Mint ST - - POLITICS - Re­spond to this col­umn at feed­

The im­ple­men­ta­tion of the goods and ser­vices tax (GST) ef­fec­tive 1 July 2017, has un­der­stand­ably put mi­cro, small and medium en­ter­prises (MSMES) in a spot of bother. To­gether with de­mon­e­ti­za­tion, GST ap­pears to have ir­re­versibly al­tered the mar­ket dy­nam­ics for these units.

In the ear­lier tax regime, en­ti­ties with a turnover of Rs1.5 crore per an­num were ex­empt from pay­ment of ex­cise duty. That thresh­old has been low­ered to Rs20 lakh for most states un­der GST. Fur­ther­more, job work units, which were pre­vi­ously not li­able to pay taxes, have been brought un­der the GST net, lead­ing to a dis­rup­tive im­pact on in­dus­tries such as tex­tiles and gems & jew­ellery where job work­ers are an in­te­gral part of the sup­ply chain.

The gov­ern­ment has at­tempted to ease the com­pli­ance bur­den on small units by al­low­ing en­ti­ties with a turnover of up to Rs1.5 crore to file re­turns on a quar­terly ba­sis as op­posed to monthly ear­lier.

The gov­ern­ment has also in­creased the up­per limit of turnover for en­ti­ties opt­ing for the com­po­si­tion scheme (wherein these can pay a flat rate of tax on their turnover) to Rs1 crore (from Rs75 lakh ear­lier), though it re­mains re­stricted to man­u­fac­tur­ers, traders, and restau­rants. En­ti­ties opt­ing for the scheme will not be el­i­gi­ble to claim in­put tax credit (ITC) and en­ti­ties with in­ter-state sup­plies are not el­i­gi­ble for this scheme.

CRISIL Re­search’s in­ter­ac­tions in­di­cate many MSMES are hes­i­tant to opt for the com­po­si­tion scheme as they worry that large play­ers will stop mak­ing pur­chases from them.

Two other pro­vi­sions most likely to hurt MSMES are the re­v­erse charge mech­a­nism that makes a pur­chaser li­able to pay taxes on pro­cure­ment from un­reg­is­tered sup­pli­ers and the match­ing prin­ci­ple wherein ITC can be claimed only when the pur­chase in­voice matches with the sales in­voice up­loaded by the sup­plier and GST has been paid by the sup­plier.

These would ad­versely hurt the cash flows of MSMES, al­though with the pay­ment li­a­bil­ity for taxes un­der the re­v­erse charge mech­a­nism sus­pended till March 2018, MSMES will have a lit­tle more time to make nec­es­sary ad­just­ments.

The neg­a­tive im­pact would, how­ever, be partly off­set by the avail­abil­ity of ITC on all in­puts used or in­tended to be used for fur­ther­ance of busi­ness. This pro­vi­sion im­plies that busi­nesses can claim ITC on GST paid on over­heads such as re­pairs and main­te­nance, print­ing and sta­tion­ary, etc, which was not al­lowed ear­lier.

Our as­sess­ment sug­gests cash flows of MSMES in syn­thetic tex­tiles and con­struc­tion sec­tors would be strained in the medium term due to change in ef­fec­tive tax in­ci­dence and/or credit pe­ri­ods. In the near term, though, MSMES would feel the pinch as large busi­nesses have de­layed pay­ment to small sup­pli­ers in many cases as they try and man­age cash flows un­der GST. There is also grow­ing con­cern on the abil­ity of MSMES to com­pete with larger cor­po­rates in the post-gst era. In CRISIL Re­search’s view, the com­pet­i­tive­ness of MSMES would be de­ter­mined by the ex­tent of tax ar­bi­trage, their po­si­tion in the value chain, labour cost ar­bi­trage, prod­uct of­fer­ing, lo­cal mar­ket knowl­edge and prox­im­ity to cus­tomer. Sec­tors sur­viv­ing largely on the ba­sis of tax eva­sion, such as mi­cro units in steel sec­tor, ply­wood sec­tor, and a sec­tion of traders, are likely to find the go­ing tough.

GST could also, over a pe­riod, lead to struc­tural changes in in­dus­try value chains.

For ex­am­ple, FMCG (fast-mov­ing con­sumer goods) com­pa­nies could in­crease re­liance on di­rect dis­tri­bu­tion as op­posed to reach­ing re­tail­ers through whole­salers. Higher vol­umes at the re­tail­ers’ end has im­proved the busi­ness case for di­rect dis­tri­bu­tion.

Ad­di­tion­ally, the liq­uid­ity freeze in the whole­sale chan­nel post­de­mon­e­ti­za­tion re­sulted in FMCG play­ers up­ping the ante on di­rect dis­tri­bu­tion. GST will fur­ther ac­cel­er­ate re­struc­tur­ing and con­sol­i­da­tion of the whole­sale chan­nel in the FMCG sec­tor.

In tex­tiles, given the im­po­si­tion of taxes on value ad­di­tion at each stage of the man­u­fac­tur­ing process, as well as job work, or­ga­nized, in­te­grated play­ers are likely to gain at the ex­pense of de­cen­tral­ized units un­der­tak­ing a sin­gle ac­tiv­ity.

Nev­er­the­less, once the dust set­tles, or­ga­nized MSMES would stand to ben­e­fit from the uni­fied pan-in­dia mar­ket thrown up by GST. They could also gain mar­ket share from play­ers com­pet­ing on the ba­sis of tax avoid­ance. Elim­i­na­tion of the cas­cad­ing ef­fect of taxes and ef­fi­ciency in lo­gis­tics will help boost prof­itabil­ity in the medium term.

MSMES across the board would be able to achieve ef­fi­cien­cies in pro­cure­ment as ITC can be claimed ir­re­spec­tive of where the pro­cure­ment is from. MSMES can start look­ing be­yond their ex­ist­ing mar­kets as the tax con­sid­er­a­tions would cease to mat­ter.

Most im­por­tantly, in­creased trans­parency post-gst would en­able tax-com­pli­ant MSMES to se­cure easier ac­cess to for­mal fund­ing at com­pet­i­tive rates.

Cor­po­rates and MSMES could, how­ever, do with clar­ity on the roadmap for in­tro­duc­tion of e-way bills, ra­tio­nal­iza­tion of mul­ti­ple tax rates, en­hance­ment of the scope of the com­po­si­tion scheme, and how and when real es­tate and petroleum prod­ucts would be bought into the GST net. In ad­di­tion, clar­ity on key pro­vi­sions in the GST law—such as the method­ol­ogy pro­posed to be adopted for rat­ing en­ti­ties based on their com­pli­ance—would en­able MSMES to as­sess the im­pact of GST bet­ter.

Ajay Srini­vasan is di­rec­tor at CRISIL Re­search.


Newspapers in English

Newspapers from India

© PressReader. All rights reserved.