Challenges and Opportunities for Small Businesses Under GST: A Closer Look
Introduction
In the seven years since the introduction of the Goods and Services Tax (GST), its impact on India’s economic landscape has been significant. Estabizz Fintech Pvt Ltd explores how GST has promised to streamline the tax system, reduce tax leakage, and eliminate the cascading impact of taxes, thereby fostering a smoother commerce flow across state lines. This transformative move has notably opened up new vistas for small businesses, enabling them to extend their market reach nationwide through e-commerce. With 14.6 million active taxpayers currently, of which nearly 10.4 million are new registrations post-GST, this policy has been instrumental in formalizing the economy. However, the question remains: to what extent have small businesses capitalized on this economic formalization?
The State of Small Businesses Post-GST
Growth and Formalization
Recent insights from the Annual Survey of Unincorporated Sector Enterprises (ASUSE) shed light on the micro, small, and medium enterprises (MSMEs) landscape from 2021 to 2023. Despite the challenges, there has been a growth in enterprises from 59.7 million to 65.4 million, accompanied by a rise in employment. However, the fact that 82.6% of these 65.4 million enterprises have an annual turnover of less than ₹5 lakh, with almost 99% turning over less than ₹50 lakhs, underscores the vast majority operating at a micro-level. More concerning is that only 2% are GST-registered, highlighting a significant gap in leveraging GST’s full potential for business growth and formalization.
Formalization Barriers and Solutions
Bridging the Formalization Gap
The reluctance of small businesses to formalize, thus forfeiting the numerous benefits such as collateral-free loans, access to priority sector loans, and preferential treatment in government procurements, is a complex issue. Reasons might include the perceived burdens of compliance and lack of financial literacy.
However, the uptick in UDYAM registrations in 2023-24 signals a shift — more businesses are beginning to see the value of formalization. Key to this shift is addressing the hurdles they face. Solutions such as GST helpdesks and a comprehensive enterprise resource planning app can serve to lower these barriers, making GST compliance more accessible and manageable for micro-enterprises.
The Impact on Business Viability
The GST Divide: Formal vs. Informal
The disparity in turnover and gross value addition (GVA) between GST-compliant businesses and non-compliant ones is stark. Businesses filing GST reports demonstrate significantly higher turnover and GVA, highlighting the tangible benefits of compliance. Yet, the informal sector, particularly those with direct sales to customers at slim margins, remains hesitant. The challenge here lies in incentivizing these small entities to embrace GST without fear of losing their competitive edge.
Leveraging Technology for Greater Compliance and Support
Enhancing Financial Literacy and Support
While the formalization process has been gradual, the capability of technology to hasten this shift cannot be underestimated. For instance, the development of a comprehensive “super-app” catering to all needs of MSMEs—from tax filing to procurement and inventory management—could mirror the impact that BHIM had on digital payments. Such an app would serve as a one-stop solution, significantly reducing the time and complexity involved in maintaining GST compliance.
More Support Structures Needed
Beyond technological solutions, the creation of more GST helpdesks or sewa kendras can provide the necessary hand-holding for small businesses. These centers would play a pivotal role in elevating the financial literacy among small business owners, breaking down complex GST processes into understandable steps. This support is critical in shifting the perception from GST as a burden to GST as a growth facilitator.
Future Prospects: Promoting Inclusive Policies
Policy Recommendations
The evidence points towards a need for more inclusive policies that understand the unique challenges faced by micro and small enterprises. Policies aimed at simplifying the GST process for small enterprises and enhancing their access to credit and markets can catalyze a more substantial transition into the formal sector.
Continued Government Support
The government has shown its support through budget allocations, like the additional ₹9,000 crore towards the Credit Guarantee Fund Trust for Micro and Small Enterprises. Continued and enhanced support is essential to build on the momentum and ensure that small businesses can leverage GST to tap into a pan-India market effectively.
Strategic Actions for Growth
Monitoring and Adaptation
Continual monitoring of the impact of these initiatives, coupled with agile adaptation of strategies based on real-time data and feedback, will ensure that the policies remain effective and relevant. It will also help in identifying new bottlenecks as they arise and adjusting the support mechanisms accordingly.
Partnership and Collaboration
Furthermore, fostering partnerships between the government, financial institutions, and technology providers can amplify the impact of these initiatives, creating a robust ecosystem that supports the growth and sustainability of small businesses in India.
Conclusion: Realizing the Full Potential of GST
In the years that have followed the rollout of GST, significant strides have been made towards formalizing the Indian economy, particularly through enabling small businesses to expand their horizons. However, there is an undeniable potential yet to be fully realized. At Estabizz Fintech Pvt Ltd, we are committed to supporting and guiding small businesses through this journey, ensuring they can navigate the complexities of GST and harness its benefits for substantial and sustained business growth. Through dedicated initiatives and strategic collaborations, we can altogether foster a more inclusive and flourishing economic environment under the GST framework.
In pursuing these goals, the ultimate aim is not just economic formalization but ensuring that GST becomes a catalyst for broader economic benefits and inclusive growth, reflecting the true spirit and promise of the GST framework introduced seven years ago.
Towards a More Inclusive Growth
As Estabizz Fintech Pvt Ltd, we recognize the crucial role of MSMEs in driving employment-intensive and inclusive growth in India. The journey since the rollout of GST has revealed both successes and areas needing improvement. By addressing the barriers to formalization and making compliance more accessible, we can ensure that more small businesses not only survive but thrive in this new tax regime. This will enhance their viability, scale-up opportunities, and contribution to India’s economic fabric, thereby realizing the true promise of GST for every business, big and small.
Estabizz Fintech compiled the material in this article using the most recent Acts, Rules, Circulars, Notifications, Provisions, Press Releases, and material applicable at the time. They ensured the completeness and correctness of the material through due diligence. When using this material, users must consult the relevant, applicable legislation. The given data may change without prior notice and does not constitute professional advice. Estabizz Fintech disclaims all liability for any results from the use of this material.
