Duty, Additional Excise Duty, Service tax, Additional Customs Duty, Special Additional Duty, and Central Sales tax. Businesses will be able to take input tax credit too with GST. This reduces the tax burden on businesses, making goods cheaper and increasing profit margins for SMEs.

4.Logistics and delivery will become faster:

GST will eliminate time-consuming border tax procedures and toll check posts and encourage the supply of goods across borders. According to a CRISIL Analysis, the logistical cost for companies manufacturing bulk good would be reduced by around 20%. Such costs can be crucial for the survival of SMEs. No entry tax will also be charged for goods manufactured anywhere in India. Thus, making logistics and delivery faster and smoother for small and medium businesses.

5.There will no longer be any confusion between a “good” and a “service”:

At present, there is great confusion between a service and a good. Each attracts a different tax. Goods attract VAT and services attract service tax. For e.g. A restaurant can be partly good and partly a service. This distinction will be eliminated with GST. It will ensure that there is no ambiguity between goods and services. It will simplify various legal proceedings related to the packaged products and there will no longer be a distinction between the material and the service component. Ultimately this will greatly reduce tax evasion.

6.Single/Unified market:

GST will allow flexibility in the transfer of goods across states and reduce the cost of doing business, as the reform will cut down multiple taxes imposed by state and central government.

7.Online compliance procedures:

Under GST all compliance procedures such as registration, payments, refunds, and returns will be carried out through online portals. The burden on SME’s (due to the current taxation system) to interact with department officers carrying out compliances will be eliminated. In this way, GST will save time and effort of SME’s.

8.Encourage manufacturing sector:

With the implementation of GST, the burden of tax is expected to reduce both for the manufacturer and the end user. The manufacturer will get the benefit of input tax credits and the end user will have to pay only the tax charged by the last dealer or the retailer in the supply chain. This will increase competitiveness and the demand for the ‘Made in India’ products would also increase immensely.

9.Higher exemptions to new businesses:

At present businesses with a turnover of 5 lakhs have to register and pay VAT. But with GST this limit has been increased to 10 lakhs. Also, any business with a turnover between 10-50 lakhs will be taxed at lower rates.

10.Use GST to manage working capital:

GST impacts working capital and working capital is very important for any business. However, businesses can use GST to manage their working capital. They can harness GST to their benefit. This is further explained in the next article. To know more visit our website www.flexiloans.com

NEGATIVE IMPACTS/CHALLENGES FOR SMES

Though GST has an overall benefit for SMEs there are certain concerns SMEs may have about GST. A lot of SMEs fear that GST is not entirely beneficial to them. This is because currently under the present excise tax regime, no duty is paid by a manufacturer with a gross turnover of less than Rs 1.50 crores. However, after GST implementation, this exemption limit would get considerably lowered to Rs 20 lakhs. But this will prevent any tax evasion and everyone will be under a uniform taxation system. As a result, a large number of SMEs and start-ups would come under the net of the GST tax. Also, GST may not be applicable to alcohol and petroleum, thus widening the gap between these products and other products These and a few other minor concerns are looming around minds of small and medium businesses. In the long run, GST will be beneficial to the nation and people will truly understand its importance!