SME

Five benefits to small and medium businesses

sme-gst-tejas-reuters There are about 50 million small and medium enterprises (SMEs) in India | Reuters (File photo)

The heart of the Indian economy is its small and medium business segment. As of now, we have about 50 million small and medium enterprises (SMEs) in India – contributing almost 37 per cent of the industrial output and 46 per cent of India’s total export. With a stable growth rate of over 10 per cent, SME India employs a staggering 120 million people and has emerged as the leading employment-generating sector over the years. It goes without saying, that when the nation is on the verge of a massive taxation regime change in the form of GST, its impact on the life of SMEs is super critical for the nation as a whole.

Here are five key benefits that we can surely see for SMEs with the introduction of GST:

Ease of starting business: In the current taxation regime, the sales tax department has various threshold limits which require VAT registration. A business with operations in multiple states has to thus follow varied tax rules, which leads to high compliance burden and associated costs, and this is bound to hit the price-sensitive Indian SME. The GST regime, however, introduces a unified taxation environment, which absorbs most of the complexities, making it much easier for anybody to start a business. The slew of indirect taxes currently levied by state and central governments will be subsumed by a unified GST, which will not only bring down the incubation cost of a business, but ensure that the focus stays on business growth rather than meeting compliance norms and associated costs.

Opportunity of market expansion: In the current system, SMEs do not find it conducive to nurture a customer base outside the borders of their home state as the tax burden arising from inter-state sales is borne by their customers, increasing the costs and impacting their competitiveness. What this leads to is a reduction of their customer base, and this is a lost opportunity. Those who can flex their money muscle a bit more, “choose” states based on tax rates and invest in warehouses to reduce the tax obligation – again an additional cost. With implementation of GST, this entire behaviour will change as there will now be a seamless flow of tax credit across states, bringing sellers outside the state and local sellers on a level playing field. In other words, the entire nation will act as a unified market, and any SME with the vision and intent can make the most of this opportunity.

Increased profitability: Most SMEs, more often than not, are bound to consume certain services that are required for the purpose of business. Under the current regime, input tax credit is available to SMEs, only on those inputs which are used or linked to their taxable output. However, any tax paid on business overheads, e.g. advertising services is not allowed as credit to a trader. In GST, the concept of input tax credit is now broadened to include any input or services “used or intended to be used in the course of or for furtherance of business”. Thus, SMEs will now be allowed to claim input tax credit on all such inward supplies, and that is surely going to reduce operational cost and enhance profitability.

Reduced complications in compliance: Currently a typical SME or start-up spends a lot of time and energy to manage the various types of taxes at various points. Filing separate returns under each department, as per the stipulated timelines, in itself is a nightmare. Further, businesses like restaurants, which fall under both sales and service taxation, have to calculate both VAT and service tax separately for compliance purposes. GST, by virtue of its unified structure and neat classification of goods and services for the purpose of taxation, practically eliminates all such complications, and most importantly reduces compliance effort and costs.

Reduced human intervention for compliance: Possibly the biggest benefit SMEs stand to gain is reduced human intervention that will be brought about by the online taxation experience of GST. SMEs now need not worry about interacting with numerous department officers for carrying out compliance procedures – something that eats into the time of a business and is considered as a headache. All the compliance procedures under GST – registration, payments, refunds and returns – will now be carried out through online portals only, which has the following advantages:

  • Registration – timely receipt of certificate of registration and minimal bureaucracy

  • Payment – more transparency and reduction in compliance costs

  • Refund – faster process and enhanced liquidity

  • Returns – automatic and hassle-free input tax credit and tax liability adjustment

In conclusion, GST may have some immediate impacts – more number of SMEs coming into the taxation fold, transaction centric compliance, technology adoption for GST compliance – for which a typical SME needs to brace itself in the time to come. But, once that’s done, GST will ensure a long term steady growth for the Indian SMEs, making them more competitive than before. Not only will we see the Indian SME competing with local large enterprises, but also foreign competition coming in from cheap cost centres such as China, Philippines and Bangladesh that which bodes well for the Indian economy in the time to come.

Tejas Goenka is the executive director of Tally Solutions

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