GST-SME Sector

GST – The Game Changer for Indian Economy: GST-SME sector

Naaharavaar Lakshmishree Dharmendra –Research scholar Dr Gaurav Khanna- Research Guide Madhav University, Abu road , Sirohi , Rajasthan

Abstract: In this paper my aim is to study about GST, journey of GST, foreign countries who have adopted GST model , impact of GST on SME sector . Indian government has structured GST for efficient tax collection, reduction in corruption, easy inter-state movement of goods, Make in India promotion etc. because of all these factor Indian SME will be more competitive in international market which will compete with China, Bangladesh etc .New emerging market in FMCG ,textile, ecommerce ,automobile sector will be benefited in future Main issue in GST is tax evasion arising out of small businesses not registering, under- reporting of actual sales by traders; traders collecting tax but not remitting to the government; and traders making false claims for refunds. Finally I just want to suggest that government should focus on cyber security ,strong IT infrastructure ,GST learning programmes for local people then and only we will get long term benefit.

Keyword : SME, foreign countries ,tax evasion , cyber security ,IT infrastructure ,Learning programmes

Introduction of GST

In India, GST is proposed to have a dual structure— a Central GST levied and collected by the Centre and a state GST administered by States. The Goods and Service Tax will bring into place a unified taxation system, which would merge most of the existing taxes into a single taxation system. It replaces the taxes levied by the central and state governments separately and at different stages of sale and purchase including State Value-Added Tax (VAT), Central Excise, Service Tax, Entry Tax or Octroi and a few other indirect taxes. GST is expected to completely restructure the way India does business by introducing a single platform, the GST Network (GSTN), where businesses can upload their invoices for tax processing and availing tax benefits.The goods and services tax comes under Constitution (122nd) Amendment Bill .The move will create uniformity in taxes across states, increasing efficiency and compliance and also boost Modi government’s big push towards ease of doing business.

Journey of GST in India

 February 1986: Finance Minister Vishwanath Pratap Singh proposes a major overhaul of the excise taxation structure in the budget for 1986-87.  2000: Prime Minister Atal Bihari Vajpyee introduces the concept, sets up a committee headed by the then West Bengal Finance Minister Asim Dasgupta to design a GST model.  2003: The Vajpayee government forms a task force under Vijay Kelkar to recommend tax reforms.  2004: Vijay Kelkar, then advisor to the Finance Ministry, recommends GST to replace the existing tax regime.  2008: Empowered Committee of State Finance Ministers constituted.  April 30, 2008: The Empowered Committee submits a report titled 'A Model and Roadmap Goods and Services Tax (GST) in India' to the government  November 10, 2009: Empowered Committee submits a discussion paper in the public domain on GST welcoming debate.  2009: Finance Minister Pranab Mukherjee announces basic structure of GST as designed by Dasgupta committee; retains 2010 deadline. BJP opposes GST basic structure.  February 2010: Finance Ministry starts mission-mode computerisation of commercial taxes in states, to lay the foundation for GST rollout. Pranab Mukherjee defers GST to April 1, 2011.  March 22, 2011: UPA-II tables 115th Constitution Amendment Bill in the Lok Sabha for bringing GST.  March 29, 2011: GST Bill referred to Parliamentary Standing Committee on Finance led by Yashwant Sinha. Asim Dasgupta resigns, replaced by the then Kerala Finance Minister KM Mani.  November 2012: Finance Minister P Chidambaram holds meetings with state finance ministers; decides to resolve all issues by December 31, 2012 for GST rollout.

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 February 2013: Declaring UPA government's resolve to introducing GST, Chidambaram in his Budget speech makes provision for Rs 9,000 crore to compensate states for losses incurred because of GST.  August 2013: Parliamentary standing committee submits report to Parliament suggesting improvements on GST. GST Bill gets ready for introduction in Parliament.  October 2013: Gujarat Chief Minister Narendra Modi opposes GST Bill saying state would incur losses worth Rs 14,000 crore every year due to GST.  2014: GST Bill cleared by Standing Committee lapses as Lok Sabha dissolves; BJP-led NDA government comes to power.  December 18, 2014: Cabinet approves 122nd Constitution Amendment Bill to GST.  December 19, 2014: Finance Minister Arun Jaitley introduces the Constitution (122nd) Amendment Bill in the Lok Sabha; Congress objects.  February 2015: Jaitley sets April 1, 2016 as deadline for GST rollout.  May 6, 2015: Lok Sabha passes GST Constitutional Amendment Bill.  May 12, 2015: The Amendment Bill presented in the Rajya Sabha. Congress demands the Bill be sent to Select Committee of Rajya Sabha; demands capping GST rate at 18 per cent.  May 14, 2015: The GST Bill forwarded to joint committee of Rajya Sabha and Lok Sabha.  August 2015: Government fails to win the support of Opposition to pass the bill in the Rajya Sabha where it lacks sufficient number.  July 2016: Centre opposes capping GST rate at 18%; gets states around.  August 2016: Congress, BJP agree to pass the Constitution Amendment Bill.  August 3, 2016: Rajya Sabha passes the Constitution Amendment Bill by two-thirds majority.  September 2, 2016: 16 states ratify GST Bill; President Pranab Mukherjee gives assent to the Bill.  September 12: Union Cabinet clears formation of GST Council  September 22-23: Council meets for first time.  November 3: GST Council agrees on four slab tax structure of 5, 12, 18 and 28% along with an additional cess on luxury and sin goods.  January 16, 2017: Jaitley announces July 1 as GST rollout deadline. Centre, states agree on contentious issue of dual control and taxing rights on goods at high sea.  February 18: GST Council finalises draft compensation bill providing to make good any revenue loss to states in first five years of GST rollout.  March 4: GST Council approves CGST and Integrated-GST bills.  March 20: Cabinet approved CGST, IGST and UT GST and Compensation bills.  March 27: Jaitley tables CGST, IGST, UT GST and Compensation bills in Parliament. Lok Sabha and Rajya Sabha pass all the four key GST Bills - Central GST (CGST), Integrated GST (IGST), State GST (SGST) and Union Territory GST (UTGST).  May 18: GST Council fits over 1,200 goods in one of the four tax slabs of 5, 12, 18 and 28%. Over 80% of goods of mass consumption either exempted or taxed under 5% slab. GST Council fixes cess on luxury and sin goods to create kitty for compensating states.  May 19: GST Council decides on 5, 12, 18 and 28% as service tax slabs.  June 21: All states except Jammu and Kashmir pass SGST law.  June 28: Mamata Banerjee announces her party's decision to skip midnight launch of GST.  June 29: Congress, Left too decide to skip launch.  June 30 Midnight: GST rollout. It took almost 30 year for implementing GST in India. The credit should be given to the Prime Minister Atal Bihari Vajpyee who introduces the concept, sets up a committee headed by the then West Bengal Finance Minister Asim Dasgupta to design a GST model and now Modi who is taking all credit for implementing GST was opposing when he was Gujarat CM by saying GST Bill would incur losses worth Rs 14,000 crore every year due to GST in OCT 2013 to state . GST in Other Countries It is a known fact that more than 160 nations have brought up GST and as a matter of fact, European tax economy has conceived the GST more than 50 years ago. In the Asia Pacific geography, the taxation scheme is a popular and broadly accepted subject of taxation. But the most important and questionable thought over this discussion concludes that there are above 40 models of GST applications which are currently running through the system of various economies in the world which includes a diverse set of rules and regulation New Zealand GST has been implemented in New Zealand in 1986 and after that, it had been applying the taxes on everything at a single and consistent rate which is 10% till 2010. The tax rate after 2010 has increased to 15% which is applicable to all purchases. There is no GST on residential rents and financial services. Here businesses can also recover the GST as an input cost.

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Singapore Singapore also follows the single and consistent rate system on every purchase. GST was initiated in Singapore in 1994 with the flat GST rate of 3% which was lowest in the market. With effect from 2007, the GST rate has been increased to 7% which is still very less compared to GST rates of India. The government committed not to raise tax for next 5 years which came in as a important decision in reviving consumer spending.Also, Singapore introduced a compensation scheme under the GST which provided support to the needy and underprivileged.However, in initial stage of GST, the country faced uptick in inflation to 3.1% in 1994 from 2.3% in 1993. But after that it moderated below 2% between 1995 – 1996.

Indonesia In Indonesia, imports are subject to VAT and GST, but most of the exports are exempted from the list of it. The tax rate is 10% if the services are supplied out of Indonesia by foreign taxpayers, and certain items are taxed at 20% with the cap of 35%. The luxury tax which is applicable on import is 10% to 50%. Most of the items like gold, mining products, arts and entertainment, education, insurance, parking, public transport, medical health, labour, hotel, financial, food and beverage served in hotels are not subject to pay any VAT China After the European and Asia Pacific market, the China has maintained the GST applications over goods and the conditioned provision of repairs, processing and replacement assisted services, which also means that it is restrictedly collected on goods which are consumed in the manufacturing process as the fixed asset goods and service tax in foreign country like China is not under recoverable terms. There are three tax rates; which includes 0%, 5%, and 19%. Australia Going to the far shores, in Australia, the GST is a federal tax which is collected by the supreme authority and thus divided further among the states without any conflict arising through the process. The GST was firstly introduced in 2000 with the tax rate of 10% which is consistent till date . Australia also replaced a range of existing taxes like the wholesale sales tax (WST), debit tax, financial institutions duty, and stamp duty on shares, leases, mortgages and cheques.

Canada Now looking to Canada model of GST, the country governs the taxation regime under 3 schemes i.e. Federal GST, Joint federal and separate federal. Federal tax is generally accepted tax system while joint federal runs on the basis of the synchronized behavior of the economy and states and the last one separate federal which only applies to the Quebec as it is deemed as a quasi-independent province. The GST rate in Canada is 5% on supplies of goods and services and in some provinces, there is harmonised sales tax which is 15%.

Canada introduced GST in the form of a multi-level VAT in 1991 on supplies of goods and services purchased in the country – included almost all products except certain essentials like groceries, residential rent and medical services. Once implemented, the bill led to new processing operations and techniques to verify the accuracy of the returns submitted by small entrepreneurs. However, Canada imposes their own sales tax besides GST – this has created price distortions in the country Brazil Talking about the Brazil model of GST, it is much independent and carefree in comparison to other nations and has a dividing rule of taxes between the states and the center. Brazil has six tax slabs which are 0%, 1.65%, 2%, 7%, 12%, and 17%. USA The US is a federal republic where taxes are collected at a separate level from federal, state, and local governments. Here the federal tax rates are between 10% and 39.6% of taxable income while state and local government is charging the tax from 0% to 13.30% of total taxable income. UK In the UK there are three tax rates including 0%, 5%, and 20% applicable on goods and services. Most of the goods are covered under 20% tax rates. The VAT on postage stamps, financial, property transactions, most food and children’s clothes are exempt from any tax. France GST has been firstly implemented in France in 1954 with 4 tax rate slabs. The rates here are chargeable in the slab of 2.1%, 5.5%, 10% and 20%. Among the tax rates, 20% is the standard rate applicable to most of the goods in France. Ukraine In Ukraine, there is a standard tax rate which is 20% and the VAT value is added to the cost of Goods and service price. There are some of the supplies are also subject to lower rates under 0% and 7%. Generally, 7% rate is applicable to pharmaceutical products, medicines and medical equipment while the export of goods and services attract 0% VAT.

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Malaysia GST has been implemented in Malaysia with effect from 1 April 2015 with the consistent rate of 6%. Here, Sales tax and service tax are categorised by different tax rates which are 10% and 6% respectively. Some of the items like piped water, first 200 units of electricity per month, transportation services, highway toll and health service are exempted from taxation. In all cases, GST rates are prefixed between 16 to 20 percent and India has somehow taken the cues from this and jotted down the similar pattern. Also, it is expected that the Indian economy will expand with a great pace as the speculated taxpaying community is likely to get a growth of 5 to 6 times than the current figure After implementation of GST, the cost of doing business in Malaysia reduced as the tax burden was transferred from manufacturers to consumers. Yet, the country has seen low revenue productivity in terms of tax collection

Positive Impact of GST on SMEs and Startups in India

Reduction of tax burden on new business: As per the current tax structure, businesses with a turnover of more than rupees 5 lakh need to pay a VAT registration fee. The government mulls the exemption limit under GST to twenty five lakh giving relief to over 60% of small dealers and traders. Enhance Indian SME more competitive : Indian SMEs would be able to compete with foreign competition coming from cheap cost centres such as China, Philippines and Bangladesh Improved logistics and faster delivery of services: Under the GST bill, no entry tax will be charged for goods manufactured or sold in any part of India. As a result, delivery of goods at interstate points and toll check posts will be expedited. According to an estimate by CRISIL, the logistics cost for manufacturers of bulk goods will get reduced significantly—by about 20%. This is expected to boost ecommerce across the nation. Ease of starting business: A business having operations across different state needs VAT registration. Different tax rules in different states only add to the complications and incur a high procedural fees. GST enables a centralized registration that will make starting a business easier and the consequent expansion an added advantage for SMEs. Unlike state specific taxes, the GST regime will introduce a centralized 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.

Elimination of distinction between goods and services: GST ensures that there is no ambiguity between goods and services. This will simplify various legal proceedings related to the packaged products. As a result, there will no longer be a distinction between the material and the service component, which will greatly reduce tax evasion. Promotion of Make in India: 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.

Impact analysis

Compliance Positives Negatives Procedure

Registration Online registration will ensure Not all the SMEs have technical timely receipt of certificate of expertise to deal with online systems, registration and minimal thus most of them will need bureaucracy interface intermediaries to obtain registration for them. This will add to their registration cost.

Payment Electronic compliance will bring Since funds are required to be transparency and will also maintained in the form of electronic reduce the compliance cost. credit ledger with the tax department, it may result in liquidity crunch.

Refund Electronic refund procedures Refunds can be claimed only after filing will fast track the process and of relevant returns. Also it depends on enhance liquidity for SMEs the compliances done by the supplier and his rating.

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Returns All returns are required to be Minimum of thirty-seven returns are filed electronically and required to be filed by every registered input tax credit and tax liability taxpayer during a financial year. Thus adjustment will happen SMEs will have to deploy additional automatically on the basis of resources and eventual cost of these returns compliance will increase

Challenges of GST for SME sector

 Negative perception of traders/businessmen: A sizeable portion of SMEs are of the opinion that GST is not all good for the sector and their fears may not be totally vacuous. The tax neutrality that the SMEs enjoy may be one of the prominent benefits. However, reduction in duty threshold is one of the key concerns that has led them to be wary of the GST Law.  Strong IT infrastructure: Government should focus on cyber security and strong IT infrastructure then and only we will get long term benefit.  Creation of trust among stakeholder and learning of GST model:- there is need to develop creation of trust among consumer, trader, government for GST for that there is learning programmes should be organized at local level.  No difference between luxury goods and normal goods: there is no differentiation between luxury goods and normal goods so it make hard for the SMES to compete with large enterprises.  Increase in the cost of products: GST that is ultimately levied on supply will not be available for input credit. So it increases the cost of product to end users. ultiple registrations for Pan-India businesses: Under the new regime, a business will have to register online for GST in every state involved in its sales process. If your business delivers goods across 5 states, then you’ll have to register for GST in those 5 states to carry out your business activities. Since the entire registration process takes place online, small business owners who are not used to working online might not find the transition easy. Registration will be mandatory for e-commerce suppliers and operators: Businesses carrying out activities related to e-commerce should register under GST irrespective of their annual turnover rate. Unlike other types of businesses, e-commerce firms will not be eligible for threshold exemptions or for the Composition Scheme (which allows firms to file their tax returns on a quarterly basis instead of 3 times a year and pay taxes at a much lower rate). Also, e-commerce firms should register for GST in every single state where they supply goods.

Sectors that are expected to benefit the most from the GST reform

FMCG - In the latest GST regime, 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 per cent. Automobile - The Indian automobile sector also stands to benefit under the new taxation system. 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. Textile - The GST regime is expected to prove beneficial for the textile sector in the long run in terms of growth and making it more competitive in both domestic and 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 that are expected to benefit the least from the GST reform

Consumer durables - Consumer durables like air conditioners, refrigerators, etc. have been put under the 28 per cent category, the highest tax bracket under GST, making them more expensive under the new regime. Entertainment - Going to watch movies at multiplexes could become dearer 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.

Conclusion GST is a welcome step towards growth interest, progress of the country .People should be prepared nationwide to accept this change & march ahead .Overall, the new tax proposals under GST will have a mixed verdict. But

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in the long run, GST will make SMEs more competitive with a large enterprises and foreign player . furthermore I just want to conclude that government should focus on cyber security and strong IT infrastructure then and only we will get long term benefit and also learning programmes should be organised at local level for building trust .

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