Impact of GST on SME Sector

Goods and Services Tax is being touted as the biggest tax reform in the history of India. This is said to do away the problem of cascading taxes by subsuming an array of taxes under one net.  With the increasing formalization of taxation system through the process of digitization, many enterprises in SME sector shall come within the ambit of taxation for the first time.

Small Business, Big Challenges

A large industrial unit enjoys economies of scale. SME sector is not required to pay social security benefits to its employees. Moreover, these enterprises also avoid tax by setting up multiple ventures or stating low employee base. This has enabled the SMEs to churn out comparative margins at par with the larger players.

Under the current rules, SMEs have an option to claim exemption on excise up to Rs 1.5 crore. This was popularly called SSI exemption (or Small Scale Industries Exemption). If they avail of this exemption there’s no set off against input, under GST this exemption limit comes down to Rs 20 lakhs.

Managing ambiguity might be the biggest challenge in the days immediately after GST is implemented, more so for SMEs. The removal of luxury tax has leveled the playing field and so SMEs run the risk of losing the market as their products would be priced equally to those of big players. Those SMEs that supply their product to the end consumer may suffer as the cost of their product will increase as the GST will not be available for input credit but will be levied on supply.

The Brighter Side for SME

 This tax reform will strengthen the functioning of SMEs. It will bring competitiveness among the enterprises which will impart more accountability and transparency. GST will standardize the processes and so starting a new business will become easier. In earlier cases, big industrialists used to procure from local SMEs to reduce overheads thus limiting the market for their produce. But now, as the nation shall be one market, these SMEs shall be able to widen their customer base. Also since GST does not distinguish between services and sales, hence it is easier for the enterprises to comply with the system.

The overall impact of GST would be positive in the long run as the sector will mature and the systemic processes will become a part of the functioning of SMEs. The short-term challenges of capacity building, poor infrastructure would be outscored by long-term benefits of hassle free trade across the unified market.