GST & MSMEs

1. GST & MSMEs Presentation before the Hon’ble Members of Lok Sabha and Rajya Sabha 21st Dec 2017, New Delhi Anil Bhardwaj, Secretary General Federation of Indian Micro and Small & Medium Enterprises (FISME)

2. FISME & GST • Federation of Indian Micro and Small & Medium Enterprises • Not for profit, politically neutral, professionally run organization • Est. 1967 as N.A.Y.E.; rechristened as FISME in 1995 • Focus on 3 thematic areas: • Market access (domestic public procurement; exports, FTAs, WTO..) • Research based advocacy for economic reforms • SME dev projects funded by World Bank, UNIDO/UNCTAD, DFID, GIZ.. • Outreach: 750 MSME associations as members- geographical & sectoral; reaches out to 2 Mn MSMEs through member associations • GST initiatives • FISME-Small Industries Dev Bank of India (SIDBI) join hands on GST • GST awareness campaigns; scores of seminars, webinars.. • A brief Guide to GST for MSMEs (English) • GST toll-free helpline: 1800-11-3585 • GST helpline portal: www.gst4msme.com with through experts • Periodic compilation of MSME issues and submission to Govt/ GST council

3. MSME universe • Micro, Small and Medium Enterprises • Defined per MSMED Act based on investment in plat & machinery • Key characteristics • 45 Mn units (2011-12) employing 101 Mn • 95% Micro; 4.8% Small; 0.2% Medium • 97% proprietorship/ partnership firms; <2 % Cos • Less than 5% have loans from banks! • Yet account for almost half of Ind. Production and exports • MSMEs in pre-GST regime: • Excise: Option-1: Exemption upto Rs1.5 Cr; Input credit not allowed; popular Option-2: Tax from start with Input Tax credit; only few opted this option • Sales Tax: Most MSMEs- other than traders, registered in State VAT • Marked difference in businesses in Manufacturing, services & trading

4. GST- quick recap • GST principles • Levied on supply of goods /services right from Mfrs to the consumer • Taxes paid on purchase (Input Tax) utilised as credits to offset tax payable • Net burden of tax on value added (increase in sales price over purchase) • Final consumer bears only GST charged by the last dealer in supply chain • Harmonization, avoidance of cascade and transparency- hallmark of GST • GST in India: Highlights • GST has subsumed 17 Taxes: 7 Central and 11 States • For specific goods/ service one rate applies across the country • Paves way for making India one single market • Takes away discretionary powers of Center/ States to frequently change Tax rates • Tax payer has to deal with one single GST authority • Laws, Regulations, Processes are harmonized nationwide

5. GST: Challenges being faced by MSMEs

6. GST - Structural Issues-1 Multiple GST slabs • Multiplicity of GST proved biggest headache for MSMEs Example: 1) All fertilizers (under FCO) spread under HS Chapters 31, 28 & 38; some attract 5%, some like micro nutrients 12 & 18% 2) Most machinery parts 18%; V belts 28% 3) Even scissors at 18% !! Poor manufacturers of Meerut Cluster affected Suggestion: • The number of slabs be limited to ideally maximum three • Lowest slab for essential goods & highest slab on sin- goods/ luxury goods • Rest all items should be in the mean rate (or revenue neutral rate) • Current practice of placing products/ services based on lobbying is unfortunate; should be based on rational/ well define dcriteria

7. GST Structural Issues-2 Delinking input credit from supplier’s tax payment In pre-GST CENVAT regime (and also in other countries) input credit was allowed while computing net tax payable thereon. Any reconciliation is done later. MSMEs are hugely burdened in the GST regime where they cannot avail the credit even when they paid the full tax on their purchases. When in GSTN every transaction could be tracked anytime, why the system should deny this facility Suggestion: Delink input credit from data entry/ payment of GST by suppliers. It would be the single biggest relief to small businesses and MSMEs.

8. GST Structural Issues-3 Delinking C-form from Transitional Credit • Historically, enormous lag for a seller to get the C form from the buyer • In GST regime, to claim ITC of VAT, C forms is must. In the event of non-submission, difference between full tax and concessional tax deducted from the ITC • Problem compounded for suppliers to projects where C-from is given after completion which may take 2-3 years. • Besides the immediate loss in transitional tax credits, the imminent deadline for claiming all transitional credits is causing panic among the MSMEs. Suggestions: • Suppliers need to be given adequate time, at least an year to collect and submit the pending C forms, till then transition credits be allowed in full. • A Penalty of 10% of input credit availed may be applied if tax payment has not been made by the supplier. This will incentivise customers to buy from genuine suppliers while not choking the entire system.

9. GST Structural Issues-4 GST on advance • Defies the cardinal principle of GST that the liability to pay GST arises at the time of ‘supply’ Suggestion: GST on Advances received should be abolished forthwith. Multiple accounts for Tax payment • A dealer has to maintain six accounts one each for making payments of SGST, IGST, CGST, Penalties, Fee and Interest. • Cross utilization of cash lying to his credit in one is not allowed at present in the other accounts making it burdensome to keep separate balances in so many accounts and also blocking capital unproductively Suggestion: Cross utilization of accounts should be allowed

10. GST -Operational issues-1 Reducing burden of Tax Returns Return should be quarterly for all, as right now if one is filing monthly and other is quarterly, there would be mismatch till 3 months and ITC would be provisional. Reversal of Credit Credit of ITC is reversed if payment is not made to the vendor within 6 months. This provision is impractical and is likely to be misused by the authorities at the time of audit. For example, if some material and/or service is purchased for some project or machine and 10-20% of the bill amount is under retention till the project/machine is commissioned successfully, which may take months and even years, how it is to be dealt with?

11. GST -Operational issues-2 Purchase from outside state: fungibility of CGST & SGST with IGST If any goods/service is purchased from out of State and vendor charges CGST and SGST, instead of IGST, we should get the credit of that too. Why only local SGST/CGST is allowed? For example, if one goes to other State and stays at a hotel, hotel will issue tax invoice by charging SGST and CGST, does the Government intend to deny this credit. Another example may be that if one purchases some goods from other State dealer and asks him to deliver the supply within that State, supplier may charge SGST and CGST and not IGST. .

12. Obligation to register in other state: Services & Goods be at par If total turnover of service provider is less then 20 lac (press release dated 06.10.2017 ), he is not obliged to have registration even if providing service out of State. The same should be extended to goods also. The vendor has to raise and upload the debit/ credit note on GSTN. This provision is creating problem, as many of the vendors are either not well acquainted or equipped to adhere to all the formalities with regard to GST provisions, hence facility of raising Debit/Credit Note and uploading the same on GSTN may be allowed to purchaser as well. GST -Operational issues-3

13. Tax Returns Tax returns should aim to capture data either HSN wise or Tax rate wise transactions. Demanding statement of both only make it cumbersome for MSMEs who cannot afford dedicated software. Refund of ITC under Public Procurement A large number of MSMEs supply to government. A separate application like that proposed for exporters should be devised to refund accumulated input tax credits on capital goods. 28% GST on capital Goods and Intermediates Still many capital goods and components attract the highest tax rate. It might have conceived based on 12% excise duty and upto 15% of state VAT a few states had. While the fact was that small industries was buying from inter states by paying 2% CST wherever higher VAT rate was applicable. Businesses, in general, are sceptical of getting refund from exchequer as per the past practices. GST rate should be kept at 12% on capital goods. GST -Operational issues-4

14. GST -Operational issues-5 Composition scheme • Good option for businesses especially those operate in B2C segment. However there are several exclusions which limit its utility. • To make it popular eligibility criteria could also include: units doing job work; Dealers selling tobacco products, ice creams etc. commonly sold in grocery; exempted goods like loose grains etc. should be excluded with taxable goods • Spl guidelines need to be issued for the state check posts where goods consigned to/ by composition dealers are routinely held-up Online support during filing • GST is entirely net based and pose unexpected challenges but there is no support • If even for buying insurance of Rs. 100- online live support coul d be provided why not for GST

15. GST -Operational issues-6 Reverse charge mechanism • A major nuisance and un-necessary burden • Registered dealers avoid buying from smaller MSMEs who are not registered under threshold exemptions • A solution needed to be explored to completely do away with it Pending decision for Himachal/ Uttrakhand • The hill states enjoyed excise exemption • No decision yet about refund of excise post GST regime E-way bill • As GSTN platform & processes are still evolving can e-e-way bill be postponed till these are stabilized?

16. Existential question before informal sector • Over 60 Mn people self-employed (Economic survey ) majority of them in informal sector • Engaged in economic activities which arenot criminal but may not be strictly legal because lack of requisite permissions/ licenses, authorised work space, high cost of compliances etc • Now with, Man-Money-Material :: Aadhar-PAN-GST, it is impossible to ‘hide’ and continue business • Need for Govt to be empathetic and offer pragmatic solutions for their safe passage to avoid resulting economic distress and its social fall out • After all in absence of social security, people have to opt for survivalist entrepreneurship

17. Thanks Federation of Indian Micro and Small & Medium Enterprises (FISME)