The proposed Goods and Services Tax, which is supposedly the biggest tax reform for Indian economy since attaining independence, will be a comprehensive indirect tax on manufacture, sale and consumption of goods as well as services. It will replace numerous the indirect taxes which are levied on goods and services by the Central and State governments separately. We have already captured the positive impact of GST on SMEs.
Now, let us look at the other side of the story:
The proposed regime does position the SMEs on an equal footing as big corporates by removing the tax differentiation of tax on stock transfers and by neutralising the cascading impact of input taxes. However, the fixation of the threshold limit for tax exemption under the proposed GST regime will have a big impact on cash flow, working capital requirements and compliance requirements for SMEs.
Under the current taxation laws, there is no duty required to be paid by a manufacturer having a turnover of less than Rs. 1.50 crore. On the other hand, the proposed GST will bring down the exemption limit to as low as Rs. 25 lakh. This will lead to a large number of SMEs come under the tax scanner which are currently not paying any minimum taxes.
Consequently, the SMEs will have to meet additional complianc
e requirements in terms of registration and filing of return. This will increase the compliance cost and administrative expenses for SMEs under the GST regime.
With decrease in the threshold (from Rs. 1.5 Cr to Rs. 25 lakhs), it will result in additional working capital requirement in the hands of SMEs as they will be required to discharge the liability under the GST for pending realisation of the invoice.
Further, in case of supplies to end-consumers, the product cost may increase in the hands of the consumer since the GST levied on such supplies will not be available as input credit to the end-consumer.
The exclusion of four crucial state level taxes from GST, namely, tax on petroleum products, electricity duties, excise duty on alcohol, and stamp duty on immoveable property, will have huge implications.
The petroleum products constitute a significant cost of production for several sectors. If these are kept out of the GST regime, then unnecessary cost inflation will remain. In the similar fashion, the electricity duty will cause cascading effect of taxes.
The ‘dual nature’ of GST (CGST and SGST) will face serious issues in the case of tax on supply of alcohol under the GST. It would have been much simpler if taxes on alcohol could be included in the radar of GST.
The differential stamp duties across the country will remain out of the purview of GST. This may lead to a rise in the price of land. The cascading effect of the same might be phenomenal.
It is not easy to decide whether GST will prove a boon or a bane for SMEs. Only time will tell!