The Goods and Services Tax (GST) introduced in 2017 is levied on value added during the supply of goods and services in the economy. It has replaced multiple indirect taxes providing for a unified system of indirect tax compliance and has reduced the cascading of taxes. It has helped create a national market, or as some have remarked – it was India signing a free trade deal with itself.
Yes, the GST is far from perfect – while some of the issues have been solved, the burden on small businesses could be further reduced, especially in terms of rate slab mergers and reducing exceptions for input tax credit refunds.
Unlike its predecessors, GST is tech-driven where the taxpayer interfaces with the state through a common portal. All processes from the first step of registration to filing, payments and claiming refunds is online. This has contributed to the overall ease of doing business in India and simplified taxpayer compliance. GST being transparent and of a self-policing character, it marks the reduction of Inspector Raj if not quite the end to be sure.
Earlier, medium/small/micro enterprises (MSMEs) had to undergo more compliances with a concomitant heavier cost burden. State had different VAT laws/rates, and trading across states involved the cumbersome CST law in a largely manual mode and answering to different authorities. Now more MSMEs are moving into the formal economy thanks in part due to the GST reform.
Although about 4.8 million taxpayers migrated from the earlier indirect tax regime when GST was introduced, the number of active GST taxpayers as on March 1, 2022, has climbed to around 13.5 million. Registration under GST laws is granted within a week or so of application when identification is authenticated. The number of enterprises being more even more (60m plus) is explained by the threshold exemptions and their upward revisions.
Moreover, composition schemes have been formulated for small businesses, that is entities with turnover less than a certain limit need to pay only a percentage based on their sales. They do have to furnish annual returns along with quarterly payment of taxes but are not required to file or pay more frequently unlike the bigger firms. Threshold exemptions provide relief in terms of compliance and in some cases even tax burden compared to larger companies.
One significant reform to ease the compliance burden for some MSMEs has been the Quarterly Return Monthly Payment Scheme (QRMP) - the number of return filings in a year has dropped sharply from 24 to only 8 for many firms. The adoption rate of the scheme is high with more than 4 million entities opting in.
Even other MSMEs benefit from the GSTR 1, GSTR 2B and GSTR 3B being inter-linked and partially self-populated. Besides, an automatic ITC statement in GSTR-2B is provided to taxpayers so that the eligible input tax credit is known to them by the 13th of each month.
GSTR-3B return filing percentage has increased from around 7 in 10 filers to almost 9 in 10 over the last one year. A facility has been provided on the portal whereby any taxpayer can verify whether his supplier has filed the requisite returns so that availing ITC is not affected owing to non-filing of returns or non-payment of tax by the supplier. Compliance requirement for MSMEs engaged in job-work has been relaxed.
Improved refund process
Refund processes have improved. Under the automated IGST route, the shipping bill itself is deemed as a refund claim and the refund is disbursed immediately on filing the relevant GST returns. This was never heard of in earlier tax regimes. Moreover, the entire structure of late-filing fees has been rationalised downwards.
It needs to be understood that under GST most payers are simultaneously suppliers and recipients of goods/services which makes this a self-disciplining tax. By casting a corresponding obligation on both the supplier and recipient, provisions reinforce payment discipline in the system and yet allow ITC to flow seamlessly.
It is often pointed out that the supplier’s liability to pay tax should arise only when he receives payment for the supply from the recipient. In other words, this implies that we switch over from collecting tax on accrual basis to cash basis. However, accrual is used across countries because it is more transparent. A switch to cash basis would imply that the tax administration and taxpayer would need to report the settlement of payments with their recipients and there is no obvious and easy way to do so.
GST is a work in progress that is significantly better than previous systems, especially for MSMEs that want to formalise, expand, and get access to structured finance. In combination with other GST change such as e-Way Bills and broader reforms such as digitisation and a focus on infrastructure, MSMEs have never had it so good, policy wise.
The writer is an investor, economist, and author