Goods and Service Tax (GST), a broad indirect taxation regime, is currently being rolled out, and Small and Medium Enterprises (SMEs) will be the ones most directly impacted by GST implementation. Its impact will be both favourable as well as unfavourable. It will bring with itself a sea change in the way we file taxes, and also how we conduct business. Many have called it a ‘behavioural change’ more than a tax change because its successful implementation depends largely on how quickly businesses adapt to the digital format of taxation.

Positive Impact of GST on SMEs and Startups

As per industry experts, SMEs and startups will be affected the most with the rollout of the GST and the impact will be favourable in more ways than one. Some of the ways GST will benefit SMEs and startups are:

• Ease of starting a business: A business having operations across different state needs VAT registration. Different tax rules in different states only add to the complications and incur high procedural fees. GST enables a centralised registration that will make starting a business easier and the consequent expansion an added advantage for SMEs.
• Reduction of the tax burden on new business: As per the current tax structure, businesses with a turnover of more than rupees 5 lakh need to pay a VAT registration fee. The government mulls the exemption limit under GST to twenty-five lakh giving relief to over 60% of small dealers and traders.
• Improved logistics and faster delivery of services: Under the GST bill, no entry tax will be charged for goods manufactured or sold in any part of India. As a result, delivery of goods at interstate points and toll check posts will be expedited. According to an estimate by CRISIL, the logistics cost for manufacturers of bulk goods will get reduced significantly—by about 20%. This is expected to boost e-commerce across the nation.
• Elimination of distinction between goods and services: GST ensures that there is no ambiguity between goods and services. This will simplify various legal proceedings related to the packaged products. As a result, there will no longer be a distinction between the material and the service component, which will greatly reduce tax evasion.
• No drawbacks and No duty-benefits: Under the current central excise tax, no duty on excise is to be paid by a manufacturer of goods if the annual turnover is less than Rs.1.50 crores. But, post-GST, the basic exemption limit will get reduced significantly. Consequently, there will be an obligation on a large number of SMEs to pay a major chunk of incomes towards tax under GST.

Challenges for SMEs

A sizeable portion of SMEs are of the opinion that GST is not all good for the sector and their fears may not be totally vacuous. The tax neutrality that the SMEs enjoy may be one of the prominent benefits. However, reduction in duty threshold is one of the key concerns that have led them to be wary of the GST bill. Under the existing excise tax, no duty is paid by a manufacturer having a turnover of less than rupees 1.50 crores. But, post GST implementation, the exemption limit will get significantly lowered. During a speech at a news conference, Finance Minister, Arun Jaitley estimate said, the limit can be as low as rupees 25 lakh. As a result, a large number of SMEs and startups will be mandated to come under the tax net and will have to pay a large chunk of their earnings towards tax. Furthermore, there are other flipsides to the proposed tax neutrality. GST regime won’t differentiate between luxury goods and normal goods; this will make it hard for the SMEs to compete against large enterprises. GST that is ultimately levied on supply will not be available for input credit. This will lead to an increase in the cost of the products for businesses that supply directly to end users.

Inarguably, implementation of Goods and Service Tax will open up a can of worms and the impact on Small and Medium Enterprises across different industries will vary greatly.