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The Impact of GST on Small Businesses in India: Pros and Cons

Written by Raj Softech

Last updated on 27 Feb 2024

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GST

Impact of GST on Small Businesses

Goods and Service Tax (GST) is a tax system in India that replaced 7 Central government Taxes and 9 State government taxes. Later it became a massive indirect tax introduced by the government and could increase economic growth.

This kind of taxation will lead to a higher amount of revenue for both the States, Central, and Union. Uniform GST across the Country will make India a common market. It will expand trade and commerce, increase export, and accelerate economic growth.

Implementing GST in India also introduced the concept of ‘MAKE IN INDIA’ because of the GST tax structure, and most of the obstacles of indirect taxes get resolved. Worldwide corporates will infuse more money into the ‘Make in India’ concept where India will gain in business with China and Asian Counterparts.

Goods and Service Tax (GST) will be another advantage to the backward states because more taxes will accrue to States where there is more population. A stable and transparent tax regime will encourage local and foreign investment in India. It will create significant job opportunities.

Corruption is one of the major problems in India, and we cannot expect anything substantial unless there exists political power. GST will lead a step towards corruption-free Services. Wider tax base under GST, the tax rate is expected to keep at a moderate level. Hence the price of goods will come down in the medium term apart from the various reasons for the decrease in the price of the product.

One of the major reasons for the reduction of the price was the product in reduction of logistics cost. That means an overall decrease in the price of products.

Impact of GST on Small Businesses

Goods and Services Tax reduces the tax burden on the extra charges now. The government brought all the indirect taxes including VAT, excise duty, service tax, etc, into one system. Getting rid of the tax-on-tax concept, resulted in more direct savings for small and medium businesses.

GSTIN holders have the upper hand in getting a collateral-free loan as per GST return to boost their business. It is one of the benefits of having a GST registration.

The previous taxation structure had a cascading effect, so the same product has taxed at different levels, which leads to higher costs and lower pricing efficiency. Since GST is a value-added tax, it solves the issue because only tax is imposed on the value addition.

1. The Positive Impact of GST on Small Businesses

A hot topic of discussion in India for the past many years is GST. Goods and service tax implemented by the government in this current financial year is something that has become a burning topic in India. Some people have different aspects of this new tax rule.

As people only know less about this tax, and this is why there is a lot of confusion regarding that. Because of a lack of knowledge, there is a lot of confusion. To eradicate such worries of people, we are highlighting the positive impact of GST on small and medium enterprises.

One nation one tax is the whole sole aim of GST, and to much extent, it has achieved success. All the nation wants is a good understanding among the people regarding the implementation of GST.

1.1. Launching a Small Business Becomes Easier

Under the previous tax system, if you have your business operates across multiple states. In that case, you need to register for VAT (Value Added Tax) with each state’s sales department to carry out your business activities.

The fact that every state has a different taxation system of rules that complicates the entire process. The businessman needs to pay multiple procedural fees for VAT registration. Which was hectic work for businessmen during that time.

Under Goods and Service Tax, the GST registration is centralized, and the rules are uniform across all the states in India. All you have to do is, you have to submit an online form and wait for your GSTIN (Goods and Services Taxation Identification Number).

After the implementation of the Goods and Service Tax in India, it became easier to launch small businesses across the country.

1.2. Reduced Cost of Logistics

The current tax regime has created a lot of inconvenience for the transportation sector. The long queues at checkpoints and inter-state entry points have caused vehicles to stand idle for long periods, adding to labour and fuel costs.

Businesses transporting goods to other states have a hard time filing paperwork and paying entry taxes at the inter-state borders, further delaying the delivery of goods.

Under Goods and Service Tax, the current (Central Sales Tax) CST on interstate sales have replaced with a combined tax called IGST. That is composed of CGST and SGST and collected by the Central Government.

The removal of border and check-post taxes makes state boundaries less significant under the current taxation regime. The delay and transportation costs have been reduced because of this. Which will increase inter-state business, facilitate faster movement of goods, and reduce maintenance costs.

1.3. The Taxation Process Becomes Transparent

The prime reason of Good and Service Tax is implemented in India is to remove cascading taxation. It reduces the complications caused by the overlap between Central taxes like Excise duty, customs duty, service tax, etc. And State taxes like VAT, purchase tax, luxury tax, etc.

Because it levies a constant tax on goods and services all over India. With one common return, the taxes on goods and services levied under VAT, purchase tax, and luxury tax will merge into one single tax. If you have spent a huge portion of your time managing multiple taxes, you can relax under the new regime because filing and paying taxes is easier with the GSTN portal.

A combined tax mentioned here as GST also means dealing with fewer tax authorities. In the olden days, business owners had to deal with many different tax authorities depending on the nature of their business and transactions. Under GST, you can be sure that the relevant authority is always neither the Centre nor the State government.

1.4. The Distinction Between Goods and Services Eliminate

Previously, businesses providing goods and services had to calculate the Value Added Tax (VAT) and service taxes individually. Goods and Services Tax (GAT) eases the process by removing the distinction between goods and services.

Tax will be calculated for the final total, not for individual products or services. This will help Small and Medium Enterprises take advantage of the tax incentives for payment on the procurement of input goods and services.
For example (import, interstate and local purchases, and telephone services).

At present, every invoice contains a long and confusing list of taxes levied on the goods and services involved in the transaction. Goods and Service Tax will make the invoice simple.

1.5. Increases Threshold Limits for New Businesses

Under the current regime, businesses with a moderate annual turnover of Rs.5 lakh in some states and Rs.10 lakh in other states are supposed to register and make payments for Value Added Tax.

This burden is eliminated for many businesses which is seen as a positive impact of GST on small businesses. Since a business does not have to register or pay if its annual turnover is less than Rs.20 lakh (Rs.10 lakh in North Eastern states).

Also, under the composition scheme, businesses with turnover between Rs.20lakhs to Rs.50 lakh will pay Goods and Services Tax at a lower rate. That should have a positive effect on startups and other small businesses by relieving them of most tax burdens.

2. Negative Impact of GST on SMEs

While the Micro, Small, and Medium Enterprises (MSME) enjoy the tax naturally, we will see some negative impacts. There is a burden of the lower threshold and selective tax levying.

There is no tax differentiation of luxury items and services, dual control, excess capital working requirement, and the burden of the highest tax rate for the service provider. The negative impact of Goods and Services Tax on Small and Medium Enterprises is seen below.

2.1. Multiple Registrations for Pan-India Business

Under the new regime, a business has to register online for Goods and Services Tax (GST) in every state involved in its sales process. If your business delivers goods across more than five states, you have to register for Goods and Service Tax in all those states to carry out your business activities. Since the entire registration process is done online, small business owners who are not used to working online might not find the transition easy.

2.2. Monthly Returns Filing is a Burden

Under Goods and Service Tax (GST), there will be around 36 returns in a financial year. GST returns will also require you to close your books every month, which will consume a lot of time. Also, until you have filed the relevant returns, you cannot claim refunds, and your customers cannot claim a tax credit for the goods they bought from you. When you miss a single return, you will be penalized Rs.100/- a day, and your compliance rating on the Goods and Services Tax Network (GSTN) portal will be reduced.

2.3. The Cost of Tax Compliance is Likely to Increase

As we all know, consistently filing three returns a month, periodically reconciling your transactions, and uploading invoices regularly. This will give rise to the need for an accountant with technical expertise. Hiring an accountant and paying them, adds a burden on small businesses. It’s boring to maintain separate books for accounts for every state involved in the supply of goods, and services and assess them. The records of various entities involved in every transaction. To manage the system, small businesses might use the services of licensed third parties that help firms comply with the GST regime. For this kind of convenience, small businesses will have to dish out a sum ranging from Rs.1000 to Rs.5000, depending on the service that is rendered to them.

2.4. Registration is Mandatory for Businesses

Businesses’ activities related to e-commerce should register under Goods and Service Tax irrespective of their annual turnover rate. Unlike other types of businesses, e-commerce firms will not be eligible for threshold exemptions or the Composition Scheme. This allows firms to file their tax returns every quarter instead of 3 times a year.

Also, e-commerce firms should register for GST in each state where they supply goods. Overall, GST simplifies the entire process of filing and paying taxes throughout the country. It will also increase the competition between Small and Medium Enterprises by unifying the Indian market. If you are proactive and take care of your Goods and Service Tax compliance measures beforehand.

You can minimize the potential dismissive effects of the new regime on your business. Goods and Service Tax is expected to have an impact on SMEs and the Indian economy as a whole.

Conclusion

It was concluded that the impact of GST in the MSMEs sector could go both positive and negative ways. For existing enterprises, GST simplified the tax structure and unified market improving all operational efficiencies of MSME, to this point.

The unorganized MSMEs were growing more quickly than the organized ones, which results in minimization. With GST in effect, it has made the taxation system transparent, thus making the entities liable for tax payments.

Finally, the impact of GST on Small Businesses in India is significantly at an alarming level. There is a balance between the pros and cons, however, the GST reduced the burden of multiple taxes.

Therefore, it led to increased business contributing to overall economic growth across several MSME sectors.

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