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GST impact: Greater tax burden for manufacturing-sector SMEs?

Jul 19, 2017

The Goods and Services Tax (GST) has been implemented and brings about huge tax reforms. One of its ramifications is for small Indian enterprises, including startups and SMEs, who find themselves burdened with more tax. Small and medium enterprises (SMEs) of the manufacturing sector in India face increased tax in the GST regime and may not have it all easy, says Indo-American Chamber of Commerce (IACC). They add that the tax burden for manufacturing SMEs has increased under the GST rollout regime.

IACC Chairman, Finance Committee, SK Sarkar says: “Small businesses in manufacturing sector won’t have it easy in GST regime. Under excise laws, only manufacturing business with turnover exceeding Rs 1.50 cr had to pay excise duty.”

Under the GST rollout, turnover limit has been reduced to Rs. 20 lakh, increasing tax burden for manufacturing-sector SMEs. Many SMEs will find compliance tough and even if they comply with GST norms, it would be at an additional cost, he pointed.

No wonder, a sizable chunk of SMEs don’t think the GST implementation is all good news for the sector; they point out to the disadvantages of this principle of equal treatment being applied to small and medium enterprises and the resulting lowering of the tax exemption limit for manufacturing units. Under the existing excise laws, no duty is paid by a manufacturer having a turnover of less than Rs. 1.50 crore. The GST, on the other hand, brings down the exemption limit Rs 20 lakh. Consequently, a large number of SMEs and startups in the manufacturing sector come under the tax net. India has 50 million micro, small, and medium enterprises.

“Earlier, we were not paying the tax, but after this policy comes into effect, I will have to bear the extra financial burden. My coir-making business may not remain profitable and I may have to look for other options,” said Dennis Jesudasan, a small business owner from Kerala.

Increased GST compliance costs for small enterprises

Businesses use enterprise resource planning (ERP) software for filing tax returns, which already have excise, VAT and service tax incorporated into them. Compliance costs for SMEs will definitely increase as the GST transition requires businesses to either upgrade their ERP software or buy new GST software, leading to increased compliance costs. Not only will they have to spend on acquiring new ERP software, they will have to train employees on how to use it.

Enterprises need to upgrade software and train manpower

According to a survey by DynamicCIO among Indian CIOs, most of the respondents felt that the GST transition would take around 1–6 months (72.73 %).

“I expect lot of work for IT teams for the next 3-4 months, as there will be lot of learning that would need to be incorporated after the rollout. As users come out with more business scenarios that were not thought through during earlier rounds of testing, there will be work to be done. IT has to work to incorporate clarifications regarding various rules. On whether the data downloads and uploads will be as smooth as being projected by most ASPs/GSPs, I think one should just go back and look at most software implementations. Despite best of global vendors and multiple rounds of testing there are plenty of bugs,” says Vijay Sethi, CIO, Hero Moto Corp.

Is the added GST tax burden on small businesses justified?

“It is ideal that some support from the government flows to the small scale sector to motivate them switch over to the GST,” says Sarkar.

National Vice President of IACC, Vasant Subramanyan, said, “Political expediency has led to a very high degree of compromise in the roll out of GST. It is understandable given the federal structure of India where there is panoply of taxes at the central, state and local levels. A large number of indirect taxes have been subsumed into GST. Yet, there are many incongruities both in the structure, uncertainties in the rollout and importantly in the impact, since a real time check at the initial stage indicates that prices of some of the goods having zero rates have gone up giving the impression that GST does not have the desired impact at least in the beginning.”
Looking at the overall picture, while the GST streamlines the tax regime, doing away with arbitrary exemptions, and making the industry more tax-compliant, it can also open up a can of worms for the already beleaguered SME sector.

This article was first published on LinkedIn by Muqbil Ahmar

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