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Impact of GST on MSMEs in India
Impact of GST on MSMEs in India
Background
In July 2017, India implemented the Goods and Services Tax (GST) to simplify the indirect tax system and create a unified national market. While GST brought transparency and improved compliance, it also posed challenges for small businesses, especially Micro, Small and Medium Enterprises (MSMEs), which account for over 30% of India’s GDP and employ more than 110 million people.
Problem
Before GST, many MSMEs operated in the informal sector with minimal tax compliance. The GST system required:
E-invoicing for certain turnover brackets
For small firms with limited resources and digital literacy, this increased compliance burden led to higher operational costs and, in some cases, temporary disruptions in business.
Policy Response
To ease the transition for MSMEs, the government introduced measures such as:
Composition Scheme: Allowing small businesses with turnover up to ₹1.5 crore to pay tax at a fixed lower rate with quarterly returns.
GST rate rationalisation: Reduction in rates for essential goods and services.
Simplified returns filing through the GST portal.
Outcome
Positive: Over time, formalisation increased; MSMEs gained access to formal credit as GST records served as proof of turnover.
Challenges: Many micro enterprises still struggle with digital compliance and the working capital lock-in due to delayed input tax credit refunds.
Economic Insight
This case highlights the trade-off between formalisation benefits and compliance costs. It also shows how policy design must balance efficiency with ease of doing business for small-scale units.
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