GST is a massive indirect tax regime for the entire country that will turn India into a unified common market. The overall goal of implementing GST was to simplify the existing complex taxation system. Small businesses, on the other hand, are being harassed with invoices and payments.
GST’s goal was to bring more and more firms into the formal sector, which will help expand the tax base needed to raise the country’s tax-to-GDP ratio, which has been floating around 10-11 per cent for a long time.
However, issues such as multiple rates and never-ending filing and reporting requirements have tainted the GST, making it unfavourable to small businesses and first-time entrepreneurs.
Only 1.34 crore of the 6.3 crore enterprises (NSSO 2015-16) has joined the GST network. There is currently no official data on how many businesses have cancelled their GST registrations. However, an ample percentage suggests that an increasing number of small businesses are either de-registering or attempting to remain small by not allowing their sales turnover to exceed the margins of Rs 20 lakh for service firms and Rs 40 lakh for manufacturing entities, above which GST registration is required.
The current GST debate is primarily focused on how unscrupulous elements are using forged invoices to claim more input tax credits (ITC) than they should. However, the main reason for this is that there are too many rates and large gaps between rates (0-28%) for different inputs, which allows for ITC over-claim. Cement, for example, is subject to a 28% GST, while steel bars are subject to an 18% GST. As real estate companies will use more cement than steel to claim more ITC than they should. The solution is to combine multiple rates into fewer rates, thereby reducing rate differentials. However, regulators responded by denying input tax credits to real estate players, which defeats the purpose — to prevent the cascading effects of a downturn.
Small businesses deal with various taxes and must track various sections to complete all tax-related certifications. Some files will have different taxes applied to them biannually, annually, and half-yearly.
Suffocating compliance burdens and unchecked inspector raj are dispiriting smaller business entities and first-time entrepreneurs from going formal by joining the GST network.
How small companies suffer
In order to encourage formalisation, the RoC (Registrar of Companies) has correctly simplified the registration process and has been allowing registration of businesses with (registered) addresses in residential buildings and apartments, which helps save on office rentals. As a result, skilled professionals engaged in consultancy, online coaching, yoga and fitness training, research and advisory, and other knowledge-intensive services are encouraged to establish their own formal setup. Such ventures do not necessitate the use of separate office space. Rather, all that is required are laptops with an internet connection, and most employees can work from home until the business grows large enough to require a physical location.
However, GST inspectors harass such businesses on flimsy grounds Which is quite stupid in an age when the line between home and office has become increasingly blurred. Furthermore, this contradicts the RoC’s contributory role and discourages the creation of knowledge-intensive jobs, which India desperately needs.
Recently, small businesses have been receiving automated GST notices based on their bank statements and being asked to provide documents that are easily accessible to the government, such as tax returns or audited balance sheets.
Tightens the noose
Typically, large companies (the type of client a small vendor cannot afford to lose) postpone paying smaller vendors, forcing them to pay GST out of their own pockets. This consumes a large portion of the supplying vendors’ working capital (even if only temporarily) and reduces the amount of working capital required by the purchasing companies. However, the small vendor would be charged interest on additional working capital. This is one of the ways that large corporations squeeze smaller vendors.
GST returns will also necessitate the closing of books on a monthly basis, which will take a significant amount of time. The time that business owners spend filing these returns could be better spent on other productive activities such as growing their business and acquiring new customers.
Businesses that engage in e-commerce activities must register for GST, regardless of their annual turnover rate. GST streamlines the entire tax filing and payment process. By unifying the Indian market, it will also increase competition among SMEs.
A business will be required to register for GST online in each state where it conducts business under the new regime. If a company delivers goods in five states, it must register for GST in each of those states in order to carry out its operations. Because the entire registration process is completed online, small business owners who are not used to working online may find the transition difficult.
Raising the limit to Rs 50 lakh for both manufacturing and services would be beneficial. This will liberate thousands of smaller businesses from the clutches of inspection raj and allow them to focus on business development.
Second, suppliers of goods and services should only be required to pay GST after receiving payment from buyers. This can put an end to all invoicing and payment-related harassment.
Third, making GST payments and filing GST returns quarterly, just like income and corporation taxes, will benefit all types of businesses by lowering compliance costs. Tax evasion can be reduced by improving coordination between direct and indirect tax departments while not harming entrepreneurship.
We need to develop, educate, and encourage more entrepreneurs to grow the economy through policy support such as various financial elevation schemes implemented by the government to support and develop small scale enterprises.