Impact of GST Regime on MSME

Introduction:

Goods and Service Tax Act, 2017 was passed by the Parliament on 29th March, 2017 which came into force on 1st July, 2017.[1] GST can be said to be a single, unified taxation system on every addition of value starting from manufacturing to the sale or consumption of goods and services. The Legacy of Excise duty, CST (Inter-State Sale), VAT (Intra-State Sale), and Service Tax was amalgamated into a single taxation system. With the advent of GST the Indian Tax system went through a paradigm shift from source-based to destination-based tax system. The GST is governed by a GST Council and its Chairman is the Finance Minister of India. In the GST regime, goods and services are taxed at the rates of 0%, 5%, 12%, 18% and 28%.

The Micro, Small and Medium Enterprises (MSME) sector is believed to be the chief driving sector of the Indian Economy. These enterprises have emerged as a huge source of employment at a low capital cost in our developing Country.[2] The investment in plant and machinery were the parameters for the classification of MSMEs earlier. However, under the Atmanirbhar Bharat Abhiyan, the classification was changed w.e.f. 1st July, 2020.[3] The new classification is based on the investment in plant and machinery as well as the annual turnover of the enterprise. The following table depicts the criteria for the classification of enterprises as MSME:[4]

The meaning assigned to the expression “plant and machinery or equipment”, in the Income Tax Rules, 1962 framed under the Income Tax Act, 1961 shall be assigned to the Plant and machinery or equipment of enterprise in the classification of the MSME. It will also include all tangible assets (other than land and building, furniture and fittings).[5]Information as related to the turnover of an enterprise shall be associated with taxing statutes like the Income Tax Act, the Goods and Services Act and also the Goods and Service Tax Identification Number(GSTIN).

Positive Impact of GST Regime on MSME:

The shift of indirect taxing system to GST has had the following positive impacts on MSME sector:

1. The unification of various indirect taxes has reduced the compliance burden on MSMEs thus, smoothing the commencement of new businesses. In the earlier tax regime, the Sales Tax department had various turnover slabs that require VAT registration. A business with a multi-state operation in an earlier case had to follow varied tax rules applicable to different states, which is not the case with GST.[6]

2. The GST regime has also enabled expansion of the customer or buyer base of MSME (Market reach). In the old tax regime, MSME had to limit their customers within the state as they had to bear the burden of tax on inter-state sales.[7]

3. GST, taxing in a neutral form will eliminate the time-consuming border tax procedures and such other toll check posts while encouraging the supply of goods across borders thus, lowering the logistical cost for companies manufacturing bulk goods.[8]

4. In the previous taxation scheme, in the year of purchase, only 50 percent of the input tax credit against the purchase of Capital Goods was available and in subsequent years the balance sum was available. Under the GST regime, in the purchasing year itself, the whole amount of input tax credit can be used, thereby boosting the MSME sector.[9]

5. All the compliances like registration, refund, return filing, payment etc. are online. This will reduce the compliance cost, ensure minimal bureaucracy interference, enhance the liquidity of SMEs and ensure a fast-track process.[10]

Negative Impact of GST Regime on MSME:

The GST regime also has few negative impacts on the MSME sector which are as follows:

1. With the advent of GST regime the businesses whose turnover exceeds Rs. 40 Lakhs are required to register as normal taxable persons. In the previous taxing regime, the threshold was Rs. 1.5 crore. This reduction in the threshold limit will significantly increase the burden on the MSME and also impact their working capital.[11]

2. There is no differentiation between luxury goods and normal goods in the GST Regime as contrary to the previous indirect taxing system, which might not be ideal for the MSME sector.[12]

3. The GST system of indirect tax has increased the tax rate for service providers. Furthermore, the scenario in the service sector will be affected as the practice of Centralized Registration is abolished and separate registration is required for each unit in different states. Thus even if services are supplied by a company's one Unit in State A to another Unit in State B , even then taxes will be payable.[13]

4. Under GST, Input Tax Credit will not be available if the vendor from whom MSME is purchasing goods does not show the same in his return statements. On account of the GST credit mechanism, sourcing strategies would thus shift.

Though the GST aims at increasing the taxpayer’s base, it rather increases the compliance burden upon MSMEs. It is said that the GST regime will turn SMEs more competitive with a level playing field between large enterprises and them.

Covid-19 Pandemic and MSME:

Covid-19 pandemic had a toll on the lives of everyone however, entrepreneurs were affected the most. On 23rd March, 2020 Honourable Prime Minister, Mr. Narendra Modi, announced a nationwide Lockdown and all the businesses were shut overnight barring a few. Due to the liquidity crunch, MSME sector faced the maximum heat of Covid-19 pandemic, with an impact of 20-50% of their earnings.[14]

The Government of India, in order to handle the situation, launched Atmanirbhar Bharat Abhiyan (Self Reliant India Mission) on 12th May, 2020. The aim of this mission was to face two burning issues; firstly to boost the MSME sector and then to ensure less dependency on the foreign countries. Out of the 15 relief measures under the mission, 6 were entirely directed upon empowering MSME. These reliefs were:

1. MSME Act, 2006 was amended to change the classification criteria.

2. Emergency Working Capital Facility

3. Subordinate Debts for Stressed MSMEs

4. Equity Infusion through Funds of Fund

5. No Global Tenders up to Rs. 200 Crore for Government Tenders

6. Emergency Credit Line Guarantee Scheme.[15]

In order to improve the MSME sector, the government has also allowed several tax exemptions. For the remaining duration of the Financial Year 2020-2021, the 'Tax Deduction at Source' and 'Tax Collected at Source' rates were reduced by 25 percent. Tax relief to businesses as pending income tax refunds to charitable trusts and non-corporate businesses and professions were issued immediately under Atmanirbhar Bharat Abhiyan. The Government had also extended the due dates for the various filing and other tax related compliances.[16]

The summarized list of changes in GST compliances due to Covid-19 Pandemic are as follows:

1. The New due date for filing GST annual returns for the Financial Year of is 28th February, 2021.[17]

2. The Due dates for filing GSTR 9/9A/9C for Financial Year 2018-2019 were extended till 31st December, 2020.[18]

3. No interest rates and penalties were charged for filing GSTR-3B by entities having annual turnover less than Rs. 5 crore by the last week of June, 2020 (which was due in April and May). Others were also allowed to file returns due in the months of March, April, May by the last week of June, 2020 at a reduced interest of 9% p.a. for 15 days after the due date.[19]

4. The date for the option for the composition scheme was extended till the last week of June, 2020.

5. The due dates for filing returns for the financial year 2018-2019 were extended till June 2021 then September, 2021.

Opinion:

During the nationwide lockdown in India when almost all the business activities were at a halt, it was practically impossible for them to pay the taxes on due dates and thus, these exemptions were much needed to give a stimulus to MSMEs.

Conclusion:

The Maxim Lex non cogit ad impossibilia can be analysed in the light of tax exemptions provided during the pandemic. This Maxim basically means that law doesn’t compel a person to do what he cannot possibly perform. The Supreme Court in the case of State of MP Vs. Narmada Bachao Andolan[20], applied this maxim and held that where the law creates a duty or a charge and the party is disabled to perform it without any fault on his part and has no control over it, the law will, in general, excuse him. The Courts have applied this maxim in several cases relating to taxing matters.[21]

[1] The Central Goods and Services Tax Act, 2017 NO. 12 of 2017, ( As Accessed on: 20th January, 2021, 21:41) https://www.cbic.gov.in/resources//htdocs-cbec/gst/cgst-act.pdf;jsessionid=E87E97F7C1FEF7C561E4D9EDC9CC9CE4

[2] Annual Report, 2019-20, Government of India, Ministry of Micro, Small and Medium Enterprises, ( As Accessed on: 13th January, 2021, 20:28) https://msme.gov.in/sites/default/files/FINAL_MSME_ENGLISH_AR_2019-20.pdf

[3] Ministry of Micro, Small and Medium Enterprises Notification, ( As Accessed on: 20th January, 2021, 21:43) https://msme.gov.in/sites/default/files/MSME_gazette_of_india.pdf.

[4] Ministry of Micro, Small And Medium Enterprises Notification, (As Accessed on: 13th January, 2021, 20:42) https://msme.gov.in/sites/default/files/MSME_gazette_of_india.pdf.

[5] Income Tax Rules 1962, ( As accessed on: 13th January, 2021, 20:52) https://incometaxindia.gov.in/Rules/Income-Tax%20Rules/103120000000007563.htm

[6] Impact of GST on MSME, (As accessed on: 13th January, 2021, 21:03) http://www.dcmsme.gov.in/CII.pdf

[7] Ibid

[8] Ibid

[9] Ibid

[10] Impact Analysis of GST on Small & Medium Enterprises (As accessed on: 13th January, 2021, 21:14) https://cleartax.in/s/impact-analysis-of-gst-on-small-medium-enterprises

[11] Supra 4

[12] Ibid

[13] Ibid

[14] Covid-19 affect on Micro, Small and Medium Enterprises (MSMEs), Times of India (As accessed on:14th January, 2021, 20:55) https://timesofindia.indiatimes.com/blogs/agyeya/covid-19-affect-on-micro-small-and-medium-enterprises-msmes/

[15] 6 Covid relief measures announced by FM Nirmala Sitharaman to make MSMEs ‘atmanirbhar’, Financial Express, (As accessed on: 14th January, 2021, 21:15) https://www.financialexpress.com/industry/sme/msme-fin-finance-minister-nirmala-sithraman-6-relief-measures-for-msmes-small-businesses-to-survive-covid-19/1958150/

[16] Press Information Bureau, Government of India, ( As accessed on: 14th January, 2020, 21:26) https://pib.gov.in/PressReleseDetailm.aspx?PRID=1623601

[17] Notification, Government of India, Ministry of Finance, Department of Revenue, (As accessed on: 14th January, 2021, 21:34) https://blog.saginfotech.com/wp-content/uploads/2020/12/taxes-due-date-extend.pdf

[18] Notification, Government of India, Ministry of Finance, Department of Revenue, (As accessed on: 14th January, 2021, 21:36) https://blog.saginfotech.com/wp-content/uploads/2020/10/gstr-9-9a-9c-date-extended.jpeg

[19] Relief in late fee to Taxpayers filing Form GSTR-3b, (As accessed on: 14th January, 2021, 21:42) https://www.gst.gov.in/newsandupdates/read/382

[20] [(2011) 7 SCC 639]

[21] Hico Enterprises Vs. Commissioner of Customs ([2005) 189 ELT 135], Commissioner of Customs (Imports) Vs. Hico Enterprises [(2008) 228 ELT 161].