GST is a mountain, and SMEs can’t scale it without some support

Gunja Kapoor 5th September 2017

Considering SMEs in India are largely promoter-driven, entrepreneurs fear they will be spending valuable resources on compliance.

The Goods and Services Tax (GST), also touted as the “Good and Simple Tax” is an indirect, destination-based tax, applicable throughout India, thereby simplifying a complex tax system.

In the pre-GST era, multiple points of tax arbitrage existed, for both SMEs and large corporations. Consequently, firms found themselves optimizing tax, instead of optimising production; adversely impacting capacity utilization and economic growth.

The advent of GST was aimed at establishing an efficient tax monitoring system and increasing the tax payer base. But it has intimidated several Small and Medium Enterprises (SMEs) after the first filing itself.

The new Compliance Cost

One of the immediate consequences of GST is the increase in compliance cost for SMEs. SMEs bear disproportionate regulatory burden, compared to their large counterparts, primarily because tax compliance is largely a fixed cost, which does not increase in direct proportion with scale of operations. As a result, tax compliance cost per unit sales is much higher for small firms (European Commission, 2007).

GST mandates three-monthly filings. To make matters worse, these deadlines are within close proximity i.e. 10th, 15th, and 20th of every month. Considering SMEs in India are largely promoter-driven, (90 percent of MSMEs in India are proprietorships or partnerships), entrepreneurs fear they will be spending valuable resources on compliance, which could have o...

Note: Views expressed in this blog are those of the author.