GST Bill and its Impact on Small and Medium Enterprises (SME)


This is what the Goods and Service Tax aims to accomplish.  After several years of heated debate among stakeholders, businessmen, and politicians, the GST is all set to roll out on July 1, 2017.

What is GST?

Goods and Service Tax (GST) bill has been passed in the Rajya Sabha and will replace the service tax, excise, VAT, Octroi and several other taxes that are currently in place. GST will be divided into Central Goods and Service Tax (CGST) and State Goods and Service Tax (SGST). The centre will levy CGST, while the state governments will levy SGST.

What is SME?

SME refers to small and medium enterprises. The enterprise can be engaged in the manufacture of goods or can render services. The size of the enterprise is determined by the investment in the equipment required for business. In the manufacturing sector, if the investment is below Rs. 25 lakh, then it is considered to be a microenterprise. If the investment in machinery is between Rs. 25 lakh to Rs. 5 crore, then it is a small enterprise. If the cost of machinery ranges between Rs. 5 crore to Rs.10 crore, then it is a medium enterprise. This is how the government defines SMEs in the manufacturing sector.

For SMEs in the service sector, the range of their investment differs. If the investment does not exceed Rs.10 lakh, it is a microenterprise, while small enterprises can invest up to Rs.2 crore. If the investment exceeds Rs.2 crore but is within Rs.5 crore, then it is a medium enterprise.

SMEs are the backbone of the Indian economy, and the government initiatives such as Make in India, GST, and Startup India will give a major boost to this sector. Even many banks & NBFCs have started giving loan to SMEs for providing financial support. 

Impact of GST on SMEs

GST is all set to revolutionise the way SMEs perform business in India. There are two sides to every coin and this is true of the GST bill as well. While there are several advantages to this bill, there are a few drawbacks as well.

Starting a business will become easier with GST. If a business has a multi-state presence, then it will need a VAT registration in each state. Currently, the tax rules vary from state to state and no uniformity is present, which further complicates it. GST will introduce uniform tax rules across the nation and will only require a centralized registration. This will also make it easier to expand a business.

GST will allow SMEs to expand in an efficient manner. Their customer base was limited earlier, as several inter-state taxes were levied. The GST will eliminate border taxes and toll costs, thus allowing SMEs to reach more people. It is also estimated that there will be a 20% drop in logistics cost, which will help cut down costs.

GST will not distinguish between sales of goods and services. This will greatly aid SMEs that deal with both sales and services, as it will simplify tax rules. The tax amount will be calculated on the total cost and this will reduce tax evasion.

As mentioned earlier, GST has its pitfalls. The major disadvantage is the reduction of tax threshold from Rs.1.5 crore to Rs.10 lakh for all states, and Rs.5 lakh for companies in North Eastern states. Hence, most SMEs will be required to pay tax after the implementation of GST, which will reduce their working capital.

The SMEs are at a disadvantage, as they are forced to compete with large corporations. GST will not levy higher taxes on luxury products and services, and all products will have to pay same taxes.

Industries such as retail, pharmaceuticals, logistics, and manufacturing will be affected due to the implementation of the GST. It is yet to be known exactly how it will affect these industries.

How SMEs can adapt to GST

  • By learning about everything related to input tax credit (ITC)
  • Maintaining clear records, pertaining to transactions and invoices
  • Digitizing their accounts to avoid errors
  • Learning the new laws they must adhere to under GST

Closing note 

Goods and Service Tax has several advantages and can benefit SMEs in the long run. It will lead to growth in the country’s GDP and bring in simpler taxation system. While it may take time for SMEs to adapt to these changes, GST is indeed a step in the right direction and how companies keep up with these changes can only be seen in the months to come!