GST Council meeting: Five changes to the tax regime can actually help MSMEs improve compliance

The Goods and Services Tax (GST) roll out had a significant impact on the MSME sector, which houses 63 million firms. Initially, infrastructural / technical challenges affected MSMEs. Despite the technology integration and subsequent stabilisation, the sector continues to struggle with filing GST returns on time. A year after the tax’s introduction, only 60 percent of all eligible taxpayers have filed returns before the deadline.

The Indian government is cognisant of both, the significance of the MSME sector, as well as the challenges being faced by the sector in terms of digital and tax structure adoption. Which is why the 29th GST Council (GSTC) meeting on 4 August, to be chaired by finance minister Piyush Goyal, will focus its energies on the MSME sector.

Here are five important recommendations that can help MSMEs in India improve their tax compliance:

Priority lending to honest taxpayers

The Council should advise the government to incentivise MSMEs who pay promptly and within timelines. Adding to this, banks and associated financial organisations can introduce priority lending for honest taxpayers based on returns filing. This would improve the working capital for these businesses and have a positive impact.

Reducing time limit for reversal of ITC

ITC ought to be inverted under the CGST, in case the receiver is unable to pay to the supplier within a time period of 180 days. Ideally, for MSMEs, this time limit should be lowered to 90 days. As, being a part of the working capital and a lifeline for their business, any postponement in the payments is sure to impact business operations at all times.

Increasing definition of class of persons

‘The class of person definition’ has been raised from Rs 3 crore to Rs 5 crore. An additional increase of Rs 10 crore is recommended because it will then cover MSME service and industrial units, thus, amounting to benefits at large.

Adding services to composition scheme

About 48 percent of the GDP is contributed by the service sector and there are several SMEs operating service businesses. Thus, it’s vital that services are counted in the composition scheme minus any cap.

Adding POS solutions to ‘Digital MSME’ scheme

As per the recent changes, taxpayers with turnover of up to Rs 5 crore can file GSTR – 1 on a quarterly basis. While this may be a relief in terms of process simplification, this also gives rise to other concerns. Businesses will have to keep uploading their invoices and keep track of a seller’s invoices as well.

The best way to tackle this is to use Point of Sale (POS) solutions that provide end-to-end assistance from generating digital invoices to payments to capturing data. MSMEs with a turnover of Rs 2 to Rs 3 crore can easily use POS, along with the associated digital compliance and filing software, to maintain their data and file on time. And the government can further expedite this process by subsiding POS sales. Under the ‘Digital MSME’ scheme that promotes cloud computing, POS solutions can also be introduced as one of the products.

India relies on human assistance to fulfil financial and tax requirements. The industry and government need to work together to offer end-to-end services along with skilling and information assistance, all at affordable costs to MSMEs and support the digital India dream.

‘One Nation, One Tax’ is the right step and the government now just needs to concentrate at filling the gap to improve digital adoption.