Clipped from: https://www.thehindubusinessline.com/opinion/empowering-msmes/article70172172.ece
The promise and challenges of GST 2.0
GST reforms are welcome but more needs to be done for MSMEs |
India’s Micro, Small, and Medium Enterprises (MSMEs) sector is regarded as the engine of the economy with its significant contribution to employment generation and output.
The MSME sector employs nearly 15.5 crore and contributes 30 per cent to India’s GDP and has played a key role in making India the world’s fourth largest economy.
Yet despite its importance, MSMEs continue to struggle for their survival with issues of access to formal finance and regulatory hurdles.
This coupled with the US decision to impose tariff on Indian exports has further threatened the survival of many MSMEs. It is widely held that the latest round of US tariffs on India may diminish the global competitiveness of Indian MSMEs.
In addition, MSMEs have often cited difficulties with the multi-slab GST system (5, 12, 18, and 28 per cent) along with compliance issues. In this context, the announcement of slew of GST reforms has provided a fresh lease of life to the MSME sector.
Given that MSMEs contribute over 45 per cent to India’s export basket and are the backbone to some of the sectors like automotive, textiles, leather, the GST rate changes are timely, since the 50 per cent US tariffs place additional cost burden on them.
In this regard, the GST reforms aim to correct the concerns of inverted duty structure (where inputs attracting higher GST than final good) would support MSMEs in staying competitive amid recent tariff imposition.
Easing compliance
Another welcome aspect of the current GST reforms is the significant focus on reducing compliance burden which is a critical pain point for MSMEs. It is expected that the simplification of GST registration will bring small informal firms under the ambit of the formal sector.
Especially, the simplification to two slab GST structure — at 5 per cent for essential and merit goods, and 18 per cent for standard goods and services will provide significant boost to the MSMEs. Further, the promise of faster processing for smaller low-risk businesses are all steps in the right direction. However, the efficacy of these measures would ultimately rest upon the digital capabilities of these enterprises.
Even though the reforms measures are positive, there are concerns that they may not benefit all stakeholders equally. For instance, all GST revisions are product specific and would help the consumers. This will also translate into greater backward linkages for MSMEs involved in manufacturing components such as compressors, displays among others.
Cost pressures
However, due to their weak bargaining power, MSMEs may be forced to absorb the cost pressure passed on by the large firms. Further, the product specific reforms imply that not all 6.3 crore MSMEs would benefit. Another major concern for MSMEs is related to the input tax credit. These enterprises face lengthy delays in claiming input tax credit and suffer from the perennial problem of delayed payments.
All these issues adversely affect the working capital cycle of MSMEs making it difficult for a vast majority of them to survive. The GST reforms while reducing GST slabs have also excluded input tax credit for many products.
Hence, exclusion or restriction of input tax credit under lowered GST slabs may further strain MSMEs by effectively increasing their operational costs — and if these costs are passed on to the consumers, the intended effect of the current measures may fall short of their potential.
Hence, there is an urgent need to introduce a slew of exclusive reforms targeted at the MSME sector that take into account structural challenges faced by these entities. The GST 2.0 reforms are certainly a step in the right direction but much more remains to be done to empower the MSME sector.
Reddy is an Assistant Professor of Economics at IIM-Raipur; and Subash is a Professor of Economics at IIT-Madras. Views expressed are personal
Published on October 17, 2025
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