ITNRODUCTION OF GST-

GST is the most ambitious and remarkable indirect tax reform in India’s post-Independence
history. Its objective is to levy a single national uniform tax across India on all goods and
services. GST has replaced a number of Central and State taxes, made India more of a
national integrated market, and brought more producers into the tax net. By improving
efficiency, it can add substantially to growth as well as government finances. Implementing a
new tax, encompassing both goods and services, by the Centre and the States in a large and
complex federal system, is perhaps unprecedented in modern global tax history. GST is a tax
on goods and services with comprehensive and continuous chain of set-off benefits up to the
retailer level. It is essentially a tax only on value addition at each stage, and a supplier at each
stage is permitted to set-off, through a tax credit mechanism, the GST paid on the purchase of
goods and services. Ultimately, the burden of GST is borne by the end-user (i.e. final
consumer) of the commodity/service. With the introduction of GST, a continuous chain of
set-off from the original producer’s point and service provider’s point up to the retailer’s
level has been established, eliminating the burden of all cascading or pyramiding effects of an
indirect tax system. This is the essence of GST. GST taxes only the final consumer. Hence
the cascading of taxes (tax-on-tax) is avoided and production costs are cut down. As already
noted, prior to the introduction of GST, the indirect tax system of India suffered from various
limitations. There was a burden of tax-on-tax in the pre-GST system of Central excise duty
and the sales tax system of the States. GST has taken under its wings a profusion of indirect
taxes of the Centre and the States. It has integrated taxes on goods and services for set-off
relief. Further, it has also captured certain value additions in the distributive trade. There is
now a continuous chain of set-offs which would eliminate the burden of all cascading effects.
Presently, services sector in India constitutes a tax base with vast potential which has not
been exploited as yet. It is in this context that GST is justified as it has subsumed under it
almost all the services for the purpose of taxation. Since major Central and State indirect
taxes have got subsumed under GST, the multiplicity of taxes has been substantially reduced
which, in turn, would decrease the operating costs of the country’s tax system. The
uniformity in tax rates and procedures across the country will go a long way in reducing
compliance costs. In a nutshell, GST is a comprehensive indirect tax levy on manufacture,
sale and consumption of goods as well as services at the national level. GST is an indirect tax
for the whole of India to make it one unified common market. GST is designed to give India
a world class tax system and improve tax collections. It would end the long-standing
distortions of differential treatment of manufacturing sector and services sector. GST will
facilitate seamless credit across the entire supply chain and across all States under a common
tax base.

Evolution of GST in India

In 2000, the Vajpayee Government started discussion on GST by setting up an Empowered
Committee, headed by Asim Dasgupta (West Bengal Finance Minister) to design the GST
model. Thereafter, the Task Force on Implementation of the Fiscal Responsibility and Budget
Management Act, 2003 (Chairman: Vijay Kelkar) recommended the removal of all inefficient
and distortionary taxes so that India obtains the efficiencies of a single national tax, and
suggested a comprehensive GST based on VAT principle. The idea of moving towards a GST
was proposed in 2005 by the then Union Finance Minister, P. Chidambaram in his budget
speech for the year 2005-06 where he observed that the entire production-distribution chain
should be covered by a goods and services tax that encompasses both the Centre and the
States. He reiterated his idea in 2006-07 budget speech and proposed April 1, 2010 as the
date for introducing GST. Towards this objective, an Empowered Committee (EC) of State
Finance Ministers was to work with the Central Government to prepare a roadmap for
introduction of GST. The final version of the report of EC was presented in the form of ‘A
Model and Roadmap for Goods and Services Tax in India’ on April 30, 2008. After receiving
comments on the report from Government of India and concerned officials of the State
Governments and taking into account their recommendations, the EC released the First
Discussion paper on Goods and Services Tax in India on November 10, 2009 to obtain the
inputs of industry, trade bodies, and people at large. On 22nd March 2011, the Constitution
(115th Amendment) Bill was introduced in the Lok Sabha to operationalize the GST and
enable Centre and States to make laws for levying of GST. However, the Bill lapsed with the
dissolution of the 15th Lok Sabha. Thereafter, on 19th December, 2014 the Constitution
(122nd Amendment) Bill, 2014 was introduced in the Lok Sabha to address various issues
related to GST. It is noteworthy that the introduction of GST required a Constitutional
amendment as the Constitution did not vest express power either in the Central Government
or State Government to levy tax on the ‘supply of goods and services’. While the Centre was
empowered to tax services and goods up to the production stage, the States had the power to
tax sale of goods. Since the GST regime requires goods and services to be simultaneously
taxed by both the Central and State Governments, a Constitutional amendment was needed.
The Constitution (122nd Amendment) Bill, 2014 was passed by the Lok Sabha on 6th May,
2015 after which the Rajya Sabha passed the Bill with 9 amendments on 3rd August, 2016.
The Lok Sabha then passed the modified Bill on 8th August, 2016. After getting approval of
half of the States, it was sent to the President for his assent which was given on 8th
September, 2016. Thus the road to GST rollout was cleared and the process of enactment was
completed.

Meaning and Defination of GST-

The full form of GST is Goods and Services Tax. It was first introduced in the Budget Speech
presented on 28th February 2006. It laid the foundation for a complete reform of India’s
indirect tax system. Finally implemented on 1st July 2017 as the Goods and Services Tax
Act, the indirect taxation system thus went through a chain of amendments since its
inception.

With this tax reform, GST replaced multiple indirect taxes that were levied on different goods
and services. The Central Board of Indirect Taxes and Customs (CBIC) is the regulatory
body governing all changes and amendments regarding this tax.

GST definition is easy to decode.It is a destination-based,multi comprehensive tax levied at

each stage of value addition. Having replaced multiple indirect taxes in the country, it has
successfully helped the Indian Government achieve its ‘One Nation One Tax’ agenda.

The tax is levied on goods and services sold within India’s domestic boundary for
consumption. Implemented by a majority of nations worldwide with respective
customisations, the tax has been successful in simplifying the indirect taxation structure of
India.

GST is levied on the final market price of goods and services manufactured internally,
thereby reflecting the maximum retail price. Customers are required to pay this tax on a
purchase of goods or services as an inclusion in their final price. Collected by the seller, it is
then required to be paid to the government, thus implying the indirect incidence.

The GST rates on different goods and services are uniformly applied across the country.
Goods and services have, however, been categorised under different slab rates for tax
payment. While luxury and comfort goods are categorised under higher slabs, necessities
have been included in lower and nil slab rates. The main aim of this classification is to ensure
the uniform distribution of wealth among residents of India.

Salient Features of GST in India

The salient features of GST in India have been highlighted below:

1. Supply as the base: GST would be applicable on “supply” of goods or services as against
the erstwhile concept of tax on the manufacture of goods or on sale of goods or on provision
of services.

2. Destination-based tax: As opposed to the previous principle of origin-based taxation, GST

would be based on the principle of destination-based consumption taxation.

3. Dual GST: The Centre and the States would simultaneously levy tax on a common base.
The GST to be levied by the Centre would be called Central GST (CGST) and the GST to be
levied by the States (including Union territories with legislature) would be called State GST
(SGST). Union territories without legislature would levy Union territory GST (UTGST).

4. Inter-State supply: An integrated GST (IGST) would be levied on inter-State supply of

goods or services. This would be collected by the Centre so that the credit chain is not
disrupted. Imports of goods and services would be treated as inter-State supplies and would
be subject to IGST. (This would be in addition to applicable customs duties).

5. Central taxes subsumed: GST would subsume the following taxes that were levied and
collected by the Centre: Central excise duty; Additional duties of excise; Additional duties of
customs (commonly known as countervailing duty); special additional duty of customs
(SAD); service tax; and cesses and surcharges insofar as they relate to supply of goods or
services.

6. State taxes subsumed: GST would subsume the following taxes that were levied and
collected by the State: State VAT; Central Sales Tax; purchase tax; luxury tax; entry tax;
entertainment tax (except those levied by the local bodies); taxes on advertisements; taxes on
lotteries, betting and gambling; and State cesses and surcharges insofar as they relate to
supply of goods or services.

7. Applicability: GST would apply to all goods and services except alcohol for human
consumption. GST on five specified petroleum products (crude, petrol, diesel, aviation
turbine fuel, natural gas) would be applicable from a date to be recommended by the GST
Council.
 1.Boosts Foreign Investment and improves overall investment climate: -Tax litigation
in certain high profile cases under income tax act has contributed to a large extent in creating
a very downbeat perception of our country’s taxation system and many allegations were
raised over its certainty

2.Single assessing authority: One of the important change that businesses will see in
the GST regime is that they need not have to deal with multiple tax authorities. Like in the
earlier tax regime, a person would have to approach multiple tax authorities like Central
Excise, VAT, Service Tax etc.

3.Increased certainty/ Reduced litigation: Under earlier indirect tax regime, the
main reason for tax litigation was due to lack of clarity in the law that makes it susceptible to
multiple interpretations, Further, the existence of multiple taxes on the same tax base led to
existence of conflicting opinions from both centre and state tax authorities across the country
which has contributed to multiplicity of litigation

4.Erosion of parallel economy: With some bold reforms like submission of invoice
wise information through electronic mode, fairly lower tax rates, system of compliance
ratings being given to all the businesses, a nation-wide e-way bill system, Concept of auto-
matching of vendor/ customers invoices and seamless flow of input taxes credit etc.

5.Reduced corruption: For the first time in the history of a taxation system of this
country, we have already witnessed that hardly any assesses had to pay bribe to obtain
registration under GST.
 6. Downslide of prices: Currently, businesses were not able to avail the credits of
various taxes paid. For instance, CST Paid was becoming fully cost, Excise Duty and Service
Tax was not available as credit to traders, VAT was not available as credit to Service
providers and various cesses like SBC etc were only adding to the cost for the businesses.
With implementation of GST, all these cascading of taxes would come down substantially
and the thereby prices of goods/ services should only slide downwards. Further, not just taxes
but if transactions are properly structured and the benefit derived is properly passed on at
each levels then the prices of goods and services can further trim down.

7.Common national market throughout the country: GST brings in the common
market meaning thereby earlier every state tax law was different and had its own rules, tax
rates, procedures etc. leading to high scope of tax planning and manipulation practices to
avoid/ reduce taxes. In many cases, purchasing from inter-state and paying only 2% CST was
more beneficial and in some cases procuring locally even at higher prices with local VAT
was more beneficial which eventually led to high unnecessary purchase planning such as
creation of depots, stock transfers etc. All these planning tools has fall on its foot in the GST
regime and businesses can now plan their purchases purely based on merit of the transaction
and a taxation factor would not have a great influence in procurement decisions to a large
extent.

8.Increase in employment opportunities: After implementation of the new tax

regime, the possibilities of job expansion in the Indian economy has increased as GST is a
promising opportunity. It is learnt that the need for skilled accountants and tax consultants
has increased substantially.

Disadvantages of GST-

1. Not a one nation one tax in spirit: An ideal GST would have been one where
only one law would have been framed and only one authority would have been
 assigned with the accountability of framing, governing and regulating the GST
law.
2. Multiple Tax rates: Presently there are 7 standard tax rates and multiple rates of
cess provided for various goods and services which only open the Pandora box of
classification disputes and unnecessary confusion.
3. GST Portal issues: The complete electronic means of reporting transactions in
GST is a good idea but it would have been better if the same is implemented with
proper system in place.
4. High compliance burden: Compliance under GST is very high due to filing of
three tax returns in a month. Not only that if a person is doing business in multiple
states then it needs to obtain multiple registrations for each state and separate GST
returns needs to be filed for each state. This structure of GST has increased
compliance burden and it is causing pain mainly for compliances mainly for small
businesses which cannot spend high costs on support functions such as accounting
and taxation etc.
5. Elimination of local tax incentives/ schemes: In earlier tax regime many
investment based tax incentives were given by central and state governments to
make the area business friendly and encourage investments by virtue of fiscal
policies.
6. Working capital blockage: Working capital is the fuel of every business, it is the
money available for your company’s day-to-day operations, and it reflects the
short-term financial health of the company. Exporters have face the brunt of
working capital to the core with refunds being blocked so much so that even today
post 200 days of implementation of GST, exporters are not able to smoothly claim
refunds, same is the position for traders who are not able to claim the transitional
benefit due to non-availability of the required forms on the portal. Further, in
service sector, tax rate will be 18% under GST as compared to 15% under earlier
regime leading to increased blocking of working capital for certain businesses
where the credit period is high.
7. Elimination of local tax incentives/ schemes: In earlier tax regime many
investment based tax incentives were given by central and state governments to
make the area business friendly and encourage investments by virtue of fiscal
policies. With implementation of GST, it is seen that the tax incentives in indirect
taxes are no more made available by the governments and the earlier existing tax
incentives have also been discontinued and pruned. This has caused a huge worry
to industries which have set up its business in various states especially in north
eastern states based on various tax incentives promised by the governments.
8. Disconnect from Foreign Trade Policy: Foreign Trade Policy (FTP) is a
beneficial piece of legislation that provide incentives to various export and import
transactions thereby encouraging foreign trade. Earlier such incentives were also
available on Excise duty, service tax, CVD, SAD paid, however it seen that
similar incentives are not continued with IGST. Further, many schemes and
 benefits as available to EOU’s, deemed exports, advance license etc. are not fully
linked to the GST regime leading to delinking of FTP with GST

Objective of GST-

The main objectives of GST are as follows:

 It helps create a common market in India with a uniform taxation system and curb tax
evasion in the country. The laws for GST are far more stringent compared to the
erstwhile indirect tax laws. The aim is to have a nationwide surveillance system under
GST, making it easier to catch defaulters and tax evaders.
 It removes the cascading effect of the indirect taxes on a single transaction. It also
allows the setting off for prior taxes that are related to the same transactions in the
form of the input tax credit. Under GST, the tax is applicable only on the net value
added during each stage of the supply chain.
 The government aims to reduce the need for multiple documentation under the
previous taxation system by introducing a consolidated tax like GST. The idea is to
help companies with an uncomplicated tax filing procedure that will improve their
efficiency and cut down the overall costs associated with business processes.
 It helps to subsume most indirect taxes into a single taxation system that reduces the
burden of compliance for taxpayers and eases the government’s tax administration
process. The main aim of this taxation system is to simplify the entire process of
paying taxes and simplify compliance. Compared to the erstwhile indirect taxes,
almost the whole GST process, including registration, returns filing, refunds and e-
way bill generation, has shifted to the online mode.
 One of the primary objectives of GST is to widen the tax base in India. Most of the
erstwhile indirect taxes had their threshold limits for registration based on the
turnover of a business. Under GST, there is greater scope for an increase in the
number of firms coming under the tax registration net because it includes all
transactions related to goods and services in the country.

Structure of GST–

There are four categories of indirect taxes under GST:

1. Central Goods and Services Tax (CGST).

2. State Goods and Services Tax (SGST).

3. Union Territory Goods and Services Tax (UTGST).

4. Integrated Goods and Services Tax (IGST)

In the context of India, it is important to note that both the state and the centre need to benefit
from GST. With this aim in mind, the GSTC introduced a dual GST mode that distributed
powers to both Centre and States to levy the tax concurrently.

1. Central Goods and Services Tax (CGST)- Central GST or CGST is the tax
incorporated by the central government. This tax is imposed on the movement of
goods and services within the state.

2. State Goods and Services Tax (SGST)- State GST or SGST is the tax levied by the
state government. This tax is appropriated in the state where the transaction occurs or
where the goods are sold and consumed.

3. Union Territory Goods and Services Tax (UTGST)- If there is a supply of goods and
services within the Indian Union Territories, which the central government governs, a
tax called Union Territory GST or UTGST is imposed.

4. Integrated Goods and Services Tax (IGST)- For interstate supplies, there is a tax
included in the GST structure in India called the integrated GST or IGST. This tax is
imposed on all the goods and services between two or more states or union territories.

RATE OF GST-

Rate of GST varies

from product to
product. There are 4
popular rates of GST
i.e.
 (a) 5% (2.5% CGST + 2.5% SGST)
(b) 12% (6% CGST + 6 % SGST)
(c) 18% (9 % CGST + 9 % SGST) and
(d) 28% (14 % CGST+14 % SGST)

Note:

(a) Special Rate of GST on Jewellery: It is 3% in case of Gold, Silver, Platinum etc.

(b) In case of Rough diamond rate of GST is 0.25%

Chapter-2

INTRODUCATION OF MSMES

INTRODUCTION TO MSMEs

What are Micro, Small & Medium Enterprises?

Definitions of Micro, Small & Medium Enterprises In accordance with the provision of
Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 the Micro, Small
and Medium Enterprises (MSME) are classified in two Classes: 1. Manufacturing
Enterprises-the enterprises engaged in the manufacture or production of goods pertaining to
any industry specified in the first schedule to the industries Development and regulation Act,
1951 or employing plant and machinery in the process of value addition to the final product
having a distinct name or character or use. The Manufacturing Enterprises are defined in
terms of investment in Plant & Machinery. 2. Service Enterprises:-The enterprises engaged in
providing or rendering of services and are defined in terms of investment in equipment. The
limit for investment in plant and machinery / equipment for manufacturing/service
enterprises, as notified, vide S.O. 1642(E) dtd.29-09-2006 are as unde

On July 1, 2017 India implemented a dual GST system - central GST (CGST) levied by the
union government and provincial, or state-GST (SGST) levied by the state (i.e., provincial)
governments. The implementation of the GST is beset by many challenges resulting from the
federal structure of the country. The micro, small, and medium enterprises (MSME) sector is
the backbone of India’s economy as these enterprises account for about 110 million jobs,
contribute about 29% of the country’s gross domestic product1 , and makeup 48.1% of total
exports. There are more than 63 million MSME engaged in the manufacturing, services, and
trade sectors, more than half of which are in rural areas. The MSME sector is the second-
largest employment generating sector in India after agriculture. In this study, we analyze the
key challenges faced by the MSME sector in India following the implementation of GST. We
will also make certain policy recommendations to reduce the compliance burden of GST in
this sector.

DEFINATION OF MSME

The MSME is largely used to describe a small business in the private sector. The World Bank
has identified three criteria viz., number of employees, asset size and annual sales for
defining MSME. If a business unit satisfies at least two of the three criteria it is recognized as
MSME by the World Bank. The table 1 provides the three criteria based World Bank
definition of MSME.

Table 1: World Bank Definition of MSME

Enterprise size Employees Assets (US $) Annual Sales (US $)

Micro 10 10000 10000

Small 50 3 mn. 3 mn.
Medium 300 15 mn. 15 mn.

While India will now be using investment and annual turnover as the criteria to classify
MSMEs, globally, the number of employees is the most widely used criteria for classifying
MSMEs. The Reserve Bank of India's Expert Committee on MSMEs (2019) cited a study by
the International Finance Corporation in 2014 which analysed 267 definitions used by
different institutions in 155 countries.[5],[6] According to the study, countries used a
combination of criteria to classify MSMEs. 92% of the definitions used the number of
employees as one of the criteria. Other frequently used criteria were: (i) turnover (49%), and
(ii) value of assets (36%). 11% of the analysed definitions used alternative criteria such as:
(i) loan size, (ii) years of experience, and (iii) initial investment.

In our country, prior to 2006, the definition provided by the Industrial Development and
Regulation (IDR) Act, 1951was adopted to identify small industries. They included tiny,
cottage, traditional, and village enterprises. They were collectively termed as Small Scale
Industries (SSIs) under the Act.They were defined in terms of “number of employees”. But
the government experienced difficulty in collecting reliable data on the number of employees.
Hence,the MSME Development Act 2006 (MSMED) took investment as a criterion for
defining the MSMEs. This was because it was relatively easy to measure and verify
investment. According to a report published in 2014, there were 267 definitions of the
MSMEs in 155 economies. However, about 90 percent of the institutions across the world
take number of employees as the basis for defining a MSME. Many other definitions are
based on turnover and value of assets. The other variables considered for defining a MSME
include loan size, years of experience, type of technology, size of the manufacturing space,
and initial investment amount etc.The table 2 shows the Indian definition of MSME as per
MSMED Act, 2006.

Table 2: Definition of MSME (MSMED Act.)

Initial investment in Plant and Machinery (in Rs.)

Category/ Enterprise Micro Small Medium
size
<25,00,000 25,00,000 to 5,00,00,000 to
Manufacturing 5,00,00,000 10,00,00,000
Services <10,00,000 10,00,000 to 2,00,00,000 to
2,00,00,000 5,00,00,000
Thus, the MSMED act. distinguished between manufacturing enterprise and service
enterprise while defining a MSME. The investment limit for recognizing an enterprise under
MSMEs was less for service providers as compared to manufacturers.The RBI in its “Report
of the Experts Committee on MSMEs, 2019” observed that the definition based on
investment limits in plant and machinery/ equipment which were decided in 2006 does not
“reflect the current increase in price index of plant and machinery/equipment”.To their small
scale of operations and informal organisation, MSMEs do not always maintain proper books
of accounts. This essentially results in their not being classified as MSMEs.

Accordingly, the government amended the MSME definition by adopting composite criteria
of classification for manufacturing and service units. According to the new definition of
MSMEs, there will be no difference between manufacturing and service sectors. Further, a
new criterion of turnover has been added in the previous criteria of classification which was
based only on investment in plant and machinery. Thus, the new definition of MSMEs is as
follows:

(i) A micro enterprise, where the investment in plant and machinery or

equipment does not exceed one crore rupees and turn over does not
exceed five crore rupees;
(ii) (ii) A small enterprise, where the investment in plant and machinery or
equipment does not exceed ten crore rupees and turn over does not exceed
fifty crore rupees; and
(iii) (iii) A medium enterprise, where the investment in plant and machinery or
equipment does not exceed fifty crore rupees and turnover does not
exceed two hundred and fifty crore rupees.

Look at table 3 for revised definition.

Table 3: MSMED Act Revised Definition of MSME w.e.f.1.7.2020

Initial investment in Plant and Machinery (in Rs.)

Investment and Micro Small Medium
Turnover
Investment in Plant <1,00,00,000 <10,00,00,000 <50,00,00,000
and Machinery or
Equipment (Rs.)
Turnover excluding <5,00,00,000 <50,00,00,000 <250,00,00,000
exports (Rs.)

In brief, the amended definition of MSMEs has not shown any distinction between
manufacturing and service providing enterprises. Further, a new criteria turnover is added to
the definition. Furthermore, the new definition significantly enhanced the limit of investment
in plant and machinery for recognition of MSMEs.This amendment to the definition of
MSME is helpful in many ways. The Government felt that the MSMEs including even the
very successful ones were not making attempt to grow for the fear that if they outgrow the
size of what is defined as the MSME,they would lose the benefits that they get. Therefore,
MSMEs preferred to remain within the definition rather than grow. This is preventing them
from reaping the benefit of economies of scale. Hence, the revision of definition would shed
the fear and help the enterprise to grow and realize the advantages of economies of scale. The
removal of distinction between manufacturing and service sector is done to facilitate the ease
of doing business. This definition helps businesses such as retail to claim the benefits of
MSME.There is no need for any MSME to prove that it is basically a manufacturing unit to
claim the benefits. Inclusion of the criteria of turnover in the recognition of MSME is also
done with a purpose. Currently there is no check on the investment in plant and machinery
claimed by an enterprise and is based on self-authentication. With the definition requiring
turnover, firms would need to register on GST thereby making them eligible for the scheme.
Hence, the additional inclusion of turnover may help in bringing in better authentication of
the MSME.The Government decided not to count the turnover with respect to exports in the
limits of turnover for any category of MSME units whether micro, small or medium. This is
yet another step towards ease of doing business.

FEATURES OF MSMEs

MSMEs exhibit special features which are distinct from large enterprises. Some such features
are discussed in this section.

(i) Limited Investment:In MSMEs, particularly micro and small enterprises, capital is
supplied by an individual or a small group of individuals. As per a census of small scale units
in India, micro and small business enterprises are run mostly as sole- proprietorship or
partnership model.

(ii) Personal Character/Owner-Management:A micro and small businesses are identified

with its owners; who themselves act as managers. Managers as such have maximum
motivation to work; as they themselves happen to be the owners also.

(iii) Labour-Intensive:Micro and small enterprises are fairly labour intensive with
comparatively smaller capital investment than the larger units. With any given investment,
employment possibilities would be greater in comparison with corresponding factory system.
(iv) Unorganized Labour:Micro and small business enterprises employ less number of
workers as compared to big business enterprises. Workers of these units do not form labour
unions and remain unprotected.

(v) Local Area of Operations:The area of operations of micro and small enterprises is
generally local as they have less capital and less marketing facilities at their disposal. There is
a local touch between employer and employees and between employer and customers. These
days products of some small scale enterprises are also exported to many countries of the
world.

vi) Flexibility: MSMEs are more adaptable to the changing business environment. So in case
of amendments or unexpected developments, they are flexible enough to adapt and carry on,
unlike large industries.

(vii) Use of Local Resources: Micro and small business units use indigenous resource. As a
result they can be located anywhere subject to the availability of these resources like raw
materials, labour etc.

(viii) Gestation Period: Compared to large units, a micro industrial unit has a lesser
gestation period, i.e. the period after which the return on investment starts.

(ix) Sustainable Development Goals (SDGs): MSMEs are best suited as compared to large
enterprises for achieving the SDGs such as creation of employment to lift people out of
poverty.

CHALLENGES IN GROWTH AND DEVELOPMENT OF MSME SECTOR IN

INDIA

The growth and contribution of MSME sector in India has not been to the desired extent due
to several challenges faced by the sector. Some of the major challenges as pointed out by the
expert committee of RBI on the MSME sector are as follows: Inadequate Policy and
Institutional Interventions:There are many institutions in India to support and help the MSME
sector.The Ministry of MSME formulates policies for overall growth of the sector. The
Office of Development Commissioner MSME implements these policies. As mentioned
earlier, MSMED Act, 2006 contains several provisions for the promotion and development of
the MSME sector. For financing MSME the central government established Small Industries
Development Bank of India (SIDBI). Broad policies for facilitating financial support to
MSMEs are formulated by RBI and Securities Exchange Board of India (SEBI).However,
there are no clear cut policies to address the problems of the sector in the following areas:
a) Infrastructure development: Due to infrastructural bottlenecks the MSMEs are
not able to compete with large industry in the domestic sector and also not able to
enter global markets. The basic amenities such as work sheds, tool rooms, product
testing laboratories, electricity, rural broadband and innovation hubs are not
adequately available to the MSMEs. This is acting as a deterrent to the growth of
the sector. The development of MSME clusters is done mainly by Government
organizations and the private investment is not coming for the development of
these clusters.

b) Formalization of the sector: As per 73rd round of National Sample Survey

(NSS), there are 63.39 million MSMEs in the country. However, a large number
of MSEs exist in the informal sector and are not registered with any statutory
authority. Reasons for lack of registration are many and varied. For
nano/household type of enterprises, in their view, not obtaining registration is an
escape from official machinery, paperwork, costs etc. For them, it is perhaps “the
art of not being governed”. Registration offers them little by way of tangible
benefits. There are other MSMEs who, upon reaching a minimum size seek
legitimacy and acknowledgement of their existence to seek benefits or credit.
While Udyog Aadhaar offers a simple mode of registration, it is usually not
enough. Often, more is needed e.g., Shops and Establishments, PAN, GST, etc.
Lack of formalization impacts the sector in terms of development.

c) Technology adoption: Many MSMEs are not able to adopt new technologies due
to paucity of funds. This has been adversely affecting the competitiveness of these
units both in domestic and international markets.
d) Backward and forward linkage: MSMEs face the challenges both in having
access to quality raw material and market for finished products. National Small
Industries Corporation (NSIC) through market assistance scheme facilitates
MSMEs to discover markets for their products.The Government e-Marketplace
(GeM) portal has enabled MSMEs to connect with buyers from Public Sector
Undertakings (PSUs) and Government Departments. However, very few MSMEs
are availing benefits under these schemes. MSEs find it difficult to access proper
market for selling their products due to their lack of scale and in-house
capabilities. Inaccessibility to remunerative market affects their growth and
sustainability. In order to support MSMEs in selling their products at a
competitive price, Public Procurement Policy for MSMEs was introduced in the
year 2012. The policy was revised in November, 2018, and came into effect from
April 1, 2019. The objective of Policy is promotion and development of MSMEs
by supporting them in marketing of their products and services. However,
complexity of the public procurement system and its process deters MSMEs to
participate in public procurement. MSMEs face constraints in terms of financial,
technical and administrative capacities to access procurement opportunities,
prepare tender documents, apply the procedures and execute the contracts.

e) Credit gap: Due to non-registration, many MSMEs lack access to formal credit.
Further, banks face challenges in credit risk assessment of MSMEs as these units
do not have financial information, historical cash flow data etc. Further, very few
MSMEs are able to attract private equity support and venture capital financing.

f) Timely payments to MSMEs and their effective implementation: Most

MSMEs have been facing problems of working capital due to non-payment of
dues by the customers. Though the Government initiated several steps to address
this problem, problems still exist in implementation of these initiatives. Buyers
tend to use MSMEs as an alternative to banks. In order to delay payments, buyers
raise objections or point errors in submitted bills. Credit notes or adjustment notes
are often used to avoid cash payment. Strict legislative measures of payments
within fixed days (and penalty in the form of charging interest) have had limited
effect as MSMEs do not complain for fear of loss of future business. Electronic
bill discounting systems (such as TReDS) have provided a partial solution but the
problem persists.

g) Availability of authentic data at one place on MSMEs: Implementation of

Goods and Services Tax (GST) has made turnover data available at a single
network about MSMEs registered under GST. However, this data alone is not
sufficient to identify a MSME. The data on investments in plant and machinery is
not available in GST network. Income tax data base contains only information
relating to financials of the units. Udyam portal contains only registration related
information of MSMEs. There is no single interface available for the lenders to
access and map data on MSMEs. In the absence of authentic source of data on
 MSMEs, the lenders have to primarily rely upon manual information furnished by
the units

h) Imperfectinformation andcapacitygaps: Entrepreneurs and MSMEs suffer from

lack of information including market information. Many entrepreneurs and
MSMEs also struggle to find the support needed to strengthen their business
management, marketing, record and book keeping, strategic and financial
planning to be able to grow, gain market share and also handle shocks. Lack of
professional business management skills may further limittheir capacity to adopt
research and development (R&D) and innovation in promoting productivity. This
would ultimately affect growth of MSMEs.

Role of MSMEs in Indian Economy

The Micro, Small & Medium Enterprises (MSMEs) have been contributing significantly to
the expansion of entrepreneurial endeavours through business innovations. The MSMEs are
widening their domain across sectors of the economy, producing diverse range of products
and services to meet demands of domestic as well as global markets. As per the data available
with Central Statistics Office (CSO), Ministry of Statistics & Programme Implementation,
the contribution of MSME Sector in country’s Gross Value Added (GVA) 1 and Gross
Domestic Product (GDP) 2, at current prices for the last five years is as below:

Contribution of MSMEs in Country’s Economy at Current Price

(Figures in Rs. Crores adjusted for FISIM3 at current prices)

Year MSME GVA Growth Total GVA Share of Total GDP Share of
(%) MSME in MSME in
GVA (%) GDP (in %
2011-12 2583263 - 8106946 31.86 8736329 29.57
2012-13 2977623 15.27 9202692 32.36 9944013 29.94
2013-14 33430091 12.27 10363153 32.26 11233522 29.76
2014-15 36581969 9.43 11481794 31.86 12445128 29.39
2015-16 3936788 8 7.62 12458642 31.60 13682035 28.77

Source: Central Statistics Office (CSO), Ministry of Statistics & Programme Implementation
and MSMS Annual Report 2017-18

The contribution of Manufacturing MSMEs in the country’s total Manufacturing GVO

(Gross Value of Output) at current prices has also remained consistent at about 33%, i.e. one
third during the last five years.

1. Gross Value Added (GVA): It may be noted that estimates of GVA had been
prepared at factor cost in the earlier series (base year 2004-05), while these are being
prepared at basic prices in the new series (2011-12). GVA estimated by production
approach: (GVA = Output – Material Inputs) and GVA estimated by income
approach: (GVA = Compensation of Employees + Operating Surplus +CFC)
2. Gross Domestic Product (GDP): GDP is derived by adding taxes on products, net of
subsidies on products, to GVA at basic prices.
3. FISIM stands for Financial Intermediation Services Indirectly Measured. In the
System of National Accounts it is an estimate of the value of the services provided by
financial intermediaries, such as banks, for which no explicit charges are made;
instead these services are paid for as part of the margin between rates applied to
savers and borrowers. The supposition is that savers would receive a lower interest
rate and borrowers pay a higher interest rate if all financial services had explicit
charges.
4. . Gross Value Output (GVO): Manufacturing Output is defined to include the ex-
factory value, (i.e., exclusive of taxes, duties, etc. on sale and inclusive of subsidies
etc., if any) of products and by-products manufactured during the accounting year,
and the net value of the semi-finished goods, work-in-process, and also the receipts
for industrial and non-industrial services rendered to others, value of semi-finished
goods of last years old in the current year, sale value of goods sold in the same
condition as purchased and value of electricity generated and sold.

CHAPTER-2
LITERATURE REVIEW
Abstract

The introduction of Goods and Services Tax (GST) on 1st July 2017 has revamped the
tax structure carving a new path for the Indian economy. The new tax regime was
envisioned to be free of problems of the previous tax system but since its proposal, it
has received mixed reviews from industries, academia, and others. With extensive
changes aimed at One Nation One Tax, it has left a massive impact on Small and
Medium Scale Enterprises. The paper critically analyses impact of GST on Small Scale
Enterprises specifically in Karnataka. Existing literature says GST shall reduce the cost
of doing business, increase transparency, decrease the price of products, improve
tax compliance and ease of doing business. This paper proves these assertions
through primary data research and further identifies the need for reforms
concerning job work, penalties for non-payment of GST, dual administration, and
issues pending from previous tax regime. It has also clearly established that the
composition scheme has been a non-performer and the reverse charge mechanism
must be re-introduced later or revamped to balance its costs and benefits. Thus the
study has implications for policymakers, industries, and academia and also provides
a better understanding of the new tax system.
Introduction
The introduction of GST has been heralded as a landmark in the history of the Indian tax
system. In 2014, the One Hundred and Twenty-Second Constitutional Amendment Bill was
introduced in Lok Sabha and this led to the enactment of the One Hundred and First
Constitutional Amendment in August 2016 to include GST in the Constitution (Bangar &
Bangar, 2017). From 1 July 2017, GST came into existence in India. All the Central and State
taxes like the excise duty, service tax, entertainment tax, luxury tax, purchase tax,
surcharges, and cesses were subsumed under GST. Currently,
GST is levied on every product except petroleum, alcohol, tobacco, and stamp duty on real
estate in four slabs of 5, 12, 18, and 28 percent. Most of the daily use articles have zero GST.
GST is a single and indirect system of taxation that is levied on ‘supply’ of goods and services
or both (it includes sale, transfer, barter, exchange, license, rentals, lease or disposal made
or agreed to be made for a consideration by a person in the course of business) except
alcoholic liquor for human consumption, right from the manufacturer to the consumer
(Bangar & Bangar, 2017). Under GST, only value addition will be taxed and the burden of tax
is to be borne by the consumer. Moreover, credit of taxes paid at the previous stages is
available as a set-off. Further GST is a consumption-based tax i.e. the tax would accrue to the
taxing authority which has jurisdiction over the place of consumption which is also termed
as the place of supply (Bangar & Bangar, 2017). In India, the system of GST is unique as there
exists a dual GST. Central Goods and Services Tax (CGST) and State or Union Territory Goods
and Services Tax (SGST/ UTGST) is levied simultaneously for supplies within State or Union
Territory and is payable to the Central government and the State government or Union
Territory respectively. The Integrated Goods and Services Tax (IGST) is applicable for inter-
state transactions and is payable to the Central government. Further imports are liable to
IGST in addition to customs duties while exports are zero-rated. Also, certain goods like
petroleum products and electricity are exempted to be taxed at a later stage. Though GST
seems to be very similar to the previous Value Added Tax system, there are certain unique
characteristics like GST being a consumption-based pan-India tax system (tax rates are
uniform throughout the country). Hence several advantages or benefits were envisaged as
an implication of GST. Reduction in tax incidence was acclaimed as the biggest advantage of
GST for consumers. For traders, the system of input credit has been a significant provision as
it helped them to pass on the lower tax to the customers and also reduce overall costing
(Anonymous, 2019). Apart from this, GST has also led to the formation of a common national
market, increased ease of doing business for industries, benefits to small taxpayers, a self-
regulating, transparent tax system, complete digitalisation of tax collection, assessment, and
audit through the GST network (GSTN), and reduction in multiplicity of taxes. It has been two
years since the implementation of GST and the government has stated that GST revenue has
been high and even more than estimated. But now reports show that revenue collections
have been falling. In the 2018-19 Budget, GST collection was estimated at Rs 7.4 lakh crore
which was revised later in 2019-20 interim budget to Rs 6.4 lakh crore. But the finance
ministry's figures show that the actual GST collection for 2018-19 was around Rs 5.8 lakh
crore, a significant shortfall of over 20 percent compared to budget projection (Anonymous,
2019). However it’s only close to two years since the implementation of GST and hence it is
very early to objectively analyse the impact of the implementation of GST but, the question
about whether the economy is headed in the right direction in the backdrop of GST is
imperative and can be answered by analysing the impact of GST on various sectors in the
economy today. Particularly, it is necessary to focus on and critically analyse its positive and
negative effects on Small and Medium Scale
Enterprises (SME’s), which are envisioned to be the keystone of the ‘Make in India’
programme. SME’s are the driving force of the economy. They employ nearly eleven crore
people through the operation of 5 crore enterprises producing a heterogeneous basket of
about 7,000 different products in India (Singh, 2015). In the era of climate change, this
sector is likely to absorb unemployed from the agricultural sector also. But current trends in
this sector and the state of the economy seem to provide bleak prospects for the
manufacturing industry in India. SME’s have been languishing under financial, credit, and
modernisation problems. It is said to have been working like an unorganised family business
with non-tax compliance and hence not providing its workers with social security benefits.
Thus the flagship ‘Make in India’ scheme shall deliver on its promises only if SME’s are fully
formalised and records high rates of tax compliance. Here is where GST and the significance
of this study step in as GST is likely to be the change-maker in the economy for the next ten
years or so. Analysing its impact on SMEs, maximizing the benefits of GST to SME’s, weeding
out externalities of GST, will put India’s economic growth trajectory on the right path,
perhaps will help achieve a 5 trillion dollar economy. Presently under the system of GST,
evidence shows that small businesses operating under the composition scheme (turnover
between Rs.20 lakh and Rs.75 lakh; later the limit was raised to Rs.1.5 crore) could not avail
the benefit of Input Tax Credit (ITC) and if anyone bought from them, then the buyer had to
pay the tax which the small businesses should have paid. This was the Reverse Charge
Mechanism (RCM) (Kumar, 2017). The E-way bills were implemented, suspended, and again
resumed, but phasewise. This added to the confusion of businesses. Thus a critical analysis
of the positive and negative impact of GST on SMEs is a necessity of the hour.
 Literature Review
Literature in this field, specifically on the topic of the impact of GST on Micro, Small, and
Medium Enterprises (MSMEs) in India is very limited. However, there are some published
journal articles and newspaper reports. Scholars Prasad and Satya have theoretically listed
out the positive and negative impacts of GST on MSME’s i.e. the positive impacts will be that
starting a business becomes easier, improved MSME market expansion, lower logistical
overheads, reduction of the tax burden on new businesses and negative impacts will be the
burden of lower threshold on tax exemption, etc (Prasad & Sathya, 2017). Dr. Sonia and her
co-authors are of the view that the government has implemented GST with a long-term
vision but it has increased the technology dependency of every enterprise which has
become a great challenge for SMEs (Verma, Khandelwal, & Raj, 2018). A paper released by
the Confederation of Indian Industries (2015) states that the lower threshold on tax
exemption will greatly impact the SME’s working capital but on the other hand GST will also
lead to expansion of MSME’s market. In a another paper it’s argued that after
demonetisation, the introduction of GST brought with it a fresh wave of challenges,
especially for the informal sector. Along with the initial confusion about GST forms and
infrastructure glitches, there has also been a reported delay in receiving ITC which has
directly affected the MSMEs. Moreover, he says that the supply chains have also been
affected (Sinha, 2018). Further, another paper states that with all the compliance
procedures under GST — Registration, Payments, Refunds and Returns now being carried
out through online portals only, SMEs need not worry about interacting with department
officers for carrying out these compliances, which were considered as a headache in the
previous tax regime (Venkateshwarlu & Vijaylakshmi, 2018). Another scholar has argued that
India’s paradigm shift to the GST regime will increase the compliance fees of MSMEs and
snare a majority of them into the oblique tax internet for the first time (Kumari, 2018).
Lastly, a paper states that as under the provisions of RCM if a registered person buys goods
from an unregistered trader/dealer the tax is to be paid by the registered person and this
will increase the working capital requirements of the registered persons. Hence registered
businesses will prefer to deal only with other registered businesses. This will in turn
negatively impact unregistered dealers by hampering their growth and development (Pandit,
2017). Most of the existing papers are theoretical, drawing inferences from secondary
source data. Thus it is evident that there is a lack of any kind of empirical investigation into
the impact of GST on SMEs, especially through primary data information. Hence this paper
attempts to address this research gap through empirical investigation.

Research Method
This study is based on primary data collected with the help of a structured questionnaire. Purposive
sampling has been adopted for the selection of samples. Data has been collected from 59
respondents. All of the respondents were Small Scale Enterprises (SSE’s) (The enterprises are
considered under the Central government classification of MSMEs 2019 based on the criteria of
investment in plant and machinery or equipment) or have started as SSE’s (but some have grown
bigger now) and are involved in processing (or production) of diverse products like machine tool
components, transformers, electromagnets, industrial chemicals, paints, rubber moulded, and
extruded components, paints and varnishes, automobile components, plastic injection moulding,
bathroom plumbing accessories, and fixtures, etc. Apart from the survey, insights from the GST
panel chairman at Peenya Association, Assistant Secretary of Karnataka Small Scale Industries
Association (KAASIA), and Joint Commissioner of Taxes have been recorded. The area of study is the
Peenya industrial area, Bangalore. Data analysis is done with the help of ratios and percentages.
CHAPTER-3 RESARCH METHOLOGY