How GST Budget Reforms Could Shape the Future of India’s MSMEs
The Goods and Services Tax (GST) has significantly altered the taxation landscape in India, particularly for Micro, Small, and Medium Enterprises (MSMEs). While GST has simplified tax structures and enhanced transparency, its stringent compliance requirements continue to pose challenges for small businesses. As the upcoming budget approaches, MSMEs are eager for reforms that could alleviate financial and operational burdens.
Challenges Faced by MSMEs Under GST
1. Input Tax Credit (ITC) Reversal on Unpaid Invoices
One of the primary challenges faced by MSMEs is the mandatory reversal of Input Tax Credit (ITC) on invoices unpaid beyond 180 days. This rule disproportionately impacts small enterprises with limited cash reserves, increasing their financial strain.
“MSMEs struggle with ITC reversals, making it harder to maintain liquidity. A relaxation of this rule would be a significant relief,” says Dr. H.P. Singh, Chairman & MD, Satin Creditcare Network Ltd.
2. ITC Mismatches & Working Capital Constraints
Reconciliation issues between supplier returns and MSME filings often lead to ITC mismatches, resulting in working capital blockages.
“Mismatch in ITC claims leads to unnecessary working capital constraints, hampering business operations,” highlights Sohrab Bararia, Partner at Grant Thornton Bharat.
3. Delayed GST Refunds for Exporters
Delayed GST refunds create significant cash flow issues, especially for export-oriented MSMEs. Timely processing of refunds is critical to ensuring smooth operations.
“MSMEs rely on timely refunds. Delays restrict liquidity and disrupt daily operations,” explains Bararia.
4. Reverse Charge Mechanism (RCM) Burden
The Reverse Charge Mechanism (RCM) requires MSMEs to pay tax on behalf of unregistered suppliers, increasing cash outflows and operational costs.
“RCM adds unnecessary cash burdens on MSMEs, forcing them to divert working capital to tax payments instead of growth initiatives,” adds Dr. Singh.
5. Multiple GST Rates & Classification Disputes
The presence of multiple GST slabs (5%, 12%, 18%, and 28%) creates confusion and disputes over tax classification. A more uniform rate structure could simplify compliance.
“Merging the 12% and 18% slabs would remove unnecessary disputes and ease classification issues for businesses,” suggests Dr. Kapil Garg, MD, Asian Energy Services Limited.
Budget 2025: What MSMEs Expect?
1. Simplified GST Compliance
Industry experts advocate for fewer return filings and a more streamlined compliance process to reduce administrative burdens on MSMEs.
“A single monthly return for small businesses would make compliance less tedious and reduce tax-related complexities,” notes Abhishek Thakkar, CFO, Niyogin Fintech Limited.
2. Inclusion of Natural Gas in GST Framework
Industries like oil and gas remain outside GST, preventing them from availing ITC. Bringing natural gas under GST could boost cleaner energy adoption and reduce costs.
“Including natural gas under GST can lower costs and encourage sustainability in the energy sector,” Dr. Garg emphasizes.
3. Faster GST Refund Processing
Accelerating GST refunds, particularly for exporters, is crucial to improving liquidity for MSMEs.
“Expedited refunds can ease liquidity stress and help MSMEs compete globally,” Bararia explains.
4. Automation & Higher Exemption Threshold
Automating GST compliance and increasing exemption limits would reduce compliance costs and simplify tax filing for small enterprises.
“Raising exemption limits and leveraging automation can enhance MSME efficiency, easing compliance challenges,” Thakkar points out.
Conclusion: A Crucial Budget for MSME Growth
The upcoming budget presents a critical opportunity to address MSME challenges under GST. Simplified compliance, rationalized tax structures, and faster refunds can significantly impact their growth trajectory. Policymakers must prioritize these concerns to ensure that MSMEs continue to thrive as the backbone of the Indian economy.