GST & MSME sector

Micro, small and medium enterprises (MSME) are the backbone to the Indian Business environment. Post-Independence, the organised sector has evolved and grown in the Indian economy. However, traditionally, cottage industry and the small and medium enterprises have been providing the basic platform for businesses to flourish across the length and breadth of the country.

The introduction of GST also, was necessitated to ease out amongst other things, the cascading effect of the various indirect taxes, the artificial barriers created by the business restrictive tax regime at State level etc. GST has tried to address these concerns and provide a seamless transfer of credit across businesses, across states, and within the business; across various activities. However, being a federal structure, with states having their revenue implications with a destination based consumption taxation system, the inherent handicaps of the GST introduced in india cannot be lost sight of.

Although the MSME sector is now partly considered as forming a section of the ‘organised sector’; the majority of the businesses falling in their MSME sector still continue to be the part of the unorganised sector of Indian economy. Typically, the MSME sector employs less capital but is more labour incentive, thereby, creating and/or supporting large employment across industries. Moreover, the MSME sector supports and nourishes the entrepreneurial spirit of the business community.

In this background, one may expect a special treatment to the MSME sector under the GST provisions. It may be noted that as such, there are no separate provisions which are directly addressed to MSME sector but if one were to see overall scheme of taxation and the product/ service classification; one may notice that there are several areas where the GST has either provided concessional /lower rate of tax or exemption from tax and/or supported the small and medium sized of businesses with lesser levels of compliances under the GST.

Let us now briefly touch upon such areas where the MSME sector is benefited / supported under the GST provisions.

1. Registration: The registration under the GST is required on the crossing of the threshold limit under the GST. This limit as per section 22 can be briefly tabulated as under:

Threshold limit in lakh

Provider of supply of

Located in North Eastern states and Pondicherry

Located in Other states & UT

Services

10

20

Goods

20

40

Therefore, small units / business having turnover limit lesser than the threshold limit as above may not be required for registration under the GST Act. However, it may be noted that GST as a concept, ensures seamless transfer of credit to the trade channel partners and hence the taxes realise on the value the ultimate consumer pays for the goods and/or services. In a case where, such chain is broken (inbetween unregistered obtains goods, the tax paid by such person at an earlier stage becomes cost and becomes inbuilt even for the further chain of transactions). This may lead to loss of business by such unregistered members as the larger players and/or other registered player may find it economically costlier to buy/avail goods and/or services. Therefore, the Act also provides for voluntary registration in case such a person wishes to be the part of the registered person. It may be noted that if a MSME business were to supply to the ultimate consumer like individual and not other business) or supply goods / services which are not eligible for further ITC in the hands of recipient, the non-registration of such small enterprises may not create the economic handicaps as discussed herein before.

2. Composition scheme: Collecting tax on the outward supplies and claiming ITC on the tax paid on the inward supply is the standard principle of GST. Obviously, collecting tax and claiming ITC requires elaborate keeping of books of account and other records & compliances. Keeping view of the physical and monetary cost of keeping records and compliances under the GST, the composition scheme is also provided. Typically, a micro or a small business may find it attractive to opt for a such a scheme.

Section 10 of the CGST provides composition levy for the registered tax payers who opt to avail the composition scheme. The scheme can be briefly stated as under:

• Who can avail:

  • A registered person whose aggregate turnover in the preceding FY did not exceed 1.5 cr (₹ 75 Lakh for North-Eastern States)

  • Supply services to an extent of ten percent of turnover, or ₹ 5 lakhs, whichever is higher is allowed (please see further discussion given hereunder for scheme for service provider)

  • He is not engaged in making any supply of goods which are not leviable to tax under this Act

  • He is not making any inter state outward supply of goods

  • He is not making any supply of goods through any e-commerce operators is require to collect tax at source u/s. 52

  • He is not manufacturer of such goods as may be notified

  • He is neither a casual taxable person nor a non-resident taxable person

• Tax payable:

  • 1% of the turnover in case of a manufacturer [effective rate 2%]

  • 2 ½ % in case of person who is engaged in restaurant or catering business (loosely worded herein) [effective rate 5%]

  • ½ % of the turnover in case of other supplier (e.g. trader) [effective rate 1%]

It may be noted that small and medium enterprises engaged in the business of providing services have special scheme made effective from 1.4.19 vide notification no. 2/2019 CT (Rate) dt. 29.3.2019 whereby 6% (3+3) is leviable for such service provider. Such scheme available to a service provider whose turnover is up to ₹ 50 lakh in the previous financial year. The Scheme also provides similar conditions as are applicable to other persons opting composition Scheme.

• ITC: No ITC is available to a Registered person opting the Composition Scheme. Further, the recipient of goods/services from such a composition taxpayer is also not eligible for ITC.

3. Maintenance of records: As discussed herein before, the presence of scheme of seamless credit on tax paid on input and input services requires the registered tax payable to maintain elaborate records in respect of supply of the inward goods/services. Similarly, invoices that are issued by such person also requires collection of tax at correct rate of tax with clear description of goods/ services and its HSN classification. This may require the person to have clarity of the classification and the rate applicable. Considering the technicalities involved and the general awareness of the HSN classification in trade and industry, the GST laws provide that the (Registered Taxpayer) RTP having turnover less than ₹ 1.5 cr may not give HSN classification and those having turnover between ₹ 1.5 to ₹ 5 cr to provide only two digits of the HSN. Whereas persons having turnover more than ₹ 5 cr, need to mention 4 digits of HSN in their invoices.

4. Return Filling: The person opting for composition have to maintain limited records of compared to the other registered taxpayers and such composition taxpayer have to file only quarterly returns.

Annual return: Recently RTPs having turnover less than ₹ 2 cr have an option to file file the annual return in Form GSTR 9. This will facilitate the MSME sectors.

5. Concessional rate of tax: if one were to see the tax rates of some of the goods and /or services predominantly provided by the MSME sector one would notice that there are several goods and services which attracts tax @5% (2 ½ + 2 ½ ). Since there is lesser burden of tax and no loss of input tax credit on the inward side supply side , overall incidence of tax is reduced and thus the sector gets economic advantage to be competitive in the market.

6. There are some initiative which help the small and medium size enterprises which are not registered under the GST. Section 5 (3) of in the CGST Act provides for RCM for inward supplies made from unregistered person. The incidence of RCM was resulting into loss of business in the hands of mirco and small scale enterprises. The GST counsel has kept the operation of this section suspended till 31-3-2019. Moreover, proviso to Section 16(2) provides that to avail the ITC the vendor should have been paid within 180 days from the receipt of the tax invoice of the supply. This is yet another example of supporting the payments to the vendors. Further, under MSME Act payments are to be made to a person registered under MSME within a period of 180 days and to top it all the statutory auditors under the Companies Act has to report such non-payment to such vendors registered under MSME Act who has not been paid within a 180 days. It is believed that this dual provisions would help MSME sector to realise their dues earlier.

7. Challenges faced by MSME: Being a MSME Enterprise, perse faces various types of challenges in the business environment. Typically, such enterprises work on small budget and employ much lesser capital in the business. Thus, there is always a tight rope walk as far as the finances are concerned. Moreover, employing skilled / unskilled manpower and retaining them is also very difficult. Since this unit have limited budget to spent, the entrepreneur generally wears multiple hats like looking after procurements, purchases, sales, marketing, manufacturing, accounting, banking, recoveries etc. Thus, it is most likely that there could be some compromises or sub-optimal performances in one of these functions that he carries out. As a result thereof, some inefficiencies creeps into the business operations leading to economic loss; some measurable and some unmeasurable.

8. Rule 36(4): Insertion of Rule 36(4) has restricted the ITC available to the recipient based on the amount of ITC reflected in his GSTR 2A report for a month plus 20% of such amount. However, with the introduction of this Rule 36(4) in the CGST Rules 2017, only time will tell how it would affect the MSME sector. At the outset, it may lead to loss of business on account of these small business mostly being quarterly GST filers and purchasers being denied credit till the end of the quarter. The larger businesses would avoid effecting purchases from such vendors. Hope the wiser counsel prevails.

9. The spirit of Indian business even with these challenges have always flourished as MSME sector in the Indian economy. With the limitation that the GST Laws have in providing leave way to the MSME sector, the concessions or the benefits provided under the law does help to an extent to an entrepreneur in its GST compliances.

Comments are closed.