GST benefits for SMEs

Since its implementation in July 2017, the Goods and Services Tax has been crowned as the tax reform that revolutionized India’s indirect tax system. Yet it has been under tight scrutiny and has been a constant subject of criticism. The country has been divided on opinions of how beneficial this tax is for certain sections of taxpayers. As a nation that hosts a very large chunk of small and medium sized enterprises, let’s understand the benefits of the Goods and Services Tax specifically for SMEs.

The concept of one nation one tax becomes a reality as the Goods and Services Tax replaces all indirect taxes and brings indirect taxation under one roof. This makes it easier for companies to maintain compliance requirements and eliminates the need to maintain documentation for several taxes, thereby saving time which would otherwise be wasted on futile manual tax functions. For small and medium sized businesses which run operations beyond State borders, a centralised tax system facilitates transparent and efficient filing of returns.

A GST Identification Number (GSTIN) acts as a validation or authentication for businesses. Having a GSTIN allows small and medium enterprises to easily avail of business loans as a GSTIN is a significant eligibility criteria.

On analysis, taxpayers will find that the output tax liability paid on the Goods and Services Tax is actually lower than the tax an SME would be liable to pay on all indirect taxes like VAT, Sales, Custom Duty etc. Previously, SMEs were liable to pay indirect taxes that totalled up to a whopping 32% but with the implementation of the Goods and Services Tax, this figure has actually come down significantly and stands between 18% to 22%.

In the previous indirect tax system, a business was required to pay VAT no matter the amount of their turnover. So a small business was required to pay tax even if their turnover was as low as ₹5 lakh, they would have to pay taxes. The threshold cap under the GST regime is a lot higher so businesses with an annual turnover of ₹40 lakh are required to register and pay GST. So if a business’s annual turnover is lower than the threshold, their output tax liability will be much lower.

The GST system is continually evolving and after feedback from businesses, the GST council announced the implementation of a new returns system. Under the new returns system, taxpayers will be categorised based on their annual turnover and filing of returns will be down to just a couple of forms instead of several return forms. Additionally, the forms will be auto populated from the first return form. Another addition to the GST system was the introduction of the PMT09 form for making amendments to tax heads under the electronic cash ledger.

Starting a business can be expensive and under the previous indirect tax system, registering for VAT was complex and cumbersome. Moreover, a business was required to abide by rules that varied across States. A centralised tax system ensures that tax rules do not vary across States, so setting up a new business becomes a lot easier and can be done using a single GST registration.

One of the biggest pet peeves of India’s indirect tax system was the Inspector Raj. Businesses who would send goods across State borders would be stopped at multiple checkpoints and would have to shell out plenty of cash to border patrolling officers. A unified tax system nipped this issue in the bud and thereby reduced logistics expenses for businesses, allowing them to expand.

As per the latest announcements by the Centre, the definition of businesses that fall under the category of MSME has been changed in a bid to offer them relief measures due to the COVID-19 crisis. But changes in the threshold of investment and turnover for both service and manufacturing based MSMEs not only allows them to grow, it also allows them to further the country’s ‘Make in India’ cause.

While the Goods and Services Tax has been a heavily debated topic, experts have always been of the opinion that the indirect tax revolution will prove to be highly beneficial for small and medium sized businesses in the long run.