GST is going to be one year old on July 1, and the journey over the past one year has been a mixed bag. While the objective of GST to eliminate the cascading effect of tax and to simplify indirect taxation in India is noble, implementation of the new regime has been easier said than done. There have been continuous challenges in coming to terms with transitional requirements, filing returns on the portal, and equipping one’s business for the increased compliance burden that GST brought along with it.
However, it is heartening to note that the government has taken cognizance of the various transition challenges, and has lent support by extending return-filing deadlines and deferring certain aspects of GST, so that the multitude of small businesses across India adopt to it easily.
Given the rollercoaster ride GST has been through, it certainly calls for an assessment of how exactly it has been beneficial to the heart of the Indian economy – the SME.
While GST essentially brought a lot of businesses under the tax net for the first time, the carrot of input tax credit flowing freely through the chain, would have been good news for most. The elimination of taxes such as central sales tax, for which credit was not available earlier, and elimination of the cascading effect of VAT being charged upon the excise component, has surely enhanced the credit pool for most businesses. As a result, working capital has had a positive impact.
However, a number of factors have also come into play, when one sees the other side of the coin. To begin with, the average trade credit cycle in the Indian market generally spans beyond the GST payment due date of the 20th of next month. This means that more often than not, businesses have to pay GST on value addition from their own funds. Speaking of businesses that operate out of several branches, stock transfers have become a taxable event under GST, which means that paying GST has become a more frequent occurrence for them. While one may argue that input tax credit is available to the recipient branch, the fact remains that the GST to be shelled out impacts the cash flow at the console level. And then there are certain sectors, such as the fertiliser industry, where an inverted duty structure resulted in blockage of cash for businesses.
One of the debatable aspects of GST from a working capital perspective has been the composition scheme. While the intention always has been to provide greater relief to the composition dealer, the absence of input tax credit for such a business is bound to increase cost of business. However, the saving grace is that the low-end flat rate of tax is expected to balance out the total outflow from such a dealer. Last but not the least, the issue of delayed export refunds has resulted in a significant cash blockage for exporters, and the government is trying its best to release such refunds as soon as possible.
However, irrespective of the hiccups GST has seen in the past one year, one cannot altogether ignore the positives. State boundaries have dissolved, the taxation structure has become simpler and the national e-way bill is well on its way to bind the entire nation into one market. With the simplified return filing model days away from implementation, it can be expected that GST will become a far smoother process than what it is right now, promising a golden future for the SMEs in India.
The author is Chief Financial Officer, Tally Solutions Pvt. Ltd. Views expressed are personal. They do not reflect the view/s of Business Standard.