To Save ‘Make in India’, Fix GST for Small and Medium Businesses

GST

On August 15, 2014, at the Red Fort in New Delhi in his maiden Independence Day speech, Prime Minister Narendra Modi announced his pet ‘Make-in-India’ scheme with much fanfare. “Come, make in India,” he said. “Come, make in India… Come, manufacture in India.”

In September 2014, the scheme was formally launched; it is one of the flagship programmes of the government. In India, however, where millions of micro and small enterprises form the backbone of the economy, ‘Make-in-India’ can only work when SMEs can operate successfully.

It is imperative to create an SME-friendly business environment. This includes having a simplified, easy-to comply-with tax regime that does not impose huge deadweight compliance costs, which in turn cripple the productive capacity of these small but vibrant enterprises.

Two major policy initiatives of the government – demonetisation and GST – appear to have crippled the SME sector. Demonetisation is done and cannot be undone. It is critical, however to at least fix GST so that the negative impact on SMEs is mitigated.

In an insightful article in the Financial Times, Amy Kazmin describes how “the GST is putting heavy pressure on informal businesses, most of which never fully recovered from last year’s demonetization. In the coming months, many are expected to shut up shop for good…”.

JP Morgan’s chief India economist Sajjid Chinoy has pointed to the disruption caused in the domestic supply chains of the manufacturing sector due to the impact of demonetisation on SMEs (which contribute up to 4% of manufacturing, by some estimates). Both GST and demonetisation are expected to have an impact on the informal sector, and the hope is that eventually SMEs turn to formalisation. But in the transition, what we have is an “adverse supply shock”, as Chinoy calls it.

Economic commentator Mihir Sharma, writing in Bloomberg, says that complying with GST has proved to be so complicated that even medium-sized companies are struggling. Small companies, “those who cannot afford to hire a tax accountant or get online daily may be forced to shut shop”.

I have some suggestions for fixing the GST for SMEs: one immediate administrative steps that must be taken now and policy proposals that need to be implemented in the medium-term.

Many countries across the world find ways to ease the administrative burden of compliance with the VAT/GST for SMEs. India would do well to adopt an appropriate mix of these ideas.

One common simplification measure is the less frequent filing of returns. Quarterly filing is used by several countries with varying levels of applicability based on turnover: in the Slovak Republic, it applies to businesses with turnover below $375,000. In Poland, the limit is < \$1 million, in Belgium it is <$1.3 million. In Canada, businesses with turnover <$430,000 qualify for annual filing with quarterly instalment payments; in Denmark semi-annual filing is offered.

Of course, in India simplification measures should apply to much lower turnover levels. In fact, I would recommend that any simplification measure should apply to all firms with turnovers below Rs 10,000,000. (BY 

Source : https://thewire.in/184096/make-in-india-gst-sme/

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