AUGUST 02, 2018

By Pritam Mahure,CA

FOR micro, small and medium enterprises (MSME), introduction of GST has either brought new challenges or aggravated the ones existing in the earlier regime. In this article, the author discusses key concerns of MSME sector which need immediate attention of the GST Council.

Facility of quarterly payment could be explored!

In GST regime, MSME sector is entangled in the web of working capital blockage which is severely hampering their businesses. For instance, many MSME service providers such as security services, manpower supply services, works contract services etc. are receiving payments only after a gap of after 4 months to 5 months from the date of invoice or completion of services. Meanwhile, along with routine organisational expenses (such as salary etc), MSME needs to pay GST.

Herein, it may be noted that the cumulative impact of GST is much more than 18%. For eg. ABC has turnover of say INR 1mn p.m. (GST liability thereon INR 1.80 lacs.) and debtor cycle is 4-5 months. Then, ABC will pay GST of INR 7.2 lacs (1.80 lacs * 4 months) whereas customer will pay after 4-5 months. For MSME having turnover of 1 mn, paying GST, on accrual basis, is practically challenging. Its pertinent to note that getting loan for paying GST is difficult, also interest adds to their cost burden.

In the earlier Service Tax regime, the aforesaid challenge was not that severe as reverse charge mechanism (RCM) was applicable on select services (such as security services, manpower supply services, works contract etc). Further, for small service providers (with turnover below 50 lacs), quarterly payment facility was available.

Given the aforesaid, GST Council may consider the option of quarterly payment of GST by MSME sector to ease their working capital burden.

Right to claim credit should be protected!

For enabling buyer to claim input tax credit (ITC), the GST law inter-alia prescribes that the vendor should deposit the GST as well as file GST returns (section 16 of CGST/SGST Act). Effectively, through this provision, the MSME sector, is burdened with the responsibility of ensuring that all their vendors pay GST and file returns.

This provision (section 16 of CGST Act) leads to a scenario wherein, say, a particular vendor of MSME is declared as insolvent or is not traceable (though recovery proceedings are initiated by the GST as well as other Authorities), then the genuine buyer, without any fault of his, could be penalised (through denial of input tax credit).Casting such onerous condition on MSME (and for that matter on every GST payer) leads to un-manageable burden.

It is pertinent to note that,erstwhile, CENVAT Credit Rules permitted claiming of credit based on invoice (provided goods/ services are received) without any condition to ensure payment of excise/ service tax by vendor. Through this mechanism, earlier, the right of excise/ service tax payer was effectively protected (unless it's a case of fraud/collusion).

In GST regime, all the returns as well as e-way bills are filed online, enabling the GST Authorities to track non-payers / non-filers and initiate appropriate proceedings than penalizing the bona fide buyers. Thus, while section 16 tries to protect right of revenue (i.e. Government), equal importance should be given to right to claim credit.

Curtail numerous compliances, disclosures requirements!

Mostly, MSME sector does not have manpower for proper accounting nor they have accounting software/ ERP. However, there are instances wherein the onerous and minute details such as details of procurement from supplier under composition scheme, exempt and nil rated supply, non-GST supply, etc. (in Table 5 in Form GSTR 3B) are required to be reported.

Similarly, in Form 3CD (Tax Audit report) under serial no. 44, a taxpayer is required to give break up of total expenditure incurred by the entity from the entities registered or not registered under the GST with bifurcation of exempt supplies, composition dealer purchases, etc. Additionally, requirement of annual returns, GST Audit, real time invoice upload (in future) would put the MSME sector with a severe compliance burden.

Given this, simpler return forms and requirement could be prescribed for MSME sector and gradually additional disclosure requirements could be prescribed.

Way forward

GST is constantly evolving. There are numerous changes in Rules, Act, rates, processes. Further, more than 421 notifications have been issued. In addition to this, there are press releases, FAQs, guides and flyers. These legal documents are quite detailed. Its practically not possible for MSME to peruse and decode the same (which are relevant for their business operations).

In the 2nd year of GST, it is an expectation by the industry that the GST Council analyses the aforesaid and takes appropriate holistic macro measures to address concerns of the MSME GST payers.

(The Author is a Chartered Accountant and has authored books on GST and Gulf VAT. The views expressed are strictly personal.)