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GST woes for SMEs

Sentinel Digital DeskBy : Sentinel Digital Desk

  |  10 Oct 2017 12:00 AM GMT

If one thing is clear three months after introduction of Goods and Services Tax, it is that this ‘unified indirect tax regime’ is very much a work in progress. The tinkering has already begun, what with the GST Council last week cutting tax rates on 27 items and announcing some relief to small and medium enterprises (SMEs) as well as exporters. The tweaking was inevitable, considering the pain to SMEs particularly, which means bad political dividends. What rubs salt into their wounds is the fact that large FMCG and other sector companies are already transitioning smoothly in the GST regime. Union Fince Minister Arun Jaitley has spoken about the need to reduce the number of GST slabs (five presently). Some State Fince ministers are unhappy that items of “common use” like cement, steel rods for construction and bath fittings are in the highest slab attracting 28 percent tax. Clearly, the GST Council has muddled somewhat in categorising which commodity or service is ‘non-merit’ and therefore needs be taxed higher, and which is ‘merit’ type. As for producers, those in the unorganised sector are struggling to come to terms with GST complexities. Considering the sensitiveness of this sector which contributes some two-fifth of the country’s gross production but employs nearly 90 percent of the workforce, the need for recalibration and course correction can hardly be overstated. As per the latest GST Council decisions, those producers with annual turnover less than Rs 1.5 crore can file their returns quarterly rather than monthly. So a little belatedly, the compliance costs for small enterprises is being sought to be lowered. The turnover threshold for small manufacturers in the ‘composition scheme’ has been raised to Rs 1 crore — who are allowed to pay tax at rates from 1 to 5 percent without going through the GST procedure. In fact, the Centre has constituted a group of ministers (GoM) of State Fince ministers, headed by Himanta Biswa Sarma, to further look into various issues relating to small taxpayers and possible relief measures within the ‘composition scheme’.

The GST Council has also put on hold till March 31 next year the ‘reverse charge mechanism (RCM)’, which pelises those purchasing goods from unregistered vendors by making them also pay tax on behalf of such vendors. This had effectively deterred large companies from sourcing supplies from small entities which are mostly unregistered. Now that the small entities are being given six months more to register, the Centre expects things to ease out on this front. But transporters too have a grouse against ‘reverse charge mechanism’ — they are protesting that due to RCM, they are not able to lift goods from unregistered traders. Major transporter bodies have already begun a countrywide strike against GST, protesting ‘forced registration and unnecessary compliance’. How transporters are brought to the negotiating table remains to be seen, because a protracted strike can foul up things on the prices front. The GST Council has tried to stabilise the new system for exporters, freeing them from paying tax upfront on raw materials and products they have to procure for making exports. Exporters will also get duty exemption on items imported for export purposes, and refunds of duties will be expedited. But similar relief is yet to be given to small enterprises, despite the latest GST Council intervention. SMEs still have to worry about high GST rates cutting into or wiping out their already thin profit margins. There are complaints galore of SMEs having to pay high tax rates for inputs; they have to pay taxes immediately on sale rather than after receiving payment from clients (the time lag can be over 3 months); and they have to bear delays in claiming input tax credit (which reduces their tax burden as part of it has already been paid by previous producers in the value chain). Because of these teething problems remaining uddressed, small producers are forced to run after more working capital to survive in the competition. One of the hardest hit has been the textile sector; Surat in Prime Minister rendra Modi’s home State Gujarat has also been afflicted with uncertainty over GST. For a State like Assam, the problem is worse compounded — its handloom products, which were earlier tax-free, will now be taxed and consequently pricier. And if the weavers here are made to compete with machine-made textiles on the same GST rates, the outlook for the handloom textile sector in the State will decidedly be grim. A similar bleak scerio awaits producers of other handicrafts and cottage industry goods, unless the State government effectively pushes their case in the GST Council.

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