Easing of GST Impact on MSME Sector

01 Feb, 2022 Advocate Akella A S Prakasa Rao, B.E.(Hons), LLB
Easing of GST Impact on MSME Sector

As per the revised guidelines, all those units with investment less than Rs one Crore and turnover less than Rs. 5 Crores are terms as Micro enterprises. All those units with investment of less than Rs.10 crores and turnover less than Rs.50 Crores are considered Small enterprises. Those with investment less than Rs.20 Crores and turnover less than Rs.100 Crores are termed as Medium enterprises. MSME (Micro, Small and Medium Enterprises) sector is the most impacted under GST. Some of the measures taken by the Government in order to ease the compliance burden of MSME sector under GST are as under:

  1. Online registration facility for taking GST registration.
  2. No registration needed if the annual turnover of goods is less than 40 lakhs and of service is less than 20 lakhs. These turnover limits are applicable only for intra-state supplies as inter-state suppliers are to be registered mandatorily.
  3. Filing of NIL returns by using sms facility.
  4. Composition scheme is available except for restaurant service providers., ice cream, pan masala and tobacco product manufacturers. Option is made available to pay taxes on quarterly basis, but to file returns on monthly basis. The composition scheme is available for goods supplier upto his annual turnover of Rs 1.5 Cr and for service providers upto 50 lakhs of his turnover. The composition tax rate is concessional rate and cannot be charged from customer on the face of invoice. He can issue bill of supply in place of tax invoice, which is a less cumbersome procedure. No ITC on inward supplies is available for the composition dealer and customer cannot avail ITC on outward supplies by composition dealer.
  5. Mentioning of HSN code on the invoice has been made easy. No HSN need be mentioned till the turnover reaches 1.5Cr, only 2 digits of HSN need be mentioned for turnovers between 1.5 cr to 5cr and 4 digits of HSN need be mentioned for turnover above 5Cr.
  6. Large number of persons from MSME are in health care and education sectors and hence these sectors are kept away from tax levy. For sectors like GTA, insurance agent, recovery agent and direct selling agents, agent of business correspondent/facilitator, security services etc., the tax is kept under reverse charge to ease MSME compliance burden.
  7. There is an obligation to make payment to MSME vendors within accepted period, which is normally 15 days from the date of supply or acceptance of remedy provided by MSME in case of raising of any objection in relation to such supply of goods/service. However an outer limit of 45 days is the free credit period within which the payment is to be made without applicability of interest as per the MSMED Act. The applicable interest is compound interest at monthly rates which are three times of the interest rates notified by RBI.

In view of such stringent guidelines, many of the customers are averse to receive supplies from MSME. In order to facilitate the process, the below alternate lines of action are suggested for which larger public debate is needed for concurrence. The alternate strategies suggested hereunder are more or less on the same lines and will have cash flow issues, but differ in the way they operate and hence merit evaluation independently as alternate options by the experts:

  1. All supplies from MSME be brought under Reverse Charge Mechanism (RCM). This is already made applicable in case of restaurant services, security services etc. Hence there will be no compliance burden for the MSME sector. However this may add to the cash flow issues for the recipient industries as RCM liability needs to be met from Cash credit ledger only.
  2. Or in the alternate, while making payment against supplies from MSME sector, the customer should be having an option to deduct the tax charged at his end and to remit the same to the Government. Once it is paid, then the same should be available as ITC for the recipient in the subsequent month. This will ease his cash flow position. Since it is part of the payment to be made to the MSME supplier, needless to say that it should be paid in cash only.

These options need to be evaluated by the authorities by constituting an expert committee under GST Council in consultation with representatives from MSME sector. This will save the authorities from the burden of picking and choosing the implementation of RCM for MSME supplies and will clarify the tax position for the GST users and will pave way for their business planning. This may help in increasing acceptance of MSME supplies in future as there will be clarity on the tax levy instead of some sectors being under RCM and the others being under forward charge mechanism. Moreover, this may help the MSME players also as there will be certainty in their tax planning. The new startups and entrepreneurs will be able to concentrate on the development of their business rather than spending time on understanding the tax compliances. This may give impetus to StartUp India initiative also and will be helpful in ease of doing business. Hence GST Council needs to take up seriously the issues being faced by MSME and do away with complex compliance burden for them by adopting a pragmatic approach in the best interests of growing startup culture in India.

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