Following months of deliberation, the Goods & Services Tax bill has been finally passed by the Indian Government in bid to create a unified taxation system in the country. The new levy ushers a revolutionary change in the taxation system with the "One Nation, One Tax" motto. This standard tax rates-standard pricing model aims to bring more transparency within the system by eliminating hidden costs and/or taxes and a fall in prices of commodities across India is expected.
GST is comprised of all indirect taxes—service tax, Value added tax (VAT), excise duty, sales tax, central sales tax, entertainment tax, luxury tax, etc. With its implementation, the new tax stands to significantly benefit both businesses and consumers, and improve the overall taxation structure in India. What's more, according to industry experts, the implementation of GST can help small-scale businesses compete better with imported goods and foreign manufacturers as duties like VAT, excise, surcharges, entry taxes, and cess are all included in the new tax.
It is a matter of extreme importance to consider the different challenges faced by SMEs so they can reap maximal benefits from this radical tax regime.
Earlier, vendors had to deal with cascading taxes levied on goods at each level throughout the whole trade process. However, under GST, a uniform tax rate would create a seamless market across the country. Apart from that, the elimination of distinction between goods and services will also help in reducing instances of tax evasion.
While there are several advantages that come with this new taxation structure, its impact on the Indian SME sector is expected to vary across different segments.
Sectors expected to benefit most from GST
FMCG: The FMCG sector is expected to benefit the most due the government's focus on reducing taxes on products of mass consumption. While food products like grains, dairy, cereals, etc. are exempt from GST, sugar, tea, and coffee are expected to be taxed at just 5%.
Automobiles: The implementation of GST is expected to reduce the overall manufacturing cost for cars as all duties will come under a single tax bracket. Moreover, the GST will be applicable on consumption level rather than the state of origin, which can give a much-needed boost to the automobile sector.
Textiles: The GST regime is expected to prove beneficial in the long run in terms of growth and making it more competitive in both domestic & international markets. It will also help in listing more players as registered taxpayers under a strictly regulated structure.
E-commerce: The impact of GST on the e-commerce sector is expected to be positive in the long run as it can help regulate this segment, and further promote this marketplace model in the country.
Sectors expected to benefit the least from GST
Consumer durables: Consumer durables like air conditioners, refrigerators, etc. have been put under the 28% category, the highest tax bracket under GST, making them more expensive under the new regime.
Entertainment: Going to watch movies at multiplexes could become more expensive for consumers following the implementation of GST in July, however, its impact will vary in different states. On the other hand, it will benefit multiplex owners due to provisions like input tax credit.
So, where do SMEs stand?
Regardless of its impact on different sectors, the implementation of GST could propel the growth of Indian SMEs by promoting the government-led "Make in India" initiative and helping small-scale enterprises in terms of ease of doing business.
Consider this: Unlike state specific taxes, the GST regime will introduce a centralised registration system, which could support new businesses by allowing them to register themselves on record. Additionally, reduced tax on new businesses could also spare such firms from the usual tax burden. Moreover, since GST is a destination-based tax, locally manufactured goods will pay the same amount of tax as imported goods, encouraging companies to reach out to local units, and in the process, significantly benefit small scale industries.
It is quite apparent that the strategies of sourcing, warehousing and other decision-making that are currently based on minimising taxes would give way to ones that lay emphasis on quality and convenience. As a consequence, we can foresee shortened delivery time spans as well as reduced overall spend on operational expenditures.
While real time issues will surface only on implementation, certain aspects that would need more thought include handling of refunds, input-tax credit, smooth implementation, and help facilities to educate users.
However, this reform may cause some hiccups in the initial months, especially for SMEs that, so far, have worked on Excel-based platforms or maybe not even that. Other factors like cash flow-related issues, delays, and uncertainties can prove to be a challenge for SMEs, which they would need to overcome with better planning and execution.
While real-time issues will surface only on implementation, certain aspects that would need more thought include handling of refunds, input-tax credit, smooth implementation, and help facilities to educate users.
Going by the aforementioned factors, it is evident that the impact of GST on the Indian SME sector could go either way. It is thus a matter of extreme importance to consider the different challenges faced by SMEs so they can reap maximal benefits from this radical tax regime.