Impact-of-GST

Impact of GST on SMEs: Myths you need to clear right now

  • 13th Jan, 2017

As rollout of GST is approaching, the nervousness of SMEs in India is increasing. This nervousness exists because it’s believed by SMEs that rollout of GST will hurt them and increase their tax burden. However, this perception is a myth, and in this article we’ll tell you why.

How Did This Perception Come into Being?

Before we explain why this perception is mythological, it’s important to understand how did it come into being. Currently Indian SMEs are exempted from Excise Duty. However, when Excise Duty is merged into GST, the exemption will come to an end. It’s this thinking that gave rise to this perception.

Why Is This A Myth?

First of all let’s take a look at some facts:

  • The exemptions apply to SMEs in manufacturing sector only. SMEs in service sector don’t enjoy any exemptions at all;
  • Even among SME manufacturers the exemption of Excise Duty is not provided on entire annual turnover. The inputs procured by SMEs are taxed and excise exemption is provided on value addition only;
  • No other exemptions are provided to SME manufactures too – they’re subject to CST, VAT, Entry tax and basically every other tax that they need to pay;
  • The combined tax incidence of these taxes is somewhere between 27% – 31%.

Now let’s do some math.

Let’s assume that annual turnover of an SME is 1 crore. According to current Small-Scale Industry (SSI) exemption value addition on part of this SME will be exempt from Excise Duty. Assuming that the value addition is 30% (and it’s a very healthy assumption), it comes down to Rs. 30 lakh. This amount will be exempt from Excise Duty of 12.5%. Upon calculation, this comes down to exemption of 375,000 INR. This is 3.75% of total annual turnover.

The remaining taxes apply as they would’ve been, which based on a 27% tax incidence comes down to Rs. 27 lakh.

However, post-GST they’ll have to pay only one tax at the rate of 20%. This is 7% lower than the current tax incidence, which means that they’ll have to pay only Rs. 20 lakh in taxes.

This is a gain of 7 lakh INR against a loss of 375,000 INR. In simple words, it’s a gain of Rs. 375,000 on annual turnover of 1 crore. Is it bad by any means?

Conclusion

As you can see from the example given above, the perception that GST will hurt SMEs is just a myth. You should not take it seriously because GST will not only save money to your business but also save a lot of time and resources that currently go in navigating through the maze of taxes.

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