Small scale industries (SSI) are the category of small and medium entrepreneurs who drive out their motivations and their business skills to engage themselves in the business cycles of production, manufacturing, services and other similar retail or wholesale business. Considered a very key and primarily, the economic driver of our country, they play an important role in the economic and social development of India.
One of the essential facts is the contribution of small scale industries in providing employment, generating revenue and cash flows in market, reducing the regional imbalances, is a key promoter to link the different business segments like farming to production, production to logistics or logistics to retail services, etc. and besides this, they drive the nation’s exports. Their products and services can be anywhere from normal or conventional services or products to high-tech.
Small scale industries are spread across the country and it is believed that they provide employment to over 100 Million people of India. They also generate about 40-45% of the overall production and can export upto 50% of overall country’s exports.
With India now catching up with the International markets on par with economy, at some stage on a bigger scale, they decided to bring in the Goods and Services Tax (GST) – one of the country’s biggest indirect tax reforms in India from the time they got Independence. Goods and Services Tax (GST) is a comprehensive indirect tax levied at the prescribed rate on every supply, i.e., sale of goods and/or services except on petroleum and alcohol for human consumption.
To really understand the impact of GST on Small scale industries, it is important for us to understand how GST has been introduced to widen the taxpayer base – meaning increasing the number of persons and/or business under tax brackets. Talking specific to GST, in the pre-GST days, any manufacturer with an annual turnover of Rupees 1.5 crore or less was not required to comply to rules of excise duty. However, with the merging of all State and Central level taxes now in the scope of GST, any manufacturer with a turnover of Rupees 20 lakh (for states generally as such) / Rupees 10 Lakhs (for special category states) or more will have to comply with the GST and its procedures.
The government made it mandatory as part of the GST that all the compliance procedures under GST that includes Registrations, Payments, Refunds and Returns will now be carried out through online portals only. The small scale industries had a big concern on paperworks and the bureaucracy of legalities in government work. However, with online portal operations, the small scale industries need not worry about interacting with department officers for carrying out these compliances, which are considered as a headache in the current tax regime.
To look back, the GST has not been something of a new concept. It has been around for the applicability introductions for some time. It is interesting to look back and reflect the history of GST in India. The journey began in the year 2000 when a committee was set up to draft it. It took 17 years from then for the Law to evolve. In the year 2017 the GST Bill was passed in Lok Sabha and Rajya Sabha. It was on 1st July 2017 the GST law came into force.
The compliance procedures from angle of small scale industries are reflected as below:
On Registration:
Positive- Online registration will ensure timely receipt of certificate of registration and minimal bureaucracy interface
Negative – Not all the SMEs have technical expertise to deal with online systems, thus most of them will need intermediaries to obtain registration for them. This will add to their registration cost
On Payments:
Positive: Electronic compliance will bring transparency and will also reduce the compliance cost.
Negative: Since funds are required to be maintained in the form of electronic credit ledger with the tax department, it may result in liquidity crunch
On Refunds:
Positive: Electronic refund procedures will fast track the process and enhance liquidity for SMEs
Negative: Refunds can be claimed only after filing of relevant returns. Also it depends on the compliances done by the supplier and his rating
On Returns:
All returns are required to be filed electronically and input tax credit and tax liability adjustment will happen automatically on the basis of these returns
Minimum of thirty-seven returns are required to be filed by every registered taxpayer during a financial year. Thus SMEs will have to deploy additional resources and eventual cost of compliance will increase
Advantages of GST in India:
i) GST is a transparent tax – further it will reduce the number of indirect taxes.
ii) It will benefit people as price will come down which in turn will help companies as consumption increases.
iii) There is no doubt that in production and distribution of goods, services are increasingly used or consumed and vice versa.
Disadvantages of GST in India:
i) GST in India would impact negatively on the real estate market. It would add up to 8% to the cost of new homes and reduce demand by about 12%
ii) The aviation industry would be affected. Service Taxes on airfares currently range from 6 to 9%. With GST, the rate will surpass fifteen percent and effectively double the tax rate.
Now, firstly how would GST affect small scale industries? Will it have a negative or positive impact. GST to begin has created a phobia with its policies and a national level full scale implementations. But looking from a national perspective, surely GST does have both positive and negative impacts on small industries.
Positive impacts:
i) There is ease of starting business: A business having operations in various states needs VAT registration. As there are different tax rules in different states, this makes the entire procedure very complex and therefore high procedural fees are incurred. With GST, the procedure is uniform payment of fees and also there is tax structure which is uniform in all states.
ii) The decrease in the tax burden on any 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.
iii) There is improved logistics and also faster delivery of services: No entry tax will be levied for goods manufactured or sold in any part of India. As a consequence, delivery of goods at interstate points and toll check posts will be expedited.
iv) No distinction between goods and services: There is no ambiguity between goods and services. This will reduce the complications in different legal proceedings related to packaged products. Therefore, there will be no distinction between material and service component, which will decrease tax evasion greatly.
Negative Impacts:
i) Multiple registrations for Pan-India businesses: Under the new regime, a business will have to register online for GST in every state involved in its state process. If your business delivers goods across 5 states, then you will have to register for GST in those 5 states to carry out your business activities. Since the entire registration process takes online, small business owners who are not used to working online might not find the transition easy.
ii) Returns must be filed on a monthly basis: Under GST, there will be around 36 returns in a fiscal year. GST returns will also require you to close your books on a monthly basis, which, realistically, will take a lot of time. The time business owners spend filing these returns could instead be spent on other productive activities, like developing their business and acquiring clients.
iii) Cost of tax compliance is likely to increase: As mentioned above, consistently filing 3 returns a month, periodically reconciling your transactions, and uploading invoices regularly will give rise to the need for an accountant with technical expertise. Hiring an accountant and paying them, adds to the burden on small businesses. Its tedious to maintain separate books of accounts for every state involved in the supply of goods/services and assess the records of various entities involved in every single transaction.
iv) Registration will be mandatory for e-commerce suppliers and operators: Businesses carrying out activities related to e-commerce should register under GST irrespective of their annual turnover rate. Unlike other types of businesses, e-commerce firms will not be eligible for threshold exemptions or for the Composition Scheme. Also, e-commerce firms should register for GST in every single state they supply goods.
Conclusion
Like any other tax reform for the development of national economy and global positioning of a country, GST is going to be a big turnaround factor both for the country and the small scale industries as such. Yes, a larger number of the small scale industries have felt that there are several disadvantages to them by way of this GST, true in a way, but then the small scale industries now will have a challenge to have come under the overall tax net.
At the same time, the government is making all the efforts to make the process of GST much easier – and with online systems in place, the small scale sector industries will have a better control over the efficiency of overall statutory compliances – making them focus on their core area niche. Apart from the challenges, they will have a bigger participative role directly contributing towards the national economy.
Further, as part of their continual business focus, small scale industries must (and will) continue to focus on expanding their visibility and markets far across. With the online mechanism in place, the visibility of performing industries will be more clearly traceable, this will help them not just report their capabilities and credit worthiness, but also help them secure forward contracts, loans for modernization facilities and then the longer term customer investive business contracts.