1.GST a huge opportunity for MSMEs (The Financial Express)

 

1.GST a huge opportunity for MSMEs (The Financial Express)

Synoptic line: It throws light on the issue of GST, which has created a huge opportunity for MSMEs. (GS paper III)

Overview

  • The micro, small & medium enterprises (MSME) sector is the backbone of Indian economy as it contributes significantly to the Gross Value Added (GVA), manufacturing output, employment and exports. In terms of volume, it is the second-largest sector for employment generation, after agriculture in India, Increasing the ease of doing business in the MSME sector will, therefore help create more jobs.
  • The GST has created a huge opportunity for MSMEs, but tax structure has to be designed well.

Assessment of MSME sector

  • As per the fourth All-India Census of MSMEs (2006-07), 94% of the enterprises are in the unorganised sector, having concomitant features like lack of access to social benefits, higher likelihood of tax evasion, feeding into the parallel economy.
  • India’s 5% rate, in the GST rate basket, is the lowest in the world. The number of effective taxpayers in India is disturbingly low at about 1.3% resulting in a relatively low tax-GDP ratio. The entry-level GST rate and measures like composition scheme are intended to facilitate the widening of the tax base.
  • The GST is more likely to lead to a shift in the market share from unorganised to organised in the medium-to-long-term by providing a positive incentive to those who are part of the GST credit chain.
  • MSMEs generally bear proportionally higher GST costs than large businesses as their compliance efforts takes a greater share of their financial, technological and human resources. The GST Council, decided to simplify the tax administration. The composition scheme is meant to reduce the transaction cost and the compliance requirements of small businesses.
  • The GST Council has constituted a ministerial panel on the composition scheme to make the scheme more attractive as only about 15.5 lakh businesses out of the total of 98 lakh registered under the GST regime have opted for it. However, the flip-side of the composition scheme is that there is no input tax credit (ITC) and inter-state trade is not covered.
  • To ensure a smoother transition of small businesses into GST with low compliance cost, the periodicity of GST returns has been reduced from monthly to quarterly for businesses with turnover up to Rs 1.5 crore.
  • Reverse charge mechanism (RCM) shifts the liability to pay GST from the supplier of the service to the buyer while, in normal circumstances, supplier pays the tax. RCM is a standard practice in international VAT law for instance, EU uses RCM to tax cross-border supplies. Though RCM facilitates tax administration and prevents tax evasion, there were some unintended consequences for supplies made by an unregistered dealer.
  • The Council’s decision for no need to pay GST when advance is received or goods are sold is welcome relief for taxpayers of turnover up to Rs 1.5 crore. GST will prove a boon for MSMEs, provided the tax structure is appropriately designed and fairly administered.

Question– GST will prove a boon for MSMEs, critically analyse.