8 years on, small businesses figure out plusses & minuses of GST

Higher compliance costs versus ease of inter-state trading

Since its application in 2017, the Goods and Services Tax has revolutionised India's economic landscape, transforming small businesses with streamlined logistics and digital compliance, but small businesses continue to struggle with challenges of rising costs and cash flow management.

Almost eight years after Goods and Services Tax (GST), an indirect tax imposed on the supply of goods and services, was implemented, small businesses have begun to come to grips with the new regime, but continue to struggle with challenges like higher compliance costs and complicated procedures.

GST, conceived in the 2006, was finally implemented in July 2017 as part of ‘One Nation One Tax’ programme. It was designed to simplify the tax structure and make movement and sale of goods and services across states. It has indeed altered India’s economic landscape significantly, especially affecting small and medium enterprises (SMEs).

“Small businesses can simplify their GST registration process by using government portals such as the GST common portal but frequent return filings such as GSTR-1, GSTR-3B and reconciliations add to administrative efforts,” Gautam Chopra, a chartered accountant from Chennai tells Media India Group.

He says that one of the primary concerns for small businesses is the compliance cost associated with GST.

“Increased compliance costs, disruptions due to mismatches in returns, and the need for digital adoption are not feasible for all. Moreover, minor errors can lead to significant penalties, impacting financial stability,” says Chopra.

However, increased reliance on technology such as automating GST return filings using specialised software not only streamlines compliance but also improves the overall efficiency of maintaining records.

“SMEs should adopt a structured approach to compliance by maintaining digital records of sales, purchases, and invoices, using GST-compliant accounting software, setting calendar reminders for return filing and tax payments and seeking professional assistance if needed,” Chopra adds.

Many small businesses have also opted for collective hiring of chartered accountants or employing GST practitioners, especially for annual returns.

On a positive note, with GST small businesses have the benefit of improved operational efficiency by reducing logistics barriers across state lines. The elimination of multiple state taxes allows for smoother movement of goods, which benefits businesses that operate interstate or supply products nationwide.

“Since GST replaced multiple state-level taxes, logistics efficiency has improved due to the removal of interstate check posts and uniform tax structures. With this, SMEs benefit from faster transit times, lower compliance burdens, and reduced warehousing costs, leading to a more integrated supply chain,” says Chopra.

Over the years, other than compliance cost and logistical efficiency, there has been better cash flow among small businesses because of the necessity to pay GST on purchases. But delayed Input Tax Credit (ITC) claims can strain liquidity. To meet their tax obligations, many small business owners have started to implement stricter budgeting practices to maintain liquidity.

“Input Tax Credit (ITC) is often blocked due to supplier non-compliance, causing working capital constraints. Strain in liquidity is due to tying up funds that could otherwise be utilised for operational expenses, investment opportunities, or cash flow management,” Chopra tells Media India Group.

On the other hand, many small business owners have taken advantage of government initiatives like the Composition scheme, which allows businesses with a turnover of up to INR 15 million to pay a flat tax rate with reduced paperwork to mitigate the challenges imposed by GST and ease compliance burden.

“GST laws and regulations are frequently evolving, leading to various interpretation challenges, especially concerning classification of goods and services, place of supply rules, applicability of exemptions, and treatment of input tax credit. Also, understanding classifications, reverse charge mechanisms, and e-invoicing requirements can be difficult,” says Chopra.

One key challenge with GST is price adjustment for goods and services. Many small businesses as e-commerce suppliers have to carefully consider their pricing strategies to remain competitive.

“As an e-commerce supplier, we face more detailed GST compliance requirements, leading to a certain level of difficulty in price adjustments for cars. These challenges include the need for timely filings and invoice generation, but sometimes it also allows us to cater to a wider customer base that we have in metropolitan cities such as Delhi, Mumbai, Bengaluru and Chennai,” Anshul Tomar, owner, House of Cars, a  car sale-purchase company in New Delhi, tells Media India Group.

For Indian small enterprises, the eight years under GST has been revolutionary yet challenging. Small business owners have effectively adjusted by embracing technology, using government programs, and improving their company strategy but they even faced challenges including rising compliance costs and frequent filing GST returns.