Small taxpayers i.e. MSMEs are considered to be the employment generators, so they need to be given importance in form of incentives in order to create more employment and thus, help in the growth of the economy. MSMED Act enacted by government tries to achieve the objective of growth of these enterprises. In accordance with the provision of Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified in two classes:

  1. Manufacturing Enterprises
  2. Service enterprises

According to the MSMED Act 2006, MSMEs are defined on the basis of capital investment made in plant and machinery, excluding investments in land and building. As per the Act, manufacturing units with investment below Rs 25 lakh come under Micro, those between Rs 25 lakh and Rs 5 crore come under Small and from Rs 5 crore to Rs 10 crore come under Medium. Similarly, in case of Service units, corresponding investment thresholds were upto Rs 10 lakh for Micro, between Rs 10 lakh to Rs 2 crore for Small and between Rs 2 crore to Rs 5 crore for Medium.

Features of Goods & Service Tax Law favoring MSME: 

  1. Mentioning the HSN code on invoice: The HSN code required to be mentioned in tax invoice has been done away for taxpayer upto annual turnover of upto Rs. 1.5 crores. Further, taxpayers having annual turnover between Rs. 1.5 Crore to Rs. 5 crores may mention only first two digits of HSN code in their invoices and taxpayers having annual turnover above Rs. 5 crores need to mention full 4 digit HSN code in their invoices
  2. Exemption from compulsory audit for MSME
  3. Increased limit from Rs. 1 crore to Rs. 1.5 crore for composition scheme
  4. Simplification of declaration followed with filing of GST return annually and payment of tax quarterly
  5. GSTN to provide Free Software for Accounting and GST Billing, to small assessees/ traders/ MSMEs having turnover upto Rs. 1.5 crore
  6. GST Council has also recommended to double the threshold limit for registration for Supply of Goods, i.e. from Rs. 20 lacs to Rs. 40 lac (Rs. 10 Lacs to Rs. 20 lacs for Hilly and NE States)
  7. Availability of easy loan for MSME while paying taxes and filing return
  8. Micro Small and Medium Enterprises registered under the Goods and Services Tax Network to obtain Udyog Aadhaar number to avail benefits of various government schemes
  9. Building technical literacy in MSMEs to make optimal use of the technology-enabled platform for GST, the Technology Facilitation Center (TFC), is working to enhance awareness on GST and its provisions amongst MSMEs through webinars, roadshows and policy roundtables across the country
  10. With the implementation of the GST in the country, MSMEs have seen reduction in overall tax burden. Different schemes and policies issued by the government is helping MSMEs as well as ultimate consumers to get maximum benefit from GST.

Cashback option for MSME:

The Micro, Small and Medium Enterprises who pay through Rupay card and BHIM UPI gets a cash back of 20 per cent of the total GST amount, subject to a maximum limit of Rs.100.  Some of the indirect beneficial effects on MSMEs and economy, are:

  1. Incentive on Digital Payments: Small taxpayers i.e. MSMEs are considered to be the employment generators, so they need to be given importance in form of every possible incentives in order to create more employment and thus, help in the growth of the economy.
  2. Minimization of Losses for Small Taxpayers: It has been found that to avoid losses, some 50 per cent of the small taxpayers avoid paying tax. The move will help tackle such situations. It will encourage people in rural and semi-urban areas to opt for cashless transactions.
  3. Formalization of Economy: Businesses who pay more tax and businesses (MSMEs) who generate employment will be given equal importance so as to bring in more revenue to the government in the form of tax.

Positive Impact of GST:

GST boosts competitiveness of MSMEs. They will benefit as follows:

  • Starting business becomes easier:

Earlier, the Sales Tax department had various turnover slabs which require VAT registration. A business with multi-state operation in this case had to follow varied tax rules applicable to different states. This not only created excess complication but also added to procedural fees, due to which the price sensitive MSMEs were burdened. Uniform GST have standardized the process.

  • Improved MSME market expansion:

In the previous system/ indirect tax regime, big corporations procured goods based on MSME’s locality in order to reduce overheads. Thus MSMEs limited their customers within state as they were bearing the ultimate burden of tax on interstate sales, reducing their customer base. With implementation of GST, this has nullified as tax credit will transfer irrespective of location of buyer and seller. This allows MSME segment to expand their reach across borders.

  • Lower logistical overheads:

As GST is tax neutral it has eliminated time consuming border tax procedures and toll check posts and encouraged supply of goods across borders. Accordingly the logistical cost and time for movement of goods for companies manufacturing bulk good has considerably reduced. Such costs can be crucial for the survival of MSMEs.

  • Aids MSMEs dealing in sales and services:

GST is not distinguishing between ‘sales of goods’ and ‘services’. This is good news for the MSMEs that deal with ‘sales of goods’ and ‘services’ model of business, for them the taxation is simplified and now under GST being calculated on total value of both without any bifurcation.

  • Unified market:

GST is allowing flexibility in transfer of goods across states and reduce the cost of doing business, as the reform has cut down multiple taxes imposed by central and state governments.

  • Purchase of Capital Goods:

In the earlier system, the input tax credit against purchase of Capital Goods was limited with many riders, but under GST regime, entire amount of input tax credit can be availed, this will support “Make in India” campaign.

Negative Impact of GST on MSMEs:

  • Burden of Lower Threshold:

GST bill has fixed the threshold limit of Rs. 20 lakh generally and Rs 10 lakh for North-eastern and hill states for Registration and payment of tax within State transection, due to which any manufacturer of goods is subject to the tax levy at lesser threshold. Earlier, the central excise threshold was INR 1.5 crore. Now, as the threshold is low, most MSMEs having marginal turnovers have to pay some portion of their investment towards tax.

  • Lack of Tax Differentiation for Luxury Items and Services:

The GST implementation has the function of tax neutrality, which though beneficial in other areas, does not differentiate between luxury and normal items and services. Unlike earlier, when the state and central government levied greater duties on luxury goods and services, the GST tax requires all goods and services to have the same tax with some exceptions. This leads to an increase in the financial gap between the rich and the poor and is not a model situation for MSMEs to compete and flourish against large industries.

  • Extra Operational Capital Requirement:

Taxes on stock transmission primarily affect the functioning capital necessities. This, in fact, varies with factors such as stock reversal time at depository, credit sequence to the consumer, etc. A greater sum of Capital pre-requisites increases the interest charge, which finally increases the rate of Completed Merchandises.

  • The burden of higher tax rate for Service Provider:

Earlier the Service Tax rate was 15% but now the GST rate is increased to 18% on Services.  Further, the scenario in the service sector has adversely been impacted as the concept of Centralized Registration has been done away with and each unit in different states now required to take separate registration. Thus even if services are supplied by an MSME company’s one Unit in State A to another Unit in State B , then also taxes will be payable.

  • Excess Working Capital Requirement :

Taxation of stock transfer in GST will primarily impact the working capital requirements. The quantum of impact will vary depending on stock turnaround time at warehouse, credit cycle to customer, quantum of stock transfer, etc. Higher amount of Capital Requirement has increased interest cost which ultimately has increased the price of Finished Goods.

  • Dual Control:

GST Council has decided that those assesses having turnover of less than 1.5 Crores will be assessed by Sate Government and existing Service Tax assesses, irrespective of turnover will be assessed by Central Government as there is lack of expertise with the State Government in relation to Service Tax matters. As a result of this, small traders dealing in both goods and services will have dual administrative control both by Centre and State Governments.