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Ease of Doing Business for MSMEs: Since GST is a destination-based tax, it is suggested to consider postponement of the taxation on stock transfers to the point when such goods are actually sold so that it will ease working capital and ease tracking and payment of tax.
Under the GST regime, the stock transfer is liable to tax. This step leads to blockage of working capital apart from a high compliance burden.
By Rajeshree Sabnavis and Isha Jain
Ease of Doing Business for MSMEs: The MSME sector is considered an important pillar of the economy as it contributes to the economy’s growth. In recent years, the sector has consistently registered a higher growth rate compared to the overall industrial sector. With its agility and dynamism, the sector has shown admirable innovativeness and adaptability to survive the recent economic downturn. Although MSMEs contribute significantly to the overall economy of the country, this sector continues to face certain constraints with respect to GST. We have enumerated certain challenges faced by the MSME sector below:
Delay in availing GST registration
An MSME that wishes to sell goods on the e-commerce platform is mandated to obtain GST registration for every state where it wishes to conduct business. However, it is observed that there has been a delay in availing GST registration which is stalling the onboarding of MSMEs on e-commerce platforms. Apart from application errors, prominent reasons for the delay in availing GST registration are discrepancies in the name or address of the business, proof of place of business etc.
High compliance burden
The accounting and taxation are not strong, stable and streamlined in MSMEs as compared to the larger sectors. There is no separate division of accounting and the proprietor himself manages the additional task of accounting and book-keeping which is quite common in any startup and growing business. It is observed that the GST law demands high compliance.
Further, returns must be filed for tax collected at source (TCS), Input Service Distributor (ISD) (if applicable) and annual return with reconciliation statement for every state. The GST computations, reconciliations etc., have to be done on monthly basis. Additionally, registration must be taken in every state since there is no concept of centralized registration. Accounting needs to be timely updated and the same needs to be maintained state-wise to reconcile the taxation with accounts at the state level.
The government’s agenda of ‘ease of doing business’ should be promoted so that the compliance burden would be lesser and the focus of the entrepreneur is on business development and growth instead of taxation aspects.
Time limit of 180 days
The payment terms are decided between the supplier and the recipient and the same is mentioned in the agreement. There are times when the terms of payment exceed the limit of 180 days. In such cases, it is apprehended that input tax credit (ITC) has to be reversed and added to outward tax liability. Further, when the payment is made by the recipient to the supplier, the supplier can reclaim the ITC. However, this exercise results in the blockage of working capital. It is a challenging job to monitor a substantial number of transactions. Non-consideration of this aspect shall have a negative impact on the MSME sector and its contribution to the economy.
Taxation on stock transfer
Under the GST regime, the stock transfer is liable to tax. This step leads to blockage of working capital apart from a high compliance burden. MSMEs do not have adequate capacities, technology, workforce and cash flows to comply with this complex requirement of the law. Under GST, for businesses engaged in stock transfers, the need for additional working capital arises due to tax instances. This is a challenge for SMEs who operate with thin working capital.
Since GST is a destination-based tax, it is suggested to consider postponement of the taxation on stock transfers to the point when such goods are actually sold so that it will ease working capital and ease tracking and payment of tax.
Time limit for return of goods sent on approval basis
The maximum time limit to return the goods sent on an approval basis is six months and if the same is not returned within the said time limit, tax invoice needs to be issued and the goods shall be deemed to have been supplied.
In various small scale industries like the ready-made garment industry, the norm is to send goods on a ‘sale on approval’ basis. The norm in such industries is that the goods are returned after the season is over. However, casting time limit on the return of goods would have a negative impact on such sectors. Therefore, it is suggested to amend this provision and implement a practice of paying GST only when the actual supply takes place.
Tax on advances
Advances received against the supply of services are taxable under the GST regime. Collection of GST on advances is cumbersome and requires compliance and tracking other than the additional cash flow of taxes. Further, in certain businesses, advances are received for multiple supplies, in such circumstances individual identification of advances and matching the same with the corresponding for determining rate and place of supply shall be an additional burden.
Condition for payment and filing of return for availing input tax credit
Once an invoice is issued by a supplier, the recipient cannot be burdened with the responsibility of knowing if that tax has actually been credited to the government. Here the burden is cast on the recipient to prove the supplier deposited the tax. Further, filing of returns is a procedural requirement and intimation to the department. These cannot be made pre-conditions for entitlement to credit.
Pre-conditions around tax paying to the credit of the government and necessary return filing be deleted/removed should be relooked and liberalized to support MSMEs to avail ITC of tax they paid. Therefore, it shall be imperative that the MSME sector through its associations or various representative bodies highlight these challenges to the government so that the same can be resolved.
Rajeshree Sabnavis is Founder and Isha Jain is Manager at Rajeshree Sabnavis & Associates. Views expressed are the authors’ own.