IMPACT OF GOODS AND SERVICES TAX ON SMALL BUSINESSES

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The Goods and Services Tax (GST) Bill has been passed by both Houses of the Parliament (Rajya Sabha and Lok Sabha) and will be effective from 1st July, 2017. The new GST regime is expected to lead to disruption in small businesses and payment cycles.

Under GST, all firms micro, small and big would have to move to a new and more advanced digital technology to facilitate audit reports, tax credits and payments among other things. Many companies will have to make several entries and chalk out the entire chain of business transactions and processes.

All central taxes, including excise duty and service tax besides state levies such as sales tax, value-added tax, entertainment and purchase taxes, would be subsumed into one, once the GST is implemented, thus creating one national market. It is also expected to further boost economic growth by about 1.5 percentage points.

Increased compliance under GST will benefit firms in the long run by providing them access to cheaper capital and lower input costs. However, in the short term, the switch from the unorganized to organized sector will make them less competitive. Thus, this may result in some job losses in the initial phase and some may become less competitive due to higher compliance costs.

Under GST, all firms micro, small and big would have to move to a new and more advanced digital technology to facilitate audit reports, tax credits and payments among other things. Many companies will have to make several entries and chalk out the entire chain of business transactions and processes.

All central taxes, including excise duty and service tax besides state levies such as sales tax, value-added tax, entertainment and purchase taxes, would be subsumed into one, once the GST is implemented, thus creating one national market. It is also expected to further boost economic growth by about 1.5 percentage points.

Increased compliance under GST will benefit firms in the long run by providing them access to cheaper capital and lower input costs. However, in the short term, the switch from the unorganized to organized sector will make them less competitive. Thus, this may result in some job losses in the initial phase and some may become less competitive due to higher compliance costs.

In current proposed form of GST, it exempts small businesses having the turnover below Rs 20 lakh from registering for the GST network (GSTN) unless they want to avail of the benefit of input credit. Small business will be in the Rs 20- 50 lakh bracket, according to GST, due to which family owned business worth around Rs 80- 90 lakh annual turnover may  be tempted to re-structure separate business entities in a manner that they fall within a lower tax bracket under the GST.

According to the latest annual report (2015-2016) of the Ministry of Micro, Small and Medium Enterprises (MSME), there are estimated to be about 51 million MSME business, employing more than a 117 million people and having combined fixed asset value of nearly Rs 15 lakh crore. Under the new GST regime entering the formal sector can provide smaller business access to cheaper capital as well as legal recourse in case of disputes.

However, businesses which are making a switch to the organized sector and moving towards formalization will eventually gain in their business. Ultimately, registered entities will only want to do business with other registered entities because of the reverse charge, the whole purpose of the reverse charge is to increase tax compliance, generate higher revenue and bring transparency into the tax system.

 

Taruna Verma

Senior Legal Associate

The Indian Lawyer

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