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With the advent of the GST, MSMEs have had to navigate through new regulations and compliance requirements. In the past, the government introduced several initiatives, including introduction of quarterly returns and increase in turnover threshold to Rs 40 lakhs for supply of goods, aiming to boost MSMEs.
Against the backdrop of some of the aforesaid relaxations, as per recent GST@7 survey conducted by Deloitte, 78% of MSMEs have endorsed GST. Tax compliance automation, e-invoicing and timely issuance of circulars/instructions on contentious tax issues, emerged as top performance areas for government in the survey. MSMEs demonstrate robust support (69%) for these initiatives compared with larger counterparts (which was around 60%)
Nonetheless, MSMEs are still facing some challenges, especially with GST compliances and hence are expecting multifold reforms some of which are discussed hereunder.
Taxpayers need to reverse Input Tax Credit (ITC) along with interest, if the payment is not made within 180 days. This stringent ITC condition can be relaxed for MSMEs providing them relief from compliances and increased liquidity of funds.
Government is keen to implement e-invoicing in a phased manner, as a measure to curb fake invoicing, enhance transparency and streamline tax compliances. Currently, the threshold for e-invoicing is Rs 5 crore. However, MSME taxpayers are not tech savvy and rely on third parties for issuing e-invoice for every transaction which increases compliance cost for them. This compliance can be relaxed for MSMEs in multiple ways such as specifying invoice value for issuing e-invoice, enabling mobile apps for generating e-invoice, exemption to specific sectors, etc.
Under GST, the recipient is liable to pay tax under Reverse Charge Mechanism (RCM) in respect of specified supplies and that too, in cash. This stipulation means that small businesses and MSMEs must allocate cash specifically to meet RCM tax liabilities, which can strain their financial resources. An exemption may be considered from RCM liabilities to MSMEs having specified turnover limits and/ or eligibility to pay RCM liability using ITC. Such an exemption could alleviate their tax compliances.
Currently, taxpayers are required to pay tax on invoicing basis, forcing businesses to remit GST on sales even before receiving payment from their customers. It is imperative to make a policy change and allow MSMEs to pay tax on cash basis as was prevalent under erstwhile service tax regime. On similar lines, MSMEs must be allowed the adjustment of taxes on account of bad debts which is currently a sunk cost to them.
Another area where reforms can be expected is rationalization of the interest rate of 18% in case of short-paid tax liabilities. There are countless situations where such short payment of tax is not with the intention to evade tax, but on account of losses in business, cash flow challenges etc. Government must consider reducing interest rate of 18% for non-fraud scenarios for MSME taxpayers.
The composition scheme offers a simplified tax payment option for small taxpayers with eligibility threshold of Rs 1.5 crores. An increase in the threshold could allow more small businesses to benefit from this scheme, thus simplifying their tax compliance and reducing their tax liabilities.
MSMEs engaged in export activities need to comply with stringent conditions to prove exports, adding to their operational burden. Timely processing of export-related refunds is crucial for maintaining cash flow. Relaxing export qualification conditions and streamlining refund processes for MSMEs will enhance their operational efficiency and financial stability. For this purpose, the government may consider setting up different wings catering specifically to GST refund applications from MSMEs.
The current GST compliance framework mandates MSMEs to file multiple returns, including monthly or quarterly returns, annual returns, and reconciliation statements. This intricate and frequent filing requirement creates a significant administrative burden for small businesses. Streamlining some of these compliance requirements could ease the administrative load on small businesses, allowing them to focus more on their core activities rather than navigating complex tax regulations.
In conclusion, the Union Budget 2024 presents an opportunity for the government to address the unique challenges faced by MSMEs. By introducing reforms that simplify compliance, reduce costs, and enhance operational efficiency, the government can provide a significant boost to this vital sector, fostering economic growth and employment generation.
Harpreet Singh is Partner, Deloitte India and Gagan Gugnani is Associate Director, Deloitte India.
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