Centre for Digital Economy Policy Research: GST Policy Support for MSME

On-ground challenges faced by MSME

MSME’s are befuddled with the concept of GST
Many who want to come into the tax net, finding it very difficult to comprehend the system, especially when they were doing cash transactions earlier
Those who were in the VAT system, are finding it difficult to understand the basic concepts of Input Tax Credit, maintaining of purchase invoices and sales invoices
Fast changing rules is an even greater hindrance
The multiplicity of tax rates, where for the same products, there are multiple tax rates (eg. Textiles of cost above Rs 2,000 attracts 12% and that below Rs 2,000, attracts 5%, similarly with shoes) is perplexing for the small and micro enterprises
Those who have adopted softwares have lost trust as the softwares have not been able to seamlessly post the GSTN returns as the GSTN system was having problems
Many cases are undefined – eg. If a textile trader buys 1000 m of cloth and it shirnks 10%, how will the shrinkage be accounted for or will the inspectors charge him with malpractices for the unaccounted 100 m cloth? How will employers deal with per diems paid to employees when they are traveling – should there be a GST on it and should that be treated as part of ITC? What happens when the employee is traveling outside of India?

GST regime requires MSME’s to have a minimal IT infrastructure in order to create and file invoices electronically
This minimal IT infrastructure includes a laptop/ PC, connectivity, cloud provisioning, GST invoicing software with access to GSP in order to access GSTN
A smartphone or tablet is not a realistic solution to create large number of invoices in a day
The cost of the above minimal infrastructure is Rs 45,000, which is a large amount for MSME’s
For every minimal IT infrastructure setup by an MSME, government receives approximately Rs 8,000 as taxes (18% of Rs 45,000). So for even two million MSME’s adopting IT solutions for filing GSTN, government receives Rs 1,600 crores as taxes on the IT infrastructure.
MSME’s believe that they have to pay for the above infrastructure in order to pay to the government and view this as an unfair arrangement

It obviously has an impact on the success of GST regime
More importantly, it impacts the large companies to whom the MSME’s are vendors, who will not be able to set off their Input Tax Credits against their Output Tax

(a) Make GSP charges free so that private sector can bring in completely free software
(b) Government procures in bulk on monthly lease, laptop, GST software, GST support, dongle, and connectivity as one bundled solution, just like EESL procuring LED bulbs in bulk, thus reducing the cost of the equipment, and provides the same to registered GST taxpayers. Government also makes this procurement tax-free, thus reducing the cost by 18% which will further reduce the lease cost as the cost of money will also come down. It is expected that the total cost will come to less than Rs 1,400 per month
(c) The monthly lease amount for this infrastructure should be allowed to be set-off by the taxpayer, against the monthly GST payments. In fact, the entire amount should be added to the Input Tax Credit for easy processing.

Alternatively, the following mechanism may also be adopted:

(d) For those registered with GSTN, should be allowed to have a one-time set-off of the cost of procuring the minimal IT infrastructure against their indirect tax liabilities, similar to allowing expenditure on IT assets to be set-off against direct tax liabilities
(e) This set-off can be capped for a maximum of Rs 50,000, on a one-time basis
(f) It can be further made easier for MSME’s by allowing them to procure equipment on an EMI basis, and setting off the monthly EMI against the GST payment due
(g) To facilitate private players to provide credit to the millions of MSME’s who have poor credit history, the government can collect the complete GST due and use that to pay off the EMI that an MSME was supposed to pay, with a cap of say Rs 4,000 pm for one year
(h) The above can be made available to only those who are paying GST of above Rs 4,000 pm

It would provide significant relief to MSME and reduce their resentment towards the GST regime
It would also introduce them to Information Technology and put them on a path of automation
It would create more jobs