Journal of Advance Management Research, ISSN: Vol.06 Issue-03, (March 2018), Impact Factor: 4.598

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1 IMPACT OF GST ON SMALL AND MEDIUM ENTERPRISES (SMEs) Raunak Ali Sain B.Com F&A, Department of Professional Studies, Christ University, Bengaluru, Karnataka, India Shivam Mewara B.Com F&A, Department of Professional Studies, Christ University, Bengaluru, Karnataka, India Shubhankar Chatterjee B.Com F&A, Department of Professional Studies, Christ University, Bengaluru, Karnataka, India ABSTRACT Small and Medium Scale enterprises (SMEs) comprises of 90% of Indian industrial facilities. On 1 st July 2017 India was able to achieve its ever longing dream of one nation one tax. When GST was implemented the biggest concern was about the impact it would bring on SMEs. Therefore, we took the initiative to do a research study on the impact of GST on SMEs. In the journey of our research study, we used descriptive and exploratory research methodology. One of our noticeable findings was that GST has eliminated the cascading effect of taxes which was the biggest loophole of the previous tax regime. As and when the amendments will come the research can be extended further. KEYWORDS: GST, SMEs, CGST, IGST, One Nation One Tax, Cascading Effect 1. INTRODUCTION 1.1 The word taxation came into existence with the civilization. As civil society develops, along with it, the complexity and the structure of tax also develops. The policy of tax in ancient India was based on logistics, economic theories and equity compared to the current taxation policies of the government. The system of tax that our ancients used to follow was quite rational, reasonable, elastic, appealing and convenient. It was based on the principle of maximum welfare with certain exceptions. The system of tax, over the centuries, has been designed and re designed to make it more acceptable, efficient and effective. The tax system restructured over the years to make it more significant. The inventions and vast improvements in the information and communication technology, has made the tax system more effective, transparent and objective. Whereas, the inventions and vast improvements in finance and commercial models, policies of liberalization and globalization, increase in international trade as well as the emergence of MNE s have made the tax system more complex. India during the recent years has been viewed as an attractive and a vigorous investment target. It has observed an increase presence of multinational enterprises and a significant growth in cross border trade. This indeed has created innumerable opportunities for the government to improve the country s tax system. Various economic reforms have been introduced in the country after the formation of New Economic Policy (NEP) in 1991, one of the major reforms being carried out is Taxation Reforms. The government of India has introduced a host of reforms since the announcement of globalization of id- jamrpublication@gmail.com Page 19

2 economy in India. Taxation measures in the business industry helps to make the Indian products competitive at an international level. 1.2 Goods and Services Tax is a type consumption tax that is destination based. GST levies at various stages of production and distribution of goods and services and henceforth regarded as a destination based consumption tax. It is a combination of multiple other central and state taxes. Tax paid on all earlier stages of production, procurement, packaging, transportation, commission and all other expenses incurred during the sales shall be allowed as full input tax credit, which at later stages shall be claimed against the gross output liability payable. 1.3 GST was first, implemented in France in the year After, 62 years of its implementation around 160 countries across the globe have adopted GST because of its transparent nature and ability to generate revenue in most efficient way. 1.4 GST is supposed to bring in the one nation one tax system whose affect will differ from industry to industry in the country. The initial level of differentiation will depend on whether the industry is a manufacturing industry, distributing and retailing or provide any kind of service. Since few voters enjoy paying taxes politicians, introducing new taxes in the country has been a rare fact. However, the overview of the new Goods and Services Tax in India s Rajya Sabha on August 3 rd marks as a deserved exception. This new GST executed in the country would direct the entire local and the national taxes into a single tax payment, and bind together the nation's 29 states and 1.3 billion individuals into a typical market and bind together the nation's 29 states and 1.3 billion individuals into a typical market. As compared to India, few countries are awkward in terms of paying taxes. Both the central and state legislatures in the country impose charges that are generally confusing to the public. It is because of the rates that vary state wise, making products in one and selling into another becomes difficult within India than in the trade blocks such as North American Free Trade Agreement (NAFTA) and European Union (EU). Tons of Lorries are seen to be standing idle in a queue at India s state borders in the same way as they are seen in the international borders. 1.5 When economic planning was introduced in India post-independence in 1951, the small-scale industries were given more importance in the process of industrialization. In order to keep pace with the economic development, the small-scale industries have changed over the years. The small-scale industries are defined in terms of investment ceilings. Small-scale industries are also defined in terms of employment and turnover because these indicators are implied for registration under the Factories Act. The principle definition of SSI s in India remains based on investment limits. 2. IMPACT OF GST ON SMES The increase in GST threshold limits provides more relief for traders and service providers previously, the threshold limit of VAT is 5 lakhs in most states and 10 lakhs for service tax, which will mean more taxpayers, will be exempt from GST. It is a big disadvantage for manufacturers because excise threshold is 1.5 crores, which has been reduced under GST to 20 lakhs. All manufacturers with threshold limit of more than 20 lakhs have to register under GST compulsorily. The compliance procedures, which are included under GST scheme for Payments, Registration, Returns and Refunds will now be done through online portals only and thus it will reduce the burden of SME s to communicate with the department officers in personal for dealing with these processes, which were id- jamrpublication@gmail.com Page 20

3 considered an obstacle in the previous tax system. Compliance burden of medium and small taxpayers in GST is being reduced, Finance Minister Arun Jaitley said after the introduction of Goods and Services Tax, the GST Council made comprehensive changes for SMEs on payment and filing of taxes, reduced tax rates on nearly more than two dozen items and made better rules for exporters. 3. PROCEDURAL PROVISION OF GST Any business that is involved in the supply of goods and services and having a turnover of Rs. 20 lakhs (Rs. 10 lakhs for the North East and Hilly states) has to register for the Goods and Services Tax scheme. If an entity runs its business without getting registered under the GST scheme, then heavy penalties will be imposed. The penalty imposed shall be 10% of the outstanding tax amount attracting a minimum of Rs. 10,000/-. In case the taxpayer deliberately evades taxes, then the penalty imposed will be 100% of the outstanding tax amount. Registration process of GST is tiresome, as it requires submission of multiple business documents. However, GST registration for businesses is free of cost. On successful registration, each business is provided with an exclusive GSTIN (Goods and Services Tax Identification Number). A business will have to apply for multiple registrations if it carries on its business in more than one state. 2. LITERATURE REVIEW 2.1 SOUNIK MITRA (sounik.m@livemint.com): NEW DELHI Dabur India Ltd. on Tuesday said in a statement that the company had minimised prices of its existing stock by 9% across categories like shampoo skin care and homecare products. The company is passing on the benefits on existing stock by providing primary discount of 9% to its trade partners, Chief Financial Officer of Dabur India, Lalit Malik told. as per GST laws last week we had communicated to our each and every business and trade associates directing them to start charging the amended lower GST rate, on all applicable goods and services existing in the market. We have also ordered them to pass on the GST benefit to all end consumers. The move comes within days of central board of excise and customs (CBEC) chairperson Vanaja Saran writing to packaged consumer goods companies to immediately revise maximum retail prices of products to conform to the new GST rates. The GST council, at its meeting on 10 th November, had cut GST for 178 items from 28% to 18%, effective 15 th November, and left only 50 items in the maximum tax slab which was on luxurious sin goods. The rate of tax was minimised on a various goods including granite and marble to chewing gum and chocolates, deodorant and detergents. (Live mint Newspaper) 2.2 Chinmaya Goyal - NITI Ayog Officer: GST Will Deliver Growth, But Immediate Challenges Need To Be Addressed Given the required smoothening of the information technology system, policy changes and need for businesses to get familiar with the new system, the process of stabilisation may take up to a year from the launch. Even if not perfect, GST does embed many fundamental reforms elements that are important in raising economic efficiency. Based on the practical problems of businesses, the GST Council and the government have been proactively taking remedial actions. For example, the GST Council on 6th October approved many measures to reduce the compliance burden on small and medium enterprises. Additional measures as expected were taken in the November 10 meeting. There may be a temptation to id- jamrpublication@gmail.com Page 21

4 reduce GST rates for small businesses to provide immediate relief. However, the design of such cuts should be made with sufficient caution. 2.3 Kapil Sibal Member of Rajya Sabha: We can only celebrate the turnaround in India s business environment when small and medium scale enterprises in the informal sector find it easy to do business Implementation of a flawed GST has adverse impacts on small and medium businesses, a large number having wound up in, or are in, deep distress. For businesses in the informal sector, ease of doing business still remains a distant dream. GST has brought up series of challenges. This involves the participation of the state government and all its administrative units to work in tandem, which will help businesses to stand on their feet. 2.4 Ratna Bhushan: GST slabs have been cut for more than 178 products including chocolates, cosmetics, detergents, etc. FMCG firms are trying their best to ensure that GST benefits are passed on to customers. Almost all large companies, which include Hindustan Unilever, ITC, Dabur, Emami, etc., have already written to trade partners including distributors and retailers to pass on benefits of the GST reduction to consumers, irrespective of the printed MRPs on the existing stocks. Such changes are a great relief provider to the stressed middle class consumers as well as traders. ( 3. RESEARCH METHODOLOGY 3.1 STATEMENT OF PROBLEM This study is about showing the impact of GST on SMEs on a ground reality basis. 3.2 OBJECTIVES This study has multiple objectives To show how cascading effect of taxation has resolved with the enactment of GST. To show how compliance with a single Indirect tax law has becomes easier through the enactment of Goods and Services Tax. To evaluate the impact of GST on SMEs To evaluate the ease of work for regulatory authority To study the consequences of the impact of GST borne by end consumers. 3.3 SCOPE The research project deals with the overall impact of Goods and Services Tax (GST) on Small and Medium Enterprises (SMEs). The difference between tax liability of SMEs pre and post GST has also been dealt with. 3.4 Research Methodology We have used Descriptive Research methodology for our research project. Descriptive method for research is used to describe the characteristics or behavior of a population or the phenomenon being studied. It does not answer any questions regarding the subject matter i.e. why and how it is occurred. To substantiate and justify our research study we have also used Exploratory Research methodology the tool used by us is a case study with respect to impact of GST on medium scale entrepreneur. By doing both descriptive and exploratory research, we were able to conclude that on application of GST on id- jamrpublication@gmail.com Page 22

5 hypothetical examples, SMEs are getting financial benefits but on ground reality basis they are facing financial difficulties (as per the data analysis of eight listed SMEs). 3.5 Sources of Data The research is conducted based on secondary data. Data has already been collected and is readily available for use. Secondary data is data collected by some other agencies or institution other than the original user. Common sources of secondary data include books, journals, articles and other online sources. Secondary data saves on time as compared to primary data that has to be collected and analyzed before use. 3.6 LIMITATIONS OF THE RESEARCH 1. Our research is based on secondary data and so up to date information that could have been got from primary data is not included. 2. Sample size is restricted to eight listed SMEs. 4. ANALYSIS 4.1 In the Indian economy, it has been always considered that Small and Medium Enterprises (SMEs) have been driving the primary growth over the period. In India, we have around 3 million SMEs at present, which contributes to around 50% of the total industrial production and around 42% of total India s export. In a developing economy like India, SMEs have proved to be the leading employment-generating sector, which provides balanced development across sectors. 4.2 GST TAX RATE SLAB RATE DESCRIPTION 0% Basic necessity commodities such as food grains, wheat, rice, milk etc. 5% Necessary commodities which includes products of mass consumption such as namkeen/ Bhujia, edible oil, toilet articles, fruit and nuts, tea and cane sugar etc. 12% All food items which are processed are included under this slab such as cheese, fruit jams, fruit pulp or fruit juice based drinks, ice cream etc. 18% Under this slab generally cosmetic and electronic products are included such as soap, shampoo, hair cream, hair dyes, razors and smart phones, camera, monitors, speakers etc. 28% Under this slab all sin products such as tobacco, pan masala, luxury cars and aerated drinks are included 4.3 INTERPRETATION OF SHORT FALL IN STATES GST REVENUE GST after its implementation allows only those states to collect indirect tax revenue where the actual consumption of goods takes place. As a matter of fact, this leads to the loss of the states whose revenue mainly depends on the export of goods and services. The government has made an act to compensate this loss of revenue called the GST Compensation Act, Under this act, certain specific items will be id- jamrpublication@gmail.com Page 23

6 charged a compensation cess for a term of 5 years. This cess will be credited to the GST Compensation Fund, which will be later used to compensate the losses met by the states under GST. 4.4 INTERPRETATION OF LOGISTICS COST ON SMEs This is a picture of trucks waiting for clearance at the Kerala state border. It was very common scenario before GST in India. Even you might have come across while travelling through the highways between two states. This process is just not for a while it sometime takes days to get clearance. GST has ensured that a SME selling and manufacturing its product anywhere in India does not have to pay entry tax. Implementation of GST has eliminated the border clearance barrier for smooth transaction of goods. SMEs in India used to face many political as well as socio economic issues including wastage of time, money and human resources. Below mentioned table, demonstrate how logistical cost reduces under GST. GST after being implemented has brought a centralized registration process which has definitely reduced the burden of SMEs and helps them to diversify the audience as well as make the market more competitive. 4.5 INTERPRETATION OF E-WAY BILL The purpose of e-way bill is to eradicate the documentation hurdle of different states to ensure speedy Transit of goods by breaking check post barrier and prevent corruption. However, it requires a strong IT infrastructure to implement e-way bill and additional expert to manage the same, which might result a big hurdle for SMEs. Failing to generate an e-way bill without IT would defeat the purpose of GST, which allows ease of doing business in the country. Therefore, e-way bill implementation would be a complete failure for the SMEs sector. The validity of an E-way bill is decided before a particular transaction takes place. This adds to the transit time for small quantities of goods within cities and ultimately incurs additional cost. Such a cost is easy to manage by the large companies but it affects the small companies as a whole. 4.6 INTERPRETATION OF GST ON CINEMA THEATRES (HYPOTHETICAL EXAMPLE) After the implementation of Goods and Services Tax, it is assumed that watching movies would be costlier affair in several parts of the country. But after implementation, it made movie nights marginally cheaper in cities. Earlier during the previous taxation system, people had to pay an additional of 30% of Entertainment Tax along with VAT and Service Tax on each movie ticket bought. Whereas, after GST has come into force, they now have to pay a single tax rate of 28% on each movie ticket brought from multiplexes, where each ticket costs more than Rs However, Union Finance Minister, Arun Jaitley, revised the GST rates bringing tickets costing less than Rs. 100 under the 18% slab while those costing more than Rs. 100 under the 28% slab. So the small and medium theatre owners whose ticket prices ranges below Rs. 100 got high financial benefit by this decision. 4.7 INTERPRETATION OF GST ON ENTERTAINMENT INDUSTRY 1. When we do industry analysis as a whole, we observe that after the implementation of GST the net profit starts declining as in case of one company. For the other three companies, the loss has further increased after GST. id- jamrpublication@gmail.com Page 24

7 2. Currently, there are no signs of recovery in case of two companies. Amongst the four companies, one has shown signs of recovery with regards to net profit. Moreover its sales in third quarter has also shown positive trend when compared to second quarter. 3. Thus, it shows that medium enterprises are recovering in this industry gradually while micro and small enterprises are struggling with regard to profits. 4.8 INTERPRETATION OF GST ON ELECTRONIC INDUSTRY 1. When we do industry analysis as a whole we observe that a medium enterprise which is comparatively making a much higher sale than those of other companies has recorded a constant increase in Net Profit as well. 2. The impact of GST is unfavourable to those which fall in the category of micro and small companies. It appears that the medium enterprises have been successful in conducting business even during this transition phase. But, the micro and small enterprises are facing financial difficulties. 5. FINDINGS AND SUGGESTIONS One of the key findings that we have noticed during our research study is that many entities that are registered under the GST Tax System will either regularly or occasionally claim for refunds. The previous tax system had resulted in a fractured national market as it had made the movement of goods difficult and the prices of goods differed from state to state. Now, after GST has been implemented a single tax rate is charged on the goods as a result of which the prices of the goods remain the same across states. In the VAT system of tax, several taxes were not based on the Value Added Principle and had a cascading effect on the price of the goods. This increased the prices of the goods. Under GST, there is no cascading of taxes as each and every good is subject to a single rate of tax. Hence, the prices of the goods are comparatively low under the GST regime than the VAT system of tax. The exports of the country under the VAT system of tax are less competitive in nature. But as per the GST, the exports of the country will have prices that will be internationally competitive because of a smooth input tax credit process and the availability of various services with input tax credit. Processes must be reduced: Filing of 37 returns per GSTIN is a very challenging and time-consuming task. Even professional Chartered Accountants are finding it difficult to meet the deadlines. Small and Medium scale businesses which usually have one member to manage the entire affairs of the business is finding it extremely difficult to carry on his regular business along with getting multiple returns to be filed. Filing of 37 returns should be reduced considering the challenges faced by enterprises across the country. The facility to file quarterly returns should be extended to assesses with up to 10 crore turnover. This will be a great relief to medium scale entrepreneurs. Provisions should be introduced by the GST Council to enable taxpayers to revise/amend their returns as clerical errors are likely to take place at least in the early stages of compliance. GST Council should set up a team of top software developers who can work towards improving the technological glitches. id- jamrpublication@gmail.com Page 25

8 Some mechanism must be adopted to enable them to claim input tax credit benefits to some extent. Service providers should also be brought within the ambit of Composition Scheme to protect the interest of small service providers. 6. CONCLUSION Goods and Service Tax (GST) is a revolution for the Business entity and the prosperity of the economic growth of the country. GST will change the style of doing business in the country in the coming years. GST is considered to be more beneficial for business entity. Old indirect tax law provision has lot difficulties due to its compliance complexity for Micro Small and Medium Enterprises (MSMEs) which is completely removed. Various number of tax scheme were always a difficult task for businessman, which is removed in GST regime. GST is a revolution as One Nation One tax which covers all type of goods and services within the ambit of GST, GST bring every indirect form of tax under one roof. GST directs all the local and national taxes into a single payment, unifying country s twenty-nine states and 1.32 billion people into a common market. GST implementation eliminated the cascading effect of various central and state taxes. There were a serious problem regarding the refund of excess tax credit in earlier indirect tax law, under GST it enhances the refund process of excess tax credit, which reduces the working capital burden of businesses. GST is a reform in the indirect tax system, which gives parity to large enterprises as well as Small and Medium Enterprises (SMEs). Dual system of GST is a best solution for State and Central taxation system. GST improves governance effectiveness, which lead more efficient operation of indirect tax revenue of businesses and help to remove tax evasion cases. Compliance of GST is more scientific and transparent in nature, which adds credibility to indirect tax computation. Overall structure of GST administration gives more attention to efficient operation of GST in the country. It is considered that GST is going to be tool for the government to plan its goal, to achieve economic growth and prosperity. id- jamrpublication@gmail.com Page 26

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