Introduced in 2017, the Goods and Services Tax (GST) was envisioned as a transformative reform to unify India’s complex taxation system under the banner of ‘One Nation, One Tax.’
For India’s Micro, Small, and Medium Enterprises (MSMEs), GST has been a double-edged sword, presenting both opportunities and challenges. While the system has simplified tax processes for some, many MSMEs continue to grapple with compliance complexities, increased costs, and disrupted cash flows. This dual impact underscores the delicate balance between ambitious policy objectives and the realities faced by small businesses.
GST’s Impact on MSMEs: A Double-Edged Sword
MSMEs in Numbers
- 3.16 crore MSMEs registered under GST
- Contribute 30% to India’s GDP and 50% of exports
- Employ 80% of the industrial workforce
As crucial drivers of economic growth, MSMEs bridge regional disparities and create jobs in small towns and rural areas. However, GST compliance hurdles have led to uneven adaptation across states.
Regional Disparities in GST Compliance
| State | GST Compliance Rate (%) |
|---|---|
| Tamil Nadu | 85% |
| Karnataka | 82% |
| Gujarat | 78% |
| Maharashtra | 75% |
| Bihar | 50% |
| Jharkhand | 45% |
| Uttar Pradesh | 48% |
| Northeast States | 40-50% |
While states like Tamil Nadu and Karnataka have successfully implemented GST, states such as Bihar, Jharkhand, and parts of the Northeast struggle due to limited technological access and infrastructure challenges.
Key Concerns: Compliance Burden & Tax Rate Disparities
- Inverted Duty Structure
- MSMEs manufacturing spare parts pay 18% GST, while finished products like tractors are taxed at 12%.
- Leads to increased costs and cash flow pressures for small businesses.
- Tax Threshold Challenges
- MSMEs are exempt up to a ₹40 lakh turnover.
- Once they exceed this, the 18% GST rate reduces their effective income, stifling growth.
Proposed GST Reforms for MSMEs
A simplified tax structure can ease compliance burdens while maintaining revenue neutrality.
| Current GST Rate | Proposed Alternative |
| 5% | 5% |
| 12% | 15% |
| 18% | 15% |
| 28% | 28% |
- A three-slab GST structure (5%, 15%, 28%) could simplify compliance.
- Ensuring uniform tax rates across industries would promote fairness.
Technical Challenges of GST Filing
- Delayed Input Tax Credit (ITC) Refunds
- Larger firms delay payments to MSMEs, waiting for ITC refunds, disrupting cash flow.
- High Compliance Costs
- MSMEs with a ₹7.5 million+ turnover must submit detailed electronic filings, increasing costs.
- Refund Barriers for Exporters
- Upfront tax payments strain working capital.
- Additional compliance requirements for export transactions.
Solutions to Reduce Compliance Burden
- Quarterly GST filings for MSMEs instead of monthly submissions.
- Cash-based invoicing rather than accrual-based for MSMEs.
- Simplified GST return filing system with correction-friendly mechanisms.
- Improved GST portal efficiency to avoid filing delays and errors.
International Comparisons: Lessons from Global Models
- Malaysia: Repealed GST in 2018 due to economic strain on small businesses.
- EU VAT System: Provides exemptions & subsidies to support SMEs, reducing compliance costs.
Policy Expectations for MSMEs in Budget 2025
- Technology Integration
- Linking GeM portal to Udyam registration for better market access.
- Technology Upgrade Fund beyond textiles for MSMEs.
- GST Incentives & Simplifications
- GST exemptions on recycling machinery to support sustainability.
- Faceless GST audits to streamline compliance.
- Tax Incentives for Innovation
- R&D incentives in renewable energy and AI.
- Lower tax rates for digital MSMEs to promote online businesses.
Final Thoughts: Bridging Reform and Reality
While GST has streamlined taxation and improved revenue collection, it has also posed significant challenges for MSMEs. The 2025 budget presents an opportunity to introduce meaningful reforms that enhance compliance efficiency, reduce financial strain, and support small businesses in driving economic growth. With targeted interventions, India can create a GST framework that fosters entrepreneurship, competitiveness, and sustainable development.