09 Oct 2017
SMERA welcomes the relief measures announced by the GST Council on October 6 and believes that these announcements will go a long way in providing relief to a large number of micro small and medium (MSME) enterprises. The measures will have a positive impact in these three different ways:
(i)simplification of tax structure and minimisation of compliance costs for small businesses
(ii)evolution of an alternative GST mechanism for exports to ensure that SME exporters don’t face liquidity or working capital pressures
(iii)revision of tax rates for some unbranded common products to improve the competitiveness of those MSMEs who manufacture and distribute them.
Impact on Business Confidence & Compliance
In a recent survey conducted by SMERA, more than 60% of respondents felt that their systems were not ready for the new tax regime. The sector has been under pressure over the last few quarters with low capital availability and demand. The credit offtake to the MSME sector at Scheduled Commercial Banks, as on August 2017, has been below the level as in the previous year. The general business confidence levels have not been encouraging and the lack of hiring plans reported by a majority of the MSMEs that SMERA surveyed, reflected this weakness.
A key announcement by the GST Council on October 6 has been a simplification of the GST structure for micro-enterprises with gross turnover upto Rs. 150 lakh. The composite scheme for small businesses which was applicable for turnover upto Rs. 75 lakh has now been extended for gross turnover upto Rs. 100 lakh. The composite scheme is the simplest of the GST scheme where the business entity pays a flat rate of tax ranging between 1-5%, without having to deal with any complex tax filing process. Further, businesses with turnover upto Rs. 150 lakh have now been allowed to file returns and pay GST on a quarterly basis instead on a monthly basis. SMERA believes that this implies that the compliance burden and its costs for small entrepreneurs and enterprises would reduce significantly. Such a simplification of the taxation structure for small businesses will also lead to an increase in the taxpayers’ base and improve compliance.
Impact on Exports
Appreciating rupee has had a negative impact on Indian exporters. Exporters, particularly those in the MSME segment have been further impacted in the first phase of GST implementation with the delay in the refund of the upfront GST being paid by them; the original mechanism was already leading to a blockage of working capital and affecting the liquidity position of small and medium exporters. Nearly 46% of our survey respondents had believed that their working capital requirements will actually go up post GST implementation.
This issue has been addressed by putting the exporters under an exempted category (where only a nominal GST of 0.1% will be applicable for the rest of the fiscal year) and proposing an e-wallet facility from next year. Additionally, the government has also assured that GST already paid by the exporters for the month of July and August will be duly refunded by the third week of October. In our opinion, such a step was necessary and has been taken in a timely manner to improve sustainability of India’s small exporters. A SMERA study indicates that the share of SMEs in India’s exports have steadily climbed from 40% in FY14 to around 50% in FY17 and is expected to climb further in the presence of an enabling environment.
SMERA believes that the introduction of GST will actually expand the market reach of MSMEs due to dismantling of inter-state barriers of trade. Specific measures now announced for the MSMEs will bring much needed relief to them as they were facing challenges post-introduction of GST. The long-term positive effects of GST will outweigh the current problems. The steps announced by the government shows its resolve to remove the pain points and make the transition to GST smooth.
Another significant decision taken by the GST Council has been the reduction of the GST rate on 27 common products which are mostly unbranded and manufactured by MSMEs. The reduction in almost all the cases has been from the higher to the immediately lower tax slab (whether from 12% to 5% or 18% to 12%) and involves indigenously processed foods, man-made textile yarn, stationery and other job-work items. SMERA believes that such a realignment of the tax rates will improve the competitiveness of the unbranded products from the unorganised sector, which continues to be a major source of employment in our country. A noteworthy item in the reduction list is government contract job which involves high component of labour, GST rates therein having been lowered from 12% to 5%. This in a way indicates the focus on encouraging those businesses which can employ a larger number of people.