The Goods and Services Tax (GST) was cleared in 2017 after a decade long parliamentary hold up. Since then, the GST has raised India’s ease of doing business index as well as government revenues from small and medium enterprises. SMEs have also benefitted from the GST as it facilitates a simple tax regime for the country’s 51 million plus small business owners. The principle aim of the GST is to subsume multiple indirect taxes and reduce the paperwork that affects all kinds of trading.
The GST collects all indirect taxes across the value chain in a fair and transparent manner. Earlier, the goods and services were taxed separately by the Indian government. The central government would levy tax on manufacturing whereas the state governments would levy taxes based on sales. The whole system involved multiple layers of taxation and a lot of paperwork to be filed and verified. This not only made the whole process cumbersome and slow but also allowed tax evaders to find loopholes in the system.
Moreover, even the government’s administrators were often troubled by the implementation process of this overly complicated taxation system. Which would sometimes result in unjustified or dual tax on end users. The introduction of GST has converted all this chaos into a single-point taxation for each category of goods and services.
The Indian SME sector is called the backbone of our economy. Providing employment to over 450 million people, the SMEs account for 45% of India’s GDP. While initial reviews of the GST implementation were a little skeptical in terms of cause and effect, the story is completely different today. Here’s how GST has allowed the SMEs and startups to prosper.
Reduced Tax Burden: The first and most obvious benefit of GST has been the cutting down of a slew of indirect taxes such as Service Tax, Entertainment Tax, Excise, Surcharge, Octroi etc. For example, Before the GST came into effect, a small business, with turnover of more than Rs. 5 lakhs, was required to pay a number of taxes at various points in the supply chain. Today, there is an exemption of GST for SMEs with turnover less than Rs. 20 lakhs. This in-turn has boosted the growth of small and medium businesses in India.
Market Unification: GST has also made it easier for SMEs to expand their customer base. Previously, the CST was implemented on inter-state sales which increased the price of locally manufactured goods being sold in other states. So, if a brassware manufacturer based in Western Uttar Pradesh wished to explore markets in Madhya Pradesh or Bengal, he would have to compete on price rather than quality of his products. GST has resolved this with the ‘one nation, one tax’ structure. A small business owner can now purchase and sell raw materials and finished products anywhere in India without having to worry about taxation and pricing.
Reduced Logistical Costs: GST has not only simplified the manufacturing and sales process but has also had a veritable positive effect on logistics in the country. With the abolishment of multiple entry taxes, there has been a drastic reduction in transportation time. The serpentine queues we witnessed at interstate toll booths are a thing of the past today. This in turn is saving a ton of money for transporters and manufacturers alike. There has been a domino effect on manufacturing as well. As goods move quicker, they sell quicker, and hence picking up the demand for new stock, thus spurring manufacturing.
Enhanced Compliance: The simplification of taxation and regulatory measures surrounding GST has also helped in increasing tax compliance in India. SMEs have taken to the new system like fish to water as it helps in legitimizing their enterprise and gain benefits like access to new markets, increasing sales and revenues, improving credit rating and getting small business loans. Furthermore, the digitization of the taxation system has also reduced human intervention – which was a primary detriment of the previous system. All compliance procedures such as registration, payments, refunds, and returns have been moved online ensuring automated delivery of GST certificates. This has brought transparency to the system and reduced the instances of bureaucratic harassment.
Made it easier to start new businesses: GST has also spurred the growth of startups and new businesses in India by doing away with different kinds of VAT registrations and varying taxation policies of states. By centralizing the whole system GST ensures fast execution and lowered costs for starting a new venture. Small business owners can now utilize more of their money for setting up and expanding their business rather than paying up unnecessary taxes and fees.
Spurred SME finance: The underlying effect of GST has been an increase in financial activity by the small and medium businesses as they open to new markets and new growth opportunities. This has led to a wider acceptance of alternate financing options from FinTech lenders who offer customized business finance for SMEs in India. Lucrative small business loans with lower interest rates can be secured within 3-days from NBFCs like Lendingkart. In turn, NBFCs have also digitized their services in tandem with GST, which means people can apply for small business loans online, submit documents, get approvals and disbursal, all through electronic channels. Online business loans have also reduced the interest rates, processing charges and prepayment penalties for SMEs.
The GST is but a step in the market reforms needed by the Indian economy. However, the follow up by the Indian Government after the implementation of GST speaks volumes about its commitment to regularizing the financial system. Several minor and major updates have been made to the GST filing and implementation process by the review committee and more are expected to come as the system matures. For now, the GST has revolutionized the way Indian SME industry operated, marking it as a definite turning point in the country’s growth story.
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