GST Reform Agenda for MSMEs

Article By Subhash Changra Garg
-Subhash Chandra Garg is a 1983 batch IAS officer of the Rajasthan cadre. He served as Economic Affairs Secretary and Finance Secretary of India. He has also served as an Executive Director of the World Bank.

GST Reform Agenda for MSMEs

GST, institutionalised in India from the 1st of July 2017, made the entire country a single market, did away with border check-posts to make the flow of goods seamless, consolidated most indirect taxes into a single tax and made the tax process -registration to assessment- fully digital and also business and consumer friendly.

Consequently, there has been a notable increase in the number of registered GST taxpayers. As many as 64.38 lakh incumbent taxpayers shifted from the erstwhile fragmented indirect-tax regimes. The number of registered GST taxpayers reached 1.40 crore by the end of March 2023, more than doubling in less than six years.

All GST transactions are being brought online in real-time. Since October 2022, it has been made compulsory, in a calibrated manner, for registered businesses to generate all sales invoices online. Starting with businesses with a turnover higher than Rs. 500 crores, the instructions issued on the 10th of May 2023 make it mandatory for businesses with an annual turnover exceeding Rs. 5 crores a year to generate GST sales invoices online from the 1st of August 2023.

Most of the GST 2017 reform package stands implemented. GST has also by and large been established.

Reflected in Healthy GST Collections

The progress in GST reforms and implementation is quite well reflected in the GST collections. The government achieved the highest monthly GST collections of Rs. 1,87,035 crores in April 2023 with year-on-year growth of 11.64 per cent. The growth of GST in 2022-23 was quite high at about 22%.

GST receipts have increased from the pre-pandemic level of Rs. 12,22,117 crores in 2019-20 to Rs. 18,06,047 crores in 2022-23. This records a healthy CAGR of 13.90 per cent. As the nominal GDP growth was 10.8 per cent during this period, GST buoyancy was also quite decent at 1.29.

There are, however, signs of a slowdown in GST.

The IGST collections, most prominently the IGST collections from imports grew by only 8.81 per cent in April 2023. This sub-par performance was on account of negative growth in IGST collections on imports. The IGST collections on imports recorded a large negative growth of 17.86 per cent over the collections in March 2023, indicating difficult times ahead.

GST 2017 Package for MSMEs Treated Them as Weaklings

GST system works best when every business which supplies goods or services on commercial consideration becomes a GST-registered business and a part of the GST network.

The strength of the GST system is a seamless flow of goods and services across all suppliers- big, small or tiny. Any break in the chain disturbs the value-added chain and harms the interest of the businesses outside the chain.

Unfortunately, misplaced considerations such as socialism, small turnover, low profitability or lack of technology adoption, kept a big chunk of India’s, about 8 crore, businesses outside the GST network in 2017.

The suppliers of goods with less than Rs. 40 lakh turnover (Rs. 20 lakhs for service businesses) are currently exempt from even registering under GST. Businesses with less than Rs. 1.5 crore turnover can opt for a composition assessment which does not require invoice-based tax assessment. Such businesses don’t claim input credits and practically remain outside the GST network. There are composition schemes for many specific sectors with larger turnover as well, for example, gold, construction and specified types of restaurants.

These measures were considered to be in the interest of small businesses. These are actually not in their real interest.

Small businesses remain non-preferred partners for bigger businesses. Consumers also consider them lesser trustworthy and transact with them largely to avoid taxes. All these businesses- below the threshold or under composite schemes- also create enormous disturbance & discontinuity in the value-added chain and GST chain.

Some tax benefits MSMEs get are outweighed by the larger loss of market, credit and profitability.

Fake Invoices Have Become a Major Concern

The government announced the launching of a two-month special drive with effect from the 16th of May 2023, to check fraudulent claims of GST input credits.

This two-month campaign aims at weeding out fraudulent and wrongful GST registrations, detecting fraudulent GST practices to lower GST liability and also fake GST invoices generated without actual sales to engineer bogus GST tax credits by the buying entities.

The government has been undertaking similar campaigns almost every year since 2019. The 2021 campaign was the first major well-publicised one and claimed to have detected fraudulent claims of about Rs. 40,000 crore.

The government has reportedly detected questionable claims exceeding Rs. 3.08 lakh crores until the end of March 2023, with the fake claims detected in 2022-23 alone exceeding lakhs of crores rupees.

The government would definitely be expecting the current campaign to yield much better results.

Eliminating Fraudulent GST Registrations is the Principal Strategy

The most important policy goal of institutionalising GST was to bring all businesses above the prescribed threshold within the GST ambit.

Post-Covid, there was a somewhat subdued increase in GST registrations in the two years of 2020-21 and 2021-22. Registrations did record a significant jump in 2022-23.

The government suspects that a good part of new GST registrations is being misused to generate fake invoices for either facilitating fraudulent claims of GST input credit or for avoiding the generation of e-way bills by misclassifying the supply of goods as the supply of manpower or other non-taxable services.

Actually reported recoveries from the campaigns launched in the last five years have been only about one-fifth of the amount claimed to have been detected. In 2022-23 also, actual recoveries are about Rs. 21,000 crores.

Though it is quite essential to weed-out fraudulent practices and fake invoices for protecting the revenues and integrity of the GST system, in the total GST revenue, which crossed Rs. 18 lakh crores in 2022-23, the contribution of the revenue detected in the campaigns is relatively quite small (a little over 1 per cent).

Government must continue with this campaign with all the vigour it requires. The real difference, however, will be made by bringing all small businesses into the GST network.

Make GST System MSME-Friendly to Bring Them In

On the face of it, it is a tough call. Even most small businesses themselves baulk at it at first sight. However, the development of electronic invoice generation and payment technologies has completely transformed the ground situation.

The smallest of businesses are now happily accepting electronic payments through UPI, QR codes or otherwise. It is quite easier to generate electronic invoices/ bills on the machine than to make them manually. The need to get working capital finance is also nudging most small businesses to maintain records of all transactions.

A small push and some good financial incentives can bring a flood of small businesses to join the GST system.

To bring all MSMEs- tiny, micro, small or medium- within the GST network will require making registration of all businesses compulsory under GST. The Government can launch a campaign to bring all businesses within the fold of GST.

Let no one be afraid that this will be financially disadvantageous to MSMEs.

The Government can continue to exempt businesses with turnover lesser than the prescribed thresholds from the GST. In fact, electronic recording of all GST transactions will make the machines/ systems automatically keep the registered businesses with less than prescribed turnover free from any assessment and payment of GST.

In fact, the Government can go one step further, without any real loss of revenue.

The Government can permit small businesses to retain the tax collected through GST-paid invoices generated by them electronically. In any case, small businesses don’t bill GST in the present system and retain the gross value of the bill.

The policy of compulsory registration, electronic billing and payment, GST assessment only over the prescribed turnover and retention of billed GST by small businesses will be a real boon to MSMEs. Tax benefits with full market integration!

Assist MSMEs in Electronic Transformation

The Government needs to work with MSMEs to enable them to migrate to electronic record-keeping, invoice generation and payments urgently.

In place of numerous small ticket schemes, the Government currently runs for the MSMEs, the Government should focus on providing a unique business identification number for all businesses, and link the same to their bank accounts and GST network.

It is possible now to design and generate real simple electronic GST registration, invoice generation, payments and account system, which works as part of the sales and payment process for the goods or services supplied.

Government should not only bear all the cost of this transmigration but should provide financial incentives through either lottery or other schemes to give a chance to MSMEs to earn additional income besides to electronic GST network.

Besides facilitating and benefiting MSMEs, such a system will also ensure that the Department has all the information for all the value-added transactions in the country. By using artificial intelligence and other smart analytic tools, the system can detect fake invoicing or under/ over invoicing much better with convincing data trails and proof seamlessly.

Bringing MSMEs In Will Complete the GST Reforms

There are several other reforms- rationalisation of rate structure, integration of petroleum products and electricity duty and other outside GST businesses like construction etc.- which need to be undertaken.

However, to fix the GST system of the leakages and make the GST truly all value-added accounting and taxing system, the MSMEs-related reforms are the real key.

The real test of complete and successful implementation of GST would be when every e-rickshaw driver, roadside vendor and chat-maker, to take some examples, supplying goods and service generates an electronic invoice whenever they undertake any transaction commercially.  

Subhash Chandra Garg is the author of ‘The $10 Trillion Dream’ and the Budget 2023-24. He is also a former Finance and Economic Affairs Secretary, Government of India

VIEW OF INDIA SME FORUM:

The success of GST reforms lies in implementing comprehensive measures beyond detection campaigns. Despite clear GST provisions regarding electronic records, circulars, instructions, FAQs and legal precedents the challenge yet prevails at the ground level. It is crucial to ensure that tax officers at the ground level are familiar with the existing provisions and other relevant information to facilitate a successful and hassle-free process. Compulsory registration, real-time invoice generation for all businesses, and leveraging technology are crucial to combating fake invoicing. Achieving universal compliance will mark the true completion of the GST reform process.