20 Effect of GST on SMEs

What are SMEs? 

SME stand for small and medium-sized enterprises. The following are categorised as SMEs in India:

  • For manufacturing industries, if the total investment is between Rs. 25 lakhs and Rs. 10 crores
  • For service sector enterprises if the total investment is between Rs. 10 lakh and Rs. 5 crore

What is GST?

GST is a single indirect tax that was implemented in India on July 1, 2017. It was introduced in an attempt to streamline the existing multiple indirect taxes that were levied by various state governments and central governments.

How does GST affect MSME?

The small and medium enterprises(SMEs) in India have been a major source of employment. They have also led the growth, in terms of the GDP of the country. Furthermore, they have also played a crucial role in generating income by exporting goods across the world.

GST, which began its rollout with a shock and awe campaign, has had its overall impact on Indian SMEs as well. It has been a mixed bag, where there are some positives and several negative aspects to coming out of the new tax regime. While some SMEs have managed to comfortably adjust to the new system, others are still struggling with it understanding its different components like the different types of GST returns, invoicing, effect on debit note etc.

So we have tried to simplify and present to you the effect of GST on SMEs so you may understand its pros and cons for your business. Here is how GST has impacted SMEs:

1. Simple taxation process but the higher cost of doing business

A common concern regarding GST is that while it has simplified the tax system, it has also increased the cost of doing business for SMEs. The rate at which SMEs conduct their business depends largely on their ability to manage costs and remain profitable in the long run. GST has increased the costs of doing business for SMEs by imposing multiple taxes on every stage of a supply chain. This tax burden is not just limited to raw materials but also includes services and labour. In contrast, large companies can offset their input taxes against output taxes through an integrated accounting system. Thus, they do not have to worry about an additional burden created by GST.

2. Lower logistics costs

For SMEs, the transportation of goods is a major cost as it involves heavy logistics expenses. The implementation of GST will help in reducing logistics costs for small and medium sectors, which were unable to bear high logistics costs due to the previous complex taxation system. The unification of taxes across the country under the GST regime will provide relief to these small and medium sectors as they will be able to reduce transportation costs while moving goods from one state to another. Additionally, the implementation of GST will result in seamless movement of goods from one state to another with no entry check, removal of inter-state check posts and reduction in transportation costs.

Moreover, in the interstate movement of goods earlier there used to be a lot of confusion and there were always chances of human errors, frauds and tax evasion. However, several aspect of GST, like the online registration process or the GST number format, have been created such that they are self-explanatory thereby making things easier. Visit this page for more info.

3. Threshold limit

Under the previous tax regime, if your business had a turnover of Rs. 10 lakhs you were supposed to pay VAT. However, now due to GST you only need to register and pay for GST if your annual turnover is more than Rs.20 lakhs.

However, on the flip side earlier the businesses were supposed to pay excise tax only if the annual turnover was more than Rs. 1.5 crores however now the amount has been reduced to Rs. 20 lakhs. The GST compensation scheme hence is a major relief for these businesses.

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