With the government being committed to roll out the goods & service tax (GST) by 1 April, 2016, it is critical that the small and medium enterprises (SMEs) analyse the impact and prepare themselves for India’s largest indirect tax reform, to adopt easily and benefit from the provisions.
Let us analyse impact of this reform on SMEs engaged in manufacture.
Under the current regime, large enterprises ‘stock transfer’ goods to other states due to availability of infrastructural resources and thereby avoid the impact of central sales tax (CST) on interstate movement. Post-stock transfer, goods are sold locally on payment of applicable value added tax (VAT) to the buyer, who is eligible to avail of credit against output VAT liability.
However, SMEs, owing to lack of infrastructure, effect inter-state sales (instead of stock transfers) and bear the burden of CST on them. The CST paid is currently not available as input credit to the buyer against his output VAT liability. The non-availability of input credit increases the cost of the product, thereby, rendering SMEs uncompetitive versus large enterprises.
The proposed regime places the SMEs on the same footing as large-scale industries by doing away with such tax differentiation by levying a tax on stock transfers and by neutralising the cascading impact of input taxes through the input credit mechanism available under the GST regime. The impact of these on a product costing R100 is illustrated in the chart.
On the other hand, the fixation of the threshold limit for tax exemption under the proposed GST regime would affect the businesses of small-scale manufacturers in terms of its impact on tax cost, working capital requirements and compliance requirements.
Under the current excise laws, no duty is required to be paid by a manufacturer having a turnover of less than R150 lakh. However, the threshold under GST is currently proposed to be around R25 lakh. The lowering of threshold to R25 lakh would bring a huge chunk of SMEs under the tax net and will have the following impact under the GST regime;
* The SMEs would have to meet additional compliance in terms of registration requirements and filing of returns, thus, increasing the compliance cost under the GST regime.
* A reduction in threshold would result in additional working capital requirement in the hands of SMEs since they may be required to discharge the GST liability pending realisation of the invoice.
* In the case of supplies to end customers, since the GST levied on such supplies would not be available as input credit to the end consumer, the same would increase the product cost in the hands of the consumer.
Though the proposed regime holds a few concerns for SMEs in the manufacturing sector, in the light of seamless credits and resultant level-playing field in pricing vis-a-vis large-scale industries, the overall impact appears to be positive, specifically for SMEs effecting B2B sales.
The author is tax partner, EY. Achal Chawla, senior tax professional, EY, contributed to the article