Impact of GST on SMEs

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SME Times News Bureau | 03 Aug, 2016
Finally the largest tax reform in Indian history has sailed through the toughest hurricane. The much awaited Goods and Services Tax ('GST') is finally ready to get constitutionalized as the Upper House of the Parliament has passed the Constitution (122nd Amendment) Bill, 2014 ('the Bill').

Explaining the impact of GST on Indian small and medium enterprises (SMEs), Rajeev Dimri, Leader, Indirect Tax, BMR & Associates LLP, said that GST throws a mix bag of opportunities and challenges for SMEs to explore.

"Irrespective of the bright side of upcoming GST, SMEs must be mindful of its accompanying challenges such as increase in compliance costs and alignment of IT systems with new processes. Thus, for the SMEs, GST throws a mix bag of opportunities and challenges to explore," Rajeev Dimri said in a press statement.

He said, Government's intention behind GST is to expand the taxpayers base and not to enhance tax burden on business/ individual tax payers. Much aligned to this objective, Model GST law released by the Ministry of Finance seeks to bring each person with an aggregate turnover of above Rs 10 lakhs within the umbrella of GST. The limit has been kept even lower at Rs 5 lakhs for north eastern states.

This should create a level playing field for organized and unorganized sector by curbing scope of various tax evasion practices such as creation of multiple entities to enjoy high exemption thresholds.

However on the flip side it could vitiate the existing protectionism provided by the government to Small and Medium Enterprises (SMEs) which necessitates them to get out of their comfort zone as far as indirect tax costs and benefits are concerned.

SME manufacturers, presently exempt (if annual taxable turnover is up to Rs 1.5 Crores) from paying excise duty, would be liable to pay full rate of GST. This may bring their products up for stiff competition with those of industry leaders in terms of tax costs involved.

Small scale service sector is also likely to face an increase in tax rate under GST as against the present effective rate of 15 percent. GST is likely to subsume some major Central and State levies such as duties of excise, additional duties of customs (applied in lieu of excise and local taxes), service tax, value added tax, central sales tax, entry tax, octroi and luxury tax. These taxes in aggregate constitute typically 25 percent to 40 percent of the price of products with certain categories being taxed at lower rates. There could be a reduction of tax incidence for several product categories if the standard GST rate is notified in the range of 18 percent to 20 percent. Headline tax rate on services is likely to increase as these are currently taxed at 15 percent even though expansion of the input credit base should partially offset the increase, he added.

However, better availability of input tax credits should leave the increased tax incidence on services to only marginal.

Trading entities, on the other hand, should largely welcome GST as it creates a single uniform market for them across the country with improved ease of doing business.

Rajeev Dimri specializes in structuring domestic & cross-border transactions for goods and services covering a range of indirect tax issues.

The Rajya Sabha on 3rd August, 2016 passed the relevant Constitution amendment bill to pave the way for the introduction of a pan-India Goods and Services Tax regime.

The upper house passed what is called the Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014, with all the 197 members present voting in its favour. Some of the amendments to the main bill, also introduced by Finance Minister Arun Jaitley, however, had a few dissenters.

The Centre and States will have just about six months' time to roll out the GST and the Finance Ministry is upbeat that it is possible. The Modi government is keen to roll out the goods and services tax from April 1, 2017.

The Constitution Amendment Bill will now require the Presidentâs assent, following which the all-important GST Council will also be set up, reports media.