ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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A Survey of the MSMEs Facing GST

Small Businesses, Big Reform

This paper draws evidences from field surveys to bring out the impact of the goods and services tax on the micro, small and medium enterprises by exploring issues of coverage, rate, selection and exemption of taxation, and subsequently, its effect on the competitiveness and viability of these businesses. The coping mechanisms the units undertook to tide over the crisis they faced as well as the GST Council responses are also discussed.


The goods and services tax (GST) was implemented in India on 1 July 2017 subsuming a number of central and state taxes with the primary objective to simplify the indirect tax structure.1 One of the principal departures from its predecessor value added tax (VAT) is a broader provision of input tax credit (ITC) across the entire value chain, particularly when levied by the centre and the state on a dual collection principle which is likely to remove the erstwhile jurisdictional hurdles to claiming ITC. While the seamless flow of ITC can minimise the cascading of taxes, the principle of reverse charge mechanism (RCM) and a system of invoice matching are envisaged as self-policing mechanisms to control tax evasion. Also, covering a much larger base of enterprises with lower exemption thresholds than before, it is seen as a mechanism to formalise the economy, by bringing informal enterprises under the tax net.

With more than two years since the roll-out of the GST regime, certain issues have come to the fore, which put to doubt the positive expectations regarding this overhauling tax reform. First, the multiple and frequent changes brought out by the GST Council demonstrates that the envisaged GST is far from being a simplification to the indirect tax regime. Second, media reportage and reports published by the industry associations have frequently cited that the impact of GST on the informal sector has been contrary to the expectations. A major repercussion is potentially on informal sector employment, especially with the ­sector reeling under weak demand situation in the country.

Lack of macro data, however, has restricted informed rese­arch on these issues. In this ­paper, I seek to identify the processes and channels through which the micro, small, and medium enterprises (MSMEs) are affected by the GST, drawing insights from primary surveys. I explore issues of coverage, tax rate, selection and exemption of taxation, and subsequently, their effect on the competitiveness and viability of these businesses. The coping mechanisms the units undertook to tide over the crisis they faced as well as the GST Council responses are also discussed.

Data and Methodology

The survey was conducted across 157 ­MSMEs in three cities, that is, Delhi, Mumbai and Surat, between December 2018 and March 2019 using both structured questionnaires and unstructured interviews.

In the absence of a readily available official listing of the MSMEs, a sample framework could not be devised. I used snowballing as a method to identify enterprises. This could ­result in bias as enterprise resource persons might recommend others who face situations similar to them. To avoid this, the first units of survey were selected purposely to ensure diversity in the size structure, product lines, activity, type of business, and so on, based on similar mixed methodology as suggested in Pickbourne (2018) and Pickbourne and Ramnarain (2018). I also used a supply chain framework for tracing the interrelated and interdependent product lines and businesses so as to understand the ecosystem of business relations ­between enterprises, and how this tax regime change affected these existing systems.

Categorising the enterprises: Of the 157 enterprises surveyed, 66% were involved in manufacturing activities, 19% were exclusively trading units, around 2.5% pursued both manufacturing and trading activities, and 12% were perfor­ming jobwork on material supplied to them. Table 1 provides a detailed description of the sample units by product and activity lines.

The sample units were further classified into micro, small and medium (the latter two being clubbed into a single category of small and medium enterprises [SMEs]) by the size of their investment in plant and machinery in case of manufacturing units and equipment in case of service sector units.2 Since the structure of GST underlines various exemption thresholds ­according to the turnover of the firms, I categorise enterprises by turnover.3

Table 2 provides a distribution of the enterprises by their plant size and turnover. Around 6% of the units, all in the ­micro category, reported their turnover to be less than 20 lakh. Though this category of firms is exempted from registration under GST if their transactions are intra-state, they could choose to register under GST optionally. About 51% of the units surveyed reported a turnover between 20 lakh and 1 crore. It is important to note that 84% of the units with an annual turnover between 20 lakh and 1 crore are in the micro enterprise category, while 16% are SMEs. At the time the survey, this category of turnover was eligible for the optional composition scheme if their transactions were intra-state. About 43% of the firms reported their turnover to be more than 1 crore; 79% of the SMEs and 19% of the micro units were in this category. At the time of the survey, it was necessary for this category of firms to register under the GST.4

Coverage of Enterprises

According to the 2019 report of the Comptroller and Auditor General, total registrations under GST as on 28 February 2019 were 1.20 crore, of which normal taxpayers accounted for 84% and composition taxpayers were around 15%. Of the total ­registrations, 59.74 lakh migrated from pre-GST regime, ­accounting for around 50% of the registrations, while the ­balance were new registrations (CAG 2019: 31). The service sector and large sections of small businesses account for these new registrations that include certain commodities exempted from taxes in the previous regime.

This is a huge departure from the past. The National Sample Survey Office’s 73rd round of surveys of unincorporated non-agricultural enterprises in 2015–16—a year before GST—found only 4% of the 633.93 lakh estimated enterprises to be registered under the VAT or sales tax. This had wide variations across industrial sectors and states, type of ­enterprise, ownerships, location of enterprises, turnover, ­investment size, and so on.

While only 1.46% of own account enterprises were registered with VAT/sales tax, this percentage was at 16% for establishment enterprises. Among the sectors that have a high presence of enterprises in the unorganised sector, wholesale and retail trade (excepting motor vehicles) had 26% and almost 7% of the enterprises registered under VAT/sales tax, respectively, followed by machinery and equipment (23%), electrical equipment (16%), recorded media (12%), fabricated metal (5%), ­paper products (6%), chemical products (5%); while manufacturing of food products, tobacco, textiles, apparel, leather, furniture, etc, and services such as, repairing activities and food and beverages service—that make for the bulk of the ­unorganised sector—had VAT registrations as low as 0% to 1.5%.

Consequently, in our sample almost two–fifths of the enterprises reported of being exempted from taxes in the pre-GST regime. These exempted units were concentrated mainly in the textiles and hosiery supply chains such as, grey cloth manufacturing, trading of grey cloth, hosiery manufacturing, and woven and braided elastics. Some micro units of leather products also reported to be exempted from paying VAT. Of the ­remaining enterprises, another 40% were paying VAT only, while 19% were paying multiple taxes (VAT, excise, octroi, CST, service tax) but not more than three indirect taxes. These were seen mostly in the chemical sector, machinery manufacturing, metal parts, and washing and dyeing of fabrics.

Taxes before and after GST

After the introduction of the GST, most of the firms surveyed (94%) were subject to taxation either via composition scheme or the GST itself. Seven of the 10 firms with an annual turnover of under the threshold of 20 lakh were also registered as part of the GST network (GSTN) as they had interstate transactions. I provide a comparison of the pre- and post-GST tax rates levied on the products of the surveyed enterprises in ­Figure 1. Nearly 40% of the firms were not paying any taxes before GST. Only 2.5% of these are now not filing any returns, while 4.5% are under the composition scheme. The remaining 32.5% of the enterprises, incurred GST at rates of 5%, 12% and 18%, and in some cases, different GST rates for the different products that they manufactured/sold.

In the next group, another 40% of the enterprises were filing VAT returns alone, at rates of 5%, 6%, 12.5% and 13.5%. Two enterprises in this group paid VAT at 5% and 13.5%, and 12.5% and 22%, based on the different types of products sold. In this group, 35% of the enterprises were paying higher GST rates at 12% or 18%. Around 19% of the enterprises were paying multiple taxes, which were now subsumed under GST, mostly in the 18% tax rate slab.

During the time of the survey, more than 70% of the enterprises surveyed reported paying a higher tax than in the earlier regime. The GST Council has periodically reduced tax rates, particularly for the 28% tax slab. During the survey, 27% of the units reported a reduction in the GST rates, especially in the chemical and leather sector where the 28% tax rate was ­reduced to 18% for many products, and in the elastics sector where the tax rate for knitted elastics was brought down to 5% from 12%. Earlier, the incidence of taxes was thus, even higher for many of these units.

Small Business and Tax Exemption

Before GST was launched, discussions took place about the exe­mption thresholds for small businesses due to higher ­compliance costs and information technology (IT) dependency of the tax reform. A ­majority of the MSMEs were competitive precisely because they were out of the tax net, and thus, exemptions were considered important. It has been argued that the compliance cost for the small businesses would be high from both sides (for the state as well as for the businesses) and hence an exemption would benefit the industry. In recognition of this, various exemptions were put in place for small businesses. Businesses with a turnover of less than 20 lakh (now extended to 40 lakh) were exempt from GST and a composition scheme put in place for enterprises doing intra-state business with an aggregate turnover of up to 50 lakh (the present limit is 1.5 crore). Under the composition scheme, a taxpayer has to pay 1% of his annual turnover as tax on a quarterly basis. However, they cannot collect GST from the customer and cannot claim ITC for their purchases.

While these exemptions are in place, under RCM, the onus of tax collection is on registered buyers if the supplier is unregistered or under the composition scheme or falling under certain specified categories like goods carriers, lawyers, etc, which led to additional compliance burden for the buyer firm. As ­Banerjee and Prasad (2017: 19) mention, an exemption of 5,000 per day is allowed to registered dealers to make purchases from unregistered vendors without the RCM obligation. This daily exemption allows for petty expenses. However, for an aggregate of transactions, this daily exemption is small and does not solve the obligation of RCM for registered dealers.

In recognition of this problem and the hurdles it places in front of the MSMEs procuring from unregistered dealers, the GSTC in its 28th meeting held on 21 July 2018, suspended the levy of GST on RCM on receipt of supplies from unregistered suppliers, except for specified goods in case of certain notified classes of registered persons. This provision was extended to September 2019 (CAG 2019: 16).5

However, the surveyed firms seemed quite unaffected by (or mostly unaware of) these provisions while making their buying decisions. During the survey, a quarter of the firms reported to have stopped buying from unregistered dealers in order to avail of ITC, while almost half of the units reported all their sellers to be registered. Only about 4% said that the unregistered sellers they were previously doing business with, had gone out of business and so they were buying from registered sellers now. Around 18% of the firms reported to carry on business with unregistered sellers as they had long-term relations with them and got cheaper material. Only two firms reported to be aware of thresholds for buying from unregistered sellers and said that they bought within the limits. Otherwise, they were procuring from registered dealers alone (Table 3).

Composition scheme: The same was applicable to composition suppliers as well. At the time of the survey, 58% of our ­respondent enterprises had the threshold turnover that could make them eligible for the composition scheme. But out of these, 73% of the enterprises were not eligible for the compo­sition scheme as they had interstate transactions, while out of the remaining 27% enterprises, I found only 28% to be ­registered under the composition scheme.

The reasons for not registering under the composition scheme are many. First, because of a perception that if they were not registered under GST, they would face a loss in their market share due to their transactions with businesses that wanted to avail of ITC. If they were B2B businesses, not registering under GST was not seen as an option. Second, the threshold of the composition scheme itself was low when the GST was rolled out. Most of the enterprises surveyed got a GST registration in July 2017 itself, when the threshold was only at 50 lakh. Thus, when GST was rolled out, the businesses, particularly the B2B businesses, already fearing loss of business due to the RCM clause, preferred opting for GST instead of the composition scheme. The relaxations to RCM came only a year later. Thirdly, these enterprises also reported that they feared harassment by tax authorities if not registered under GST, as it would be difficult for them to prove that their transactions were below a certain threshold. They thought it better to be “transparent” in an auditable fashion under GST, even if that meant filing nil returns.

Even as the GST Council decided to raise the threshold of the composition scheme to provide relief to the businesses, the aforesaid reasons deterred opting for this scheme. Alarmingly, the revenue secretary Ajay Bhushan Pandey is quoted to have said that, “even though currently the exemption limit is 20 lakh, but still there are about 10.93 lakh taxpayers who are below 20 lakh but are paying taxes” (Economic Times 2019). That itself would mean that 9% of the total GST registrations are from enterprises that are below the threshold of 20 lakh and are filing nil returns.

The Economic Survey (2017–18) talked of voluntary registrations of 17 lakh registrants that were not obliged to register under GST as of December 2017. While it views these registrations as voluntary, it points to the compelling nature of the tax structure that has forced low threshold businesses to also ­register under GST. Registration under GST came with the heavy cost of compliance in terms of increased paperwork, ­additional fee to accountants, and the mental load of keeping track of all bills, and collecting detailed invoices and receipts even for small transactions.

Declining Competitiveness

Some of the businesses surveyed wanted the council to get rid of the multiplicity of rules for similar businesses. Though their businesses were small, they were paying GST, while the composition dealers were able to sell at lesser prices as they did not collect GST and were paying an annual rate of tax on their turnover. Even though these businesses could avail input tax credit, they perceived competition and a loss of their market from the composition scheme dealers who were able to sell at lesser prices.

Furniture manufacturers in Mumbai: The steel almirah manufacturers we interviewed in Sakinaka, Mumbai had 5% VAT on their products before. Now, the GST rates were at 18%. The composition dealers in the same line of business do not collect 18% tax and sell at cheaper prices. In order to not lose market shares, these manufacturers reported to absorb a part of GST themselves and sell at meagre profit margins. Migration to composition scheme was not seen as an option as they feared loss of business, selling to registered dealers themselves. Even though they could claim ITC for their inputs, the price difference between them and the composition dealers was a cause for concern for them. Additionally, there were higher compliance costs for GST registered enterprises. This, they said, was in no way a demonstration of “one nation, one market, one tax.”

These firms seemed to be sandwiched between two sources of competition. On the one hand, if small firms did not register under GST, they could stand to lose market share as registered clients would not buy from them due to the perception of RCM and non-availability of ITC. On the other hand, small firms that choose to join GSTN faced higher compliance costs and the burden of excessive paperwork. If their business was with ­unregistered clients, they would have to absorb a part of GST themselves or lose market share. While a coercive formalisation into the tax system is in play, the working margins of the small businesses is put to risk. Additionally, the incidence of GST on small businesses was higher than the taxes they had faced earlier for a majority of enterprises, where many of them were never paying taxes before. Moreover, the prices of the small manufacturers, after a 18% GST, had moved closer to the branded products and they faced stiff competition from the ­organised sector that was eating into their market shares. The last factor has found resonance in many newspaper reports (Srinivasan and Shankar 2018).

A mechanism seemed to be in play, and no matter which path small businesses chose for themselves, it affected them adversely. Being part of a paper trail, however difficult its ­upkeep, was deemed necessary to do business.

Power loom sector in Surat: Manufacturing cheap polyester sarees and garments for low middle-class income groups, ­demonetisation and the ensuing cash crunch in the economy dried up the demand for sarees and garments, and in turn for grey cloth. Even before they could recover or sell off their ­inventories, the GST was launched. The unorganised power loom industry was facing the incidence of indirect taxes for the first time. Previously, their profits rose out of low wages paid to the workers on the one hand, and the absence of taxes on the sector on the other. Meanwhile, one of the essential ­inputs for production, yarn was taxed at 18% after GST was launched (12% subsequently), while the output—grey cloth—was taxed at 5%, creating a situation of inverted duty structure for these manufacturers. This resulted in blocked capital for the sector, and stiffer competition from the integrated units.6

An illustration is in order. To make 15 metres of grey cloth, 1 kilogram (kg) of yarn is required. Let us assume that cost of 1 kg of yarn is 100, with 12% GST. Thus, the GST paid by the power loom unit to make 15 metres of grey cloth is 12. If the selling cost of grey cloth of a decentralised unit is 14 per ­metre with a 5% GST, then the GST collected by the unit by ­selling 15 metres of grey cloth is 10.50. Thus, for every 15 metres of grey cloth sold, there is an accumulation of 1.50 in the GST credit ledger for the decentralised power loom unit due to the inverted duty structure. This amount was found to vary between 1 and 2 depending upon the qualities of the yarn and the grey cloth. Comparatively, for an integrated unit that is able to sell the dyed cloth at a price of say, 26 a metre, its GST collection is at 19.5 for 15 metres, and there is no instance of inverted taxation.

The owners of the power loom units we interviewed reported to run less number of machines than before. Many of the weavers, particularly the smallest in the sector who ran 12 or less machines, shut shop, sold their machines to scrap, and leased out their units to others. Their income now was the rent arising from the factory spaces. We held informal interviews with 20 such owners who had shut their shops. With a profit rates at 1%-2%, down from 8% earlier, their businesses were no more viable. One remarked, “we were job creators before, now we have turned job-seekers.” Further, many family owned businesses were found to be spilt into different units of smaller sizes to escape labour laws. They are mostly registered under the Shops and Establishment Act, and though many employ as many as 100 workers, these units are split to escape registration under the Factories Act.

Another obvious route of coping with adverse conditions of demand and downturn of turnover was to retrench workers; 93% of all the enterprises surveyed by us reported to have sacked workers. In certain cases, the enterprises had fired all their workers and instead banked on own and/or ­family labour alone. The percentage of micro enterprises not hiring any worker at all increased from 7% to 18%, as the entrepreneurs were unable to sustain paying wages to their employees and production itself was cut.

In the power loom sector the workers who are paid on a piece-rate basis for per metre of cloth that they produce during each shift of 12 hours, saw a reduction in their wage rate from 1–1.25 to 0.90–1.10. However, their total income had increased even as the wage share in total output fell as they were producing more cloth per shift by working on six to eight machines, instead of the four on an average previously. This meant intensification of labour during each shift, being more swiftly “on-foot,” with even lesser breaks. More disconcertingly, the conditions of work in this industry, like much of the unorganised sector, is highly exploitative.7

From manufacturing 4 crore metres per day, the grey cloth manufacturing production in Surat fell to 2.5 crore metres per day, and out of the 6.5 lakh looms in the city, 1.25 lakh looms were sold off as scrap. Reportedly, 50,000 power loom workers lost their jobs in the months following the launch of GST.8 Migrant workers from states like Odisha, Bihar and Uttar Pradesh bore the brunt of job losses. Suggestions to allow the refund of ITC on account of inverted tax duty structure were discussed for the textiles sector. Since the sector had huge employment ­potential, there was consensus that the sector must be provi­ded relief even if that meant a fall in revenue. The GST Council in its 28th meeting held on 21 July 2018, recommended allowing refunds on account of inverted duty structure with prospective effect from 27 July 2018. However, the power loom units surveyed had not received any refunds at the time of ­survey and were suffering from severe cash crunch and blocked working capital.

Hosiery supply chain: The scenario in this supply chain was rather complex, primarily distorted due to different tax rates. The VAT rates on latex threads were 5% previously and under GST this had increased to 12%. For woven elastics, it reduced to 5%, while for braided elastics, it had remained at 12%.

The latex thread manufacturers said that their clients, mostly small manufacturers, would be unwilling to pay the GST rate of 12%. This would result in them absorbing some of the GST cost themselves, particularly right after GST, as many of their ­clients were unregistered businesses who would not be willing to pay the higher prices due to taxes. With time, a part of their clientele took GST registration, and this problem eased. But ­delayed payments, a problem that was always there, increased further after GST, with delays increasing. from 45 days to 75 days.

Further, the woven elastic manufacturers faced inverted duty structure while purchasing rubber latex threads and saw much higher input costs than before, while the braided elastic manufacturers were facing stiff competition due to the higher taxes on their products. Many of the manufacturers we interviewed had tried to diversify their manufacturing to knitted and woven elastics due to higher taxes. They were unable to sell their products to hosiery manufacturers as the hosiery manufacturers, in turn, were facing inverted duty structure and were unwilling to pay the 12% GST, when they could ­collect only 5% on their products.

The demand conditions for the small manufacturers of latex threads and micro elastic units had turned adverse as their end clients, small hosiery manufacturers, had reportedly gone out of business after GST. The hosiery manufacturers we ­interviewed in Delhi, also reported a downturn in their sales, and an increase in their cost of production after GST. Their products were untaxed before, and were not competing well with the branded products after GST.

For the wholesalers and retailers in the textiles industry, ­imposition of the GST deterred their erstwhile informal process of doing business, wherein they could either return or sell their unsold inventory elsewhere. After GST, the spatial ­movement of the inventory came under severe restrictions due to the paperwork involved. Retailers complained that wholesalers, unwilling to undertake the requisite paperwork, would be unwilling to take back unsold stock like before, and thus, they would have to be wary about buying goods. This put a cap on the amount, variety, and quality of goods the retailers could display to consumers on demand. The wholesalers too, were simply not buying as much as they did before. During our interviews with wholesalers and retailers in Surat and Delhi, this was one of the repeated narratives.

Some of the hosiery retailers under the composition scheme said that procuring goods from the branded organised sector had become more difficult for them after the GST, and many of the registered wholesalers were not willing to do business with them, especially during the months following the launch of GST. At that point of time, they had diversified their fare by stocking other goods. At the time of the survey, their procurements had smoothened, but they still faced difficulties. Additionally, there was an unprecedented lack of demand that they witnessed after demonetisation and the launch of GST, not to mention the boom in e-retailing.

Impact on Business Viability

More than half of the enterprises surveyed said their turnover had reduced by 10%–30%, while more than one-third of the enterprises perceived their turnover to have reduced by more than 30% after the GST was introduced (Table 4).

A major shock to demand, particularly to the units that ­almost exclusively dealt in cash transactions was expected ­after the immediate roll-back of 86% of currency from the economy.9 Almost 90% of the enterprises (97% of the micro units and 77% of the SMEs) reported that even before things could stabilise and they could deal with their unsold inventories, their sales fell further after GST was introduced in July 2017.

Besides the lack of demand, other reasons predominantly identified by the surveyed firms for a downturn in business are increase in input costs due to taxes, blocked working capital, facing inverted tax duty, greater delays in payments, increased compliance costs and associated paperwork, distortions in buyer–supplier chains, and restrictions on flexibility of movement of stock (Table 5). It is interesting to note that for the textile supply chain for example (manufacture of grey cloth and hosiery products, job work in textiles, as well as retail), the imposition of a tax itself was not perceived as a problem as much as other issues identified before.

Complications of compliance: Compliance with regard to GST was one of the most difficult challenges facing the small businesses. As seen in Table 5, four-fifth of businesses surveyed saw compliance as challenge. The kind of knowledge about tax procedures and rules that the businesses required was simply not available to them. Most of them were not even paying any taxes before, and those who did were not used to such elaborate and complex bookkeeping. The rules under GST also kept changing swiftly as did the tax rates, the threshold limits, RCM clauses, and rules pertaining to late fines, deadlines for filing taxes, and so on. Initially, all businesses registered under GST were to file three returns per month and one annual return, amounting to 37 returns in a year (Banerjee and Prasad 2017).

Many of the respondents we spoke to told us that it was not just the rate of tax or the imposition of taxes that bothered them, but the very mechanism of record-keeping and accountancy through which they had to go through. Thoroughly unfamiliar with the software systems that GST necessitated, they had to depend on part-time chartered accountants, as most of the enterprises did not have an in-house accountant like the organised sector. Some of them had to hire an accountant to manage their books, even as they saw their profits and ­incomes affected due to the factors discussed before. Others who could not afford to hire someone for bookkeeping, banked on family labour. We saw in several cases, that one of the male children, often pursuing some other line of education, took over book-keeping just to keep the family business afloat.

Monthly filing of taxes was the biggest incumbent to business. As brought out in the minutes of the 32nd GST Council meeting, businesses with an annual turnover of as small as 60 lakh that were paying taxes of only 5,000 annually, would have to spend 15,000–20,000 annually to file the taxes (32nd GST Council Signed Minutes, 10 January 2019, p 9). While 30% of the SMEs (mostly medium-sized firms) we ­surveyed had in-house accounts, all of the micro units under GST had to hire accountants spending from 12,000 to ₹₹30,000 annually. A number of power loom units we surveyed in Surat were sharing the accountant costs. The benefits of filing a ­single tax were reaped only by medium-sized enterprises that already were accustomed to filing taxes digitally and had an in-house accountancy department. Along with this were the glitches vis-à-vis the inefficient GSTN, the failure of the IT ­dependent system, which meant that the businesses had to waste a number of days just trying to file the taxes.

In such a scenario, the proposed increases in exemption and composition scheme thresholds might not be beneficial unless something concrete is done about the RCM clause and the ITC structure. Since these are very much a part of the GST fabric, ease of compliance becomes the most important route. The ITC claims were to happen through matching the invoices of the buyer with that reported by the seller. Any incorrect or ­unmatched transactions filed by the supplier leads to the ­denial of credit to the buyer. This led to huge problems, as the suppliers were not technically adept at recording these transactions on the one hand, and on the other IT-related glitches made it difficult to cater to such a huge flow of information. This led to problems of buyers not being able to claim ITC and affected their working capital.

The GST Council is well aware of the challenges that face businesses, particularly small businesses, due to compliance, and certain steps were taken to ease the burden of compliance. Businesses with a turnover of less than 1.5 crore are now ­allowed to file returns and pay taxes on a quarterly basis, which will be a big relief for small businesses. GSTR-2 (a ­purchase ­return) and GSTR-3 (input–output return) were suspended due to its complex structure, and instead, GSTR-1 (the sales return) and GSTR-3B, (summary input–output return) ­remain, along with the annual return form. The new forms are uploaded from 1 April 2019, in an attempt to simplify the ­returns ­under GST. The new return formats—“sahaj” (for B2C outward supplies) and “sugam” (for both B2B and B2C ­outward ­supplies)—are to make the compliance process simpler for the small businesses where taxpayers up to a turnover of 5 crore could opt to file any of the three forms on a quarterly basis.

Business Relations

More than three-quarters of the enterprises we surveyed were business-to-business (B2B) firms, and most amongst them, the small units in particular, had a large part of their business
with unregistered clients. For example, acid traders in Sakinaka, Mumbai were supplying to metal part manufacturers, half of whom were unregistered small businesses with a turnover of less than 20 lakh. They reported to have to absorb part of the 18% GST, otherwise lose a significant share of their market. They were thus forced to sell at the previous VAT rate of 6%, or slightly higher, which in turn affected their small profit margins and working capital as the additional tax would have to be paid out of their pockets.

For the hardboard manufacturers in Delhi, who manufactured boards for bag lining, cartons, boxes, and so on, not only many erstwhile clients had gone out of business, but the existing unregistered clients were unwilling to pay the GST rate of 12%. They too would have to absorb the GST rates themselves making their businesses with small firms unsustainable. But accessing an established clientele was not easy either.

In some instances, where they sold to larger clients, the ­impact on their overall turnover was not as severe. Similarly, the elastic traders in Delhi who were selling to more established organised businesses did not fare as badly as the ones who had been dealing with smaller businesses. In fact, some of the enterprises surveyed, in spite of some facing some ­decrease in their annual turnover, listed benefits arising out of GST, such as the ITC claims (also increase in the coverage of ITC with services in its ambit), and/or the e-way bill easing inter-state trade, ease of compliance and the convenience of paying a single indirect tax (Table 6).

Gainers from GST: Our interviews with six medium-sized dye manufacturing units in Surat revealed that though the industry faced a downturn in their production and sales due to ­adverse demand conditions, the manufacturers largely felt that they had benefited through the GST. These units with large modern factory spaces, registered under the Factories Act, ­employing more than 70 regular workers and with a turnover of above 20 crore, were the only ones in our sample that were exporting their products directly.

For them the GST had made exporting goods much more convenient. Before GST, they had to fill six sheet of paper for container shipments and 402 border forms used radio frequency identification (RFID) seals and paid octroi. Post GST, a simple bill went with the ­material, and the manufacturers could put the seal ­themselves. Transportation with e-way bill saved them time. Their compliance burden had reduced substantially and refunds had become convenient—being directly credited into their ­accounts, with less paperwork and follow-ups. However, it is also important to note here that these firms already had ­in-house accountants, and were not unfamiliar with the process of filing taxes and digital bookkeeping.

Another example of a gainer from GST is one of the manufacturing and trading firms we had interviewed. Again, a ­medium-sized enterprise, registered under Shops and Esta­blishment Act, employing 75 regular workers, had gained from GST, as it could now collect ITC for its vast expenditure on ­advertisements. With the increase in their turnover, they could now pass on the benefits of lower production costs to the customers. The tax rate on some of their products has ­declined, while on some others it has increased. However, they perceived all their products to be cheaper after the GST.


While the findings reveal that the benefits of the reforms till date seem to be skewed towards the medium-sized businesses, it might be too early to completely rule out the prospects for the small businesses, in particular. How resilient the small businesses will be to this change, is a matter of time and largely contingent upon whether and how the attempts for simplifying the design of the GST regime for the small businesses pan out.

As far as higher threshold exemptions are concerned, they might not yield desired results, unless the GST in its very structure with RCM and invoice matching makes the task of compliance easy. Tax filing on a quarterly basis will be a welcome move, however, one needs to see how it works out along with the provisions for invoice matching. The issue of inverted tax duty structure too might not be creating a level playing field for all businesses. Added to it is the issue of multiple tax rates, where many similar kinds of products in the same value addition chain are facing different rates.

I acknowledge that the caveats of this study are its sample size, and limited scope and coverage of the variegated MSME sector. However, the strength of the exercise lies in the fact that it is amongst the rare attempts, if not the only one till date, of exploring the effects of a mammoth tax reform like the GST, empirically, though our findings are largely qualitative in nature.


1 For a comprehensive reading of the journey of indirect taxation towards GST, see Mukherjee and Rao (2019) and Bhattacharjee and Bhattacharjee (2018).

2 The definition for micro, small and medium ­enterprises is as per the MSME Act, 2006.

3 It was not possible to verify the annual records of the units (neither did all the units keep a book of accounts). Even the NSS rounds report only 12% of the enterprises to maintain a book of accounts, and data from the book of acc­ounts is collected for a negligible percentage of enterprises (0.13%). During the survey, I saw a reluctance on part of the entrepreneurs to give details about turnover. In many cases, I provided them with the range (as used in this analysis: less than 20 lakh, between 20 lakh and ₹1 crore, and more than 1 crore), and then the information was much more forthcoming. Wherever possible, for example, in the case of grey cloth manufacturers, I triangulated the figures reported to me by asking about the capacity of the machines, the number of machines operated, days of operation, and the prices of grey cloth per metre, and so on.

4 The threshold for the optional composition scheme stands at 1.5 crore from 1 April 2019, bringing a parity to the earlier regime where manufacturers were exempt from the payment of central excise duty up to an annual turnover of 1.5 crore. The exemption limit from GST has been upped at 40 lakh. Further, states of India have been given the option to decide the exemption threshold from GST. Service providers making interstate supplies, whose aggregate turnover does not exceed
20 lakh have been exempted from registration under GST.

5 This was again changed from 1 April 2019, via notification No 07/2019-Central Tax (Rate)
29 March 2019 to specify supply of goods related to construction activity liable for RCM.

6 These are a small number of companies that are vertically integrated and do most of the production in-house. They buy yarn from outside but do the weaving, printing and post-­production work like embroidery in one factory. ₹7 For an account, see Subramanian (2018).

8 Author’s personal interview with Ashish Gujarati, President of Pandesara Weavers’ Association, Surat.

9 More than half of the enterprises surveyed reported that a majority of their transactions were still in cash. This was true for three-quarters of the micro enterprises and a quarter of the SMEs surveyed. These responses were in urban centres. It can be fair to expect a much higher percentage of cash-based transactions at the all-India level.


Banerjee and Prasad (2017): “Small Businesses in the GST Regime,” Economic & Political Weekly, Vol 52, No 38, pp 18–22.

Bhattacharjee, Govind and Debasis Bhattacharya (2018): GST and Its Aftermath: Is Consumer ­Really the King? Sage Publications India Private Limited.

CAG (2019): Report No 11 of 2019, Compliance Audit of Union Government, Department of Revenue (Indirect taxes-Goods and Services Tax).

Economic Times (2019): “Boost for SMEs: Exemption Limit for GST Hiked to 40 lakh from 20 Lakh,” 5 August, =mdr.

GST Council Signed Minutes, GST Council, various meetings,

Mukherjee, Sacchidananda and R Kavita Rao (2019): Evolution of Goods and Services Tax in India, UK: Cambridge.

Pickbourne, Lynda and Smita Ramnarain (2018): “Separate or symbiotic? Quantitative and Quali­tative Methods in (heterodox) Economics research,” Handbook of Research Methods
and Application in Heterodox Economics, Freferic S Lee and Bruce Cronin (eds), UK: Edward Elgar.

Pickbourne, Lynda (2018): “Combining Qualitative and Quantitative Methods in Fieldwork: An Application to Research on Gender, Migration and Remittances in Ghana,” Handbook of
Research Methods and Application in Heterodox Economics, Freferic S Lee and Bruce Cronin (eds), UK: Edward Elgar.

Srinivasan, Raghuvir and Jay Shankar (2018): “Goods and Services Tax Has Reduced Competition from Unorganised Sector: T T Jagannathan,” Hindu, 28 October,

Subramanian (2018): “Synthetic Fabric, Authentic Despair,” People’s Archive of Rural India,
12 June, synthetic-fabric-authentic-despair/?fbclid=IwAR2m6JmSOPwcw0mGk9BOtgrOYn6kfK95lXekWvEHZsPRdK0rb4WYKP_h_SQ.


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Updated On : 4th May, 2020
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