GST Impact on Small and Medium Enterprises


Small and Medium Enterprises (SMEs) are the primary growth drivers of the Indian economy with more than three million SMEs operating in India, contributing to almost 50 percent of the industrial output and 42 percent of India’s total exports. A leading employment-generating sector, SMEs have provided balanced development across sectors.

They also happen to be the leading employment-generating sector in the country as well. And so it goes without saying that the benefits of implementing GST on SMEs will play a vital role in shaping India’s economy in the coming years.

Keeping in mind the fact that Digital India has been a significant element of the Modi Sarkar’s agenda so far, it’s not surprising to see many of GST’s benefits for Small and Medium Enterprises be in the digital space.

Positive Impact of GST on SMEs and Startups

As per industry experts, SMEs and startups will be affected the most with the rollout of the GST and the impact will be favorable in ways more than one. Some of the ways GST will benefit SMEs and startups are:

  • Ease of Starting Business

A business having operations across different state needs VAT registration. Different tax rules in different states only add to the complications and incur high procedural fees. GST enables a centralized registration that will make starting a business easier and the consequent expansion an added advantage for SMEs.

  • Reduction of Tax Burden on New Business

As per the current tax structure, businesses with a turnover of more than rupees 5 lakh need to pay a VAT registration fee. The government mulls the exemption limit under GST to twenty five lakh giving relief to over 60% of small dealers and traders.

  • Improved Logistics and Faster Delivery of Services

Under the GST bill, no entry tax will be charged for goods manufactured or sold in any part of India. As a result, delivery of goods at interstate points and toll check posts will be expedited. According to an estimate by CRISIL, the logistics cost for manufacturers of bulk goods will get reduced significantly—by about 20%. This is expected to boost ecommerce across the nation.

  • Elimination of Distinction Between Goods and Services

GST ensures that there is no ambiguity between goods and services. This will simplify various legal proceedings related to the packaged products. As a result, there will no longer be a distinction between the material and the service component, which will greatly reduce tax evasion.

Possible Negative Impact of GST

  • Registration Woes

Under the GST law, every supplier of goods or services is required to be registered under the GST Act in the state or union territory from where they operate, if their turnover in a financial year is Rs. 20 lakh or more (for special category states such as those from the northeast, this threshold is Rs 10 lakh). Thus, one would think that there is no need for smaller players to register under GST.

  • Concept of ‘Casual Taxable Person’

This means that someone who occasionally undertakes transactions involving supply of goods or services or both, in the course or furtherance of business, whether as a principal, agent, or in any other capacity, in a state or union territory where he has no fixed place of business, also needs to register. Other than registering under the GST Act, the casual taxable person also has to pay tax at the time of applying for registration on an estimated basis. Since he or she doesn’t have a place of business in that state, there would be no output tax in that state, thus the state GST cannot be adjusted as an input tax credit. To that extent, the GST is a sunk cost for such individuals.

  • Composition Levy Mechanism is very Restrictive

It is an alternative method of levy of tax designed for small taxpayers whose turnover is up to Rs 50 lakh. Those who opt for this mechanism are not allowed to take input tax credit, or collect any tax from the recipient. To such an extent, it seems fair. After all, the rate of GST under the composition levy is low. It is 2.5 percent of the turnover in case of a manufacturer or 1 percent for dealers. But there are restrictions attached. For instance, once again no inter-state supply is permissible. Or for that matter, a person opting for a composition scheme, cannot sell via an e-marketplace (GST requires e- marketplaces to collect tax at source).

  • The Draconian Reverse Charge Mechanism

If a small businessman (who as per the threshold limits is not required to obtain GST registration) supplies goods or services to a customer who is registered under the GST Act, the customer (buyer) is liable to pay the GST on such a purchase. Not only this, but the buyer also must self- invoice. In other words, the buyer must issue an invoice for the purchase made by him from the unregistered seller. This invoice is to be uploaded onto the GST system.

  • Technological Challenge

Not all SMEs have the technical expertise to deal with online systems. Thus, most of them will need intermediaries to take them through the registration process. This will add to their registration cost.

  • Working Capital Blockage

Since GST requires businesses to maintain funds in the form of electronic credit ledger with the tax department, it may result in liquidity crunch. Also, the harsh Input Tax Credit mechanism will also lead to working capital blockage.

The Final Verdict

Unarguably, GST rollout will open up a can of worms and the impact on SMEs across various industries will vary greatly. It is quite natural for a pervasive, country-wide tax reform, as GST is, to have a mixed opinion. Furthermore, the revolutionary tax regime will have acceptance that will vary from state to state. Overall, the new tax proposals under GST will have a mixed verdict. In essence, the GST’s effect on the entire Indian economy will have to be scrutinized in totality to reach a widely accepted conclusion.


Note – Please note that the above article is for education purpose only. This is based on our interpretation of laws which may differ person to person. Readers are expected to verify the facts and laws.

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