GST: Why being small is a big risk now
The goods and services tax (GST) is finally here, so grow bigger! This is the unequivocal message of the GST to millions of small businesses. Being small is a tangible risk now. Irrespective of the GST being a success or failure, the government is convinced on doing away with incentives to remain small in the world of business. One may disagree, but the government appears firm on the following:
1. Being small facilitates tax thievery. In general, small, informal and unorganised businesses avoid taxes.
2. The cost of tax collection from small businesses is too high.
3. Besides tax exemptions, smaller units also get other concessions, including cheaper loans and these incentives cost a lot.
Perhaps this is why, in one go, the government has brought the 150 million small industrial units and businesses on a par with big industries.
Before discussing the GST for small businesspersons, let’s take a look at some of the facts.
According to a latest report by brokerage Edelweiss Securities, there are about 17 industries, services and businesses in the country whose 30 per cent to 90 per cent production comes from the unorganised sector. Almost 70 per cent to 90 per cent production in yarn, fabric and apparel businesses lies in unorganised sector. Around 50 per cent to 70 per cent dairy, jewellery, plywood, air-coolers, dyes and pigments, sanitary ware, footwear and pathology services are related to small units. Now let us see what being small means in GST.
1) Before the imposition of GST, manufacturing units with an annual turnover of Rs 1.5 crore were exempt from excise duty and annual turnover of Rs 10 lakh were exempt from service tax.
2) Under GST, service and production units with Rs 20 lakh annual turnover will get exemption from registration and return in filing.
3) Those doing business worth Rs 70 lakh can become part of the composition scheme. Under it, producers, businesspersons and restaurateurs will pay tax on concessional rates. They will have to file quarterly and annual returns.
4) Under the GST, if a registered unit gets supplies from an unregistered one, the onus of filing a return and paying tax will go to the registered unit. One must read into the concealed message in these provisions of GST.
The vital point of exemption and composition scheme is that businesses adopting them would not get the advantage of input tax credit. That is, they will not get back the tax they have paid on the services or raw materials of their produce.
Under GST, saving via input tax credit is going to be a crucial factor for profitability and competitiveness. The businesses operating without benefits of input tax credit will not be competitive compared to those under GST. Similarly, there is little hope that the big businesspersons would buy materials from small businessmen and pay tax (reverse charge) on their behalf.
The bigger companies are definitely better prepared to embrace the GST as they can integrate their entire value chain together.
The government is well aware that small businesses are unprepared for the GST because of their outdated business practices and less access to digital means. However, by the time the GST reaches their shops, its objective would have changed. This tax reform, introduced to increase the ease of doing business, is transforming into an effort to promote tax vigilance and prevent tax theft.
The government may not object to the conclusion that the GST will make life easier for big companies. The informal and unorganised sector has to shrink so that the big and organised ones can grow in a better tax-compliant environment.
Therefore, stop complaining about the GST and get set to get big quick!
That's the only way out.