Changing rules of business post GST worry MSMEs

Concerns over new tax, accounting norms overshadow those about stricter compliance, higher costs

Most MSMEs are worried over the govt's decision to reduce tax exemption limit from Rs 1.5 crore to Rs 20 lakh, and to phase out CENVAT credit from September

Micro, small and medium enterprises (MSME) are trying to assess the full extent of the goods and services tax (GST) regime over their businesses, as some crucial rules of operation are still unclear.

Though the government has unveiled GST rates of a significant number of items, a majority of companies in the sector are worried about the new accounting and taxation norms that have been opposed by industry and are being discussed. These include a decision to reduce the tax exemption limit for small-scale industry units from Rs 1.5 crore to Rs 20 lakh, as well as to phase out central value added tax (VAT) credit from September.

“We are in talks with the government on a number of these rules which need to be finalised soon, especially as compliance norms are getting much stricter and the majority of the sector is coming under the taxation umbrella for the first time,” Om Prakash Mittal, national president of MSME network Laghu Udyog Bharti, said.

Currently, the government recognises micro enterprises as those with less than Rs 25 lakh investment in plant and machinery. Small and medium enterprises are those with investments less than Rs 5 crore and Rs 10 crore, respectively.

MSMEs have opposed the introduction of taxation on stock transfers, claiming that would stretch their working capital even further. Greater harassment from tax officials on infractions is also a prime concern for companies. 

“Mistakes are bound to be made in the transition period, with so many companies dealing with the system for the first time and the government should take that into account,” Sanjay Bhatia, head of Ficci’s MSME council, said.

Companies have said the monetary threshold for tax authorities to arrest for an offence should be brought down to Rs 50 lakh from Rs 1 crore. “There are apprehensions based on experience that authorities may misuse their power and harass genuine taxpayers. There is a high possibility that authorities may adopt arm-twisting tactics to extract undue advantage,” a Ficci consultation note to the government said.

With the administration of the reformed tax structure being divided among the central GST authorities, companies have complained that intra-state transactions would have to deal with two sets of assessment and enforcement agencies. 

Also, the new system is expected to refuse tax credit to a MSME if the vendor from whom purchases are being made does not show the same in his return.

While the government has unveiled the new taxation rates for 1,211 products, those for textiles and footwear are yet to be decided.

Since a significant number of MSMEs in the country are concentrated in the textile industry, apart from leather and footwear, most companies in the sector have their eyes set on the rates.

"However, among those that have been announced, with marble, cement and paint all being placed under higher tax slabs, home costs may go up," Mittal said.

While both marbles and cement have been placed in the highest tax slab of 28 per cent, paints have been kept at the 18 per cent slab.

However, a lower tax burden for light manufacturing, auto components and electrical equipments segments is expected to bring down the cost of raw materials and freight.