CHAPTER 1- INTRODUCTION

Goods and service tax (GST)

Whether it was uniformity of taxation and consequent free interior trade or possession of ‘the
jewel in the crown’ at the root of prosperity of Britain is debatable, nonetheless the words of
father of modern economics on the benefits of uniformity of system of taxation cannot be
taken too lightly. Before implementation of Goods and Service Tax (GST), Indian taxation
system was a farrago of central, state and local area levies. By subsuming more than a score of
taxes under GST, road to a harmonized system of indirect tax has been paved making India an
economic union.

CONSTITUTIONAL SCHEME OF INDIRECT TAXATION IN INDIA

BEFORE GST:

Article 265 of the Constitution of India provides that no tax shall be levied or collected except
by authority of law. As per Article 246 of the Constitution, Parliament has exclusive powers to
make laws in respect of matters given in Union List (List I of the Seventh Schedule) and State
Government has the exclusive jurisdiction to legislate on the matters containing in State List
(List II of the Seventh Schedule). In respect of the matters contained in Concurrent List (List III
of the Seventh Schedule), both the Central Government and State Governments have concurrent
powers to legislate.

Before advent of GST, the most important sources of indirect tax revenue for the Union were
customs duty (entry 83 of Union List), central excise duty (entry 84 of Union List), and service
tax (entry 97 of Union List). Although entry 92C was inserted in the Union List of the Seventh
Schedule of the Constitution by the Constitution (Eighty-eighth Amendment) Act, 2003 for
levy of taxes on services, it was not notified. So tax on services were continued to be levied
under the residual entry, i.e. entry 97, of the Union List till GST came into force. The Union
also levied tax called Central Sales Tax (CST) on inter-State sale and purchase of goods and on
inter-State consignments of goods by virtue of entry 92A and 92B respectively. CST however is
assigned to the State of origin, as per Central Sales Tax Act, 1956 made under Article 269 of
the Constitution.

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On the State side, the most important sources of tax revenue were tax on sale and purchase
(entry 54 of the State List), excise duty on alcoholic liquors, opium and narcotics (entry 51 of
the State List), Taxes on luxuries, entertainments, amusements, betting and gambling (entry 62
of the State List), octroi or entry tax (entry 52 of the State List) and electricity tax ((entry 53 of
the State List). CST was also an important source of revenue though the same was levied by the
Union.

HISTORICAL EVOLUTION OF INDIRECT TAXATION IN POST-

INDEPENDENCE INDIA TILL GST:

In post-Independence period, central excise duty was levied on a few commodities which were
in the nature of raw materials and intermediate inputs, and consumer goods were outside the net
by and large. The first set of reform was suggested by the Taxation Enquiry Commission (1953-
54) under the chairmanship of Dr. John Matthai. The Commission recommended that sales tax
should be used specifically by the States as a source of revenue with Union governments'
intervention allowed generally only in case of inter-State sales. It also recommended levy of a
tax on inter-State sales subject to a ceiling of 1%, which the States would administer and also
retain the revenue.

The power to levy tax on sale and purchase of goods in the course of inter-State trade and
commerce was assigned to the Union by the Constitution (Sixth Amendment) Act, 1956. By
mid-1970s, central excise duty was extended to most manufactured goods. Central excise duty
was levied on unit, called specific duty, and on value, called ad valorem duty. The number of
rates was too many with no offsetting of taxes paid on inputs leading to significant cascading
and classification disputes.

The Indirect Taxation Enquiry Committee constituted in 1976 under Shri L K Jha
recommended, inter alia, converting specific rates into ad valorem rates, rate consolidation and
input tax credit mechanism of value added tax at manufacturing level (MANVAT). In 1986, the
recommendation of the Jha Committee on moving on to value added tax in manufacturing was
partially implemented. This was called modified value added tax (MODVAT). In principle,
duty was payable on value addition but in the beginning it was limited to select inputs and
manufactured goods only with one-to-one correlation between input and manufactured goods

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for eligibility to take input tax credit. The comprehensive coverage of MODVAT was achieved
by 1996-97.

The next wave of reform in indirect tax sphere came with the New Economic Policy of 1991.
The Tax Reforms Committee under the chairmanship of Prof. Raja J Chelliah was appointed in
1991. This Committee recommended broadening of the tax base by taxing services and pruning
exemptions, consolidation and lowering of rates, extension of MODVAT on all inputs including
capital goods. It suggested that reform of tax structure must have to be accompanied by a
reform of tax administration, if complete benefits were to be derived from the tax reforms.
Many of the recommendations of the Chelliah Committee were implemented. In 1999-2000, tax
rates were merged in three rates, with additional rates on a few luxury goods. In 2000-01, three
rates were merged into one rate called Central Value Added Tax (CENVAT). A few
commodities were subjected to special excise duty.

Taxation of services by the Union was introduced in 1994 bringing in its ambit only three
services, namely general insurance, telecommunication and stock broking. Gradually, more and
more services were brought into the fold. Over the next decade, more and more services were
brought under the tax net. In 1994, tax rate on three services was 5% which gradually increased
and in 2017 it was 15% (including cess). Before 2012, services were taxed under a ‘positive
list’ approach. This approach was prone to ‘tax avoidance’. In 2012 budget, negative list
approach was adopted where 17 services were out of taxation net and all other services were
subject to tax. In 2004, the input tax credit scheme for CENVAT and Service Tax was merged
to permit cross utilization of credits across these taxes.

Before state level VAT was introduced by States in the first half of the first decade of this
century, sales tax was levied in States since independence. Sales tax was plagued by some
serious flaws. It was levied by States in an uncoordinated manner the consequences of which
were different rates of sales tax on different commodities in different States. Rates of sales tax
were more than ten in some States and these varied for the same commodity in different States.
Inter-state sales were subjected to levy of Central Sales Tax. As this tax was appropriated by
the exporting State credit was not allowed by the dealer in the importing State. This resulted
into exportation of tax from richer to poorer states and also cascading of taxes. Interestingly,

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States had power of taxation over services from the very beginning. States levied tax on
advertisements, luxuries, entertainments, amusements, betting and gambling.

A report, titled "Reform of Domestic Trade Taxes in India", on reforming indirect taxes,
especially State sales tax, by National Institute of Public Finance and Policy under the
leadership of Dr. Amaresh Bagchi, was prepared in 1994. This Report prepared the ground for
implementation of VAT in States. Some of the key recommendations were; replacing sales tax
by VAT by moving over to a multistage system of taxation; allowing input tax credits for all
inputs, including on machinery and equipment; harmonization and rationalization of tax rates
across States with two or three rates within specified bands; pruning of exemptions and
concessions except for a basic threshold limit and items like unprocessed food; zero rating of
exports, inter-State sales and consignment transfers to registered dealers; taxing inter-State sales
to non-registered persons as local sales; modernization of tax administration, computerization
of operations and simplification of forms and procedures.

The first preliminary discussion on transition from sales tax regime to VAT regime took place
in a meeting of Chief Ministers convened by the Union Finance Minister in 1995. A standing
Committee of State Finance Ministers was constituted, as a result of meeting of the Union
Finance Ministers and Chief Ministers in November, 1999, to deliberate on the design of VAT
which was later made the Empowered Committee of State Finance Ministers (EC). Haryana
was the first State to implement VAT, in 2003. In 2005, VAT was implemented in most of the
states. Uttar Pradesh was the last State to implement VAT, from 1st January, 2008.
INTERNATIONAL PERSPECTIVES ON GST / VAT:
VAT and GST are used inter-changeably as the latter denotes comprehensiveness of VAT by
coverage of goods and services. France was the first country to implement VAT, in 1954.
Presently, more than 160 countries have implemented GST / VAT in some form or the other. The
most popular form of VAT is where taxes paid on inputs are allowed to be adjusted in the
liability at the output. The VAT or GST regime in practice varies from one country to another in
terms of its technical aspects like ‘definition of supply’, ‘extent of coverage of goods and
services’, ‘treatment of exemptions and zero rating’ etc. However, at a broader level, it has one
common principle, it is a destination based consumption tax. From economic point of view, VAT
is considered to be a superior system over sales tax of taxing consumption because the former is

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neutral in allocation of resources as it taxes value addition. Besides, there are certain distinct
advantages of VAT. It is less cascading making the taxation system transparent and anti-
inflationary. From revenue point of view, VAT leads to greater compliance because of creation
of transaction trails.

When compared globally, VAT structures are either overly centralized where tax is levied and
administered by the Central government (Germany, Switzerland, Austria), or dual GST structure
wherein both Centre and States administer tax independently (Canada) or with some co-
ordination between the national and sub-national entities (Brazil, Russia). While a centralized
structure reduces fiscal autonomy for the States, a decentralized structure enhances compliance
burden for the taxpayers. Canada is a federal country with unique model of taxation in which
certain provinces have joined federal GST and others have not. Provinces which administer their
taxes separately are called ‘non- participating provinces’, whereas provinces which have teamed
up with the Federal Government for tax administration are called ‘participating provinces’.

The rate of GST varies across countries. While Malaysia has a lower rate of 6% (Malaysia
though scrapped GST in 2018 due to popular uproar against it), Hungary has one of the highest
rate of 27%. Australia levies GST at the rate of 10% whereas Canada has multiple rate slabs. The
average rate of VAT across the EU is around 19.5%.

NEED FOR GST IN INDIA:

The introduction of CENVAT removed to a great extent cascading burden by expanding the
coverage of credit for all inputs, including capital goods. CENVAT scheme later also allowed
credit of services and the basket of inputs, capital goods and input services could be used for
payment of both central excise duty and service tax. Similarly, the introduction of VAT in the

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States has removed the cascading effect by giving set-off for tax paid on inputs as well as tax
paid on previous purchases and has again been an improvement over the previous sales tax
regime.

But both the CENVAT and the State VAT have certain incompleteness. The incompleteness in
CENVAT is that it has yet not been extended to include chain of value addition in the
distributive trade below the stage of production. Similarly, in the State-level VAT, CENVAT
load on the goods has not yet been removed and the cascading effect of that part of tax burden
has remained unrelieved. Moreover, there are several taxes in the States, such as, Luxury Tax,
Entertainment Tax, etc. which have still not been subsumed in the VAT. Further, there has also
not been any integration of VAT on goods with tax on services at the State level with removal of
cascading effect of service tax.

CST was another source of distortion in terms of its cascading nature. It was also against one of
the basic principles of consumption taxes that tax should accrue to the jurisdiction where
consumption takes place. Despite remarkable harmonization in VAT regimes under the auspices
of the EC, the national market was fragmented with too many obstacles in free movement of
goods necessitated by procedural requirement under VAT and CST.

In the constitutional scheme, taxation powers on goods was with Central Government but it was
limited upto the stage of manufacture and production while States have powers to tax sale and
purchase of goods. Centre had powers to tax services and States also had powers to tax certain
services specified in clause (29A) of Article 366 of the Constitution. This sort of division of
taxing powers created a grey zone which led to legal disputes. Determination of what constitutes
a goods or service is difficult because in modern complex system of production, a product is
normally a mixture of goods and services.

As can be seen from the previous paragraphs, India moved towards value added taxation both at
Central and State level, and this process was complete by 2005. Integration of Central VAT and
State VAT therefore is nothing but an inevitable consequence of the reform process. The
Constitution of India envisages a federal nature of power bestowed upon both Union and States

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in the Constitution itself. As a natural corollary of this, any unification of the taxation system
required a dual GST, levied and collected both by the Union and the States.

GST : A HISTORICAL PERSPECTIVE:

The Kelkar Task Force on Fiscal Responsibility and Budget Management (FRBM)
recommended in 2005 introduction of a comprehensive tax on all goods and service replacing
Central level VAT and State level VATs. It recommended replacing all indirect taxes except the
customs duty with value added tax on all goods and services with complete set off in all stages of
making of a product.
An announcement was made by the then Union Finance Minister in Budget (2007-08) to the
effect that GST would be introduced with effect from April 1, 2010 and that the EC, on his
request, would work with the Central Government to prepare a road map for introduction of GST
in India. After this announcement, the EC decided to set up a Joint Working Group in May 10,
2007, with the then Adviser to the Union Finance Minister and Member-Secretary of the
Empowered Committee as its Co-conveners and four Joint Secretaries of the Department of
Revenue of Union Finance Ministry and all Finance Secretaries of the States as its members.
This Joint Working Group got itself divided into three Sub-Groups and had several rounds of
internal discussions as well as interaction with experts and representatives of Chambers of
Commerce & Industry. On the basis of these discussions and interaction, the Sub-Groups
submitted their reports which were then integrated and consolidated into the report of Joint
Working Group (November 19, 2007).

This report was discussed in detail in the meeting of the EC on November 28, 2007, and the
States were also requested to communicate their observations on the report in writing. On the
basis of these discussions in the EC and the written observations, certain modifications were
considered necessary and were discussed with the Co-conveners and the representatives of the
Department of Revenue of Union Finance Ministry. With the modifications duly made, a final
version of the views of EC on the model and road map for the GST was prepared (April 30,
2008). These views of EC were then sent to the Government of India, and the comments of
Government of India were received on December 12, 2008. These comments were duly
considered by the EC (December 16, 2008), and it was decided that a Committee of Principal
Secretaries/Secretaries of Finance/Taxation and Commissioners of Trade Taxes of the States

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would be set up to consider these comments, and submit their views. These views were
submitted and were accepted in principle by the EC (January 21, 2009). Based on discussions
within the EC and between the EC and the Central Government, the EC released its First
Discussion Paper (FDP) on GST in November, 2009. This spelled out the features of the
proposed GST and has formed the basis for discussion between the Centre and the States.

THE DESIGN OF INDIAN GST:

Concurrent dual model of GST: India has adopted dual GST model because of its unique
federal nature. Under this model, tax is levied concurrently by the Centre as well as the States
on a common base, i.e. supply of goods or services or both. GST to be levied by the Centre
would be called Central GST (Central tax / CGST) and that to be levied by the States would be
called State GST (State Tax / SGST). State GST (State Tax / SGST) would be called UTGST
(Union territory tax) in Union Territories without legislature. CGST & SGST / UTGST shall be
levied on all taxable intra-State supplies.

 The IGST Model: Inter-State supply of goods or services shall be subjected to

integrated GST (Integrated tax / IGST). The IGST model is a unique contribution of
India in the field of VAT. The IGST Model envisages that Centre would levy IGST
(Integrated Goods and Service Tax) which would be CGST plus SGST on all inter-State
supply of goods or services or both. The inter-State supplier will pay IGST on value
addition after adjusting available credit of IGST, CGST, and SGST on his purchases.
The Exporting State will transfer to the Centre the credit of SGST used in payment of
IGST. The person based in the destination State will claim credit of IGST while

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 discharging his output tax liability in his own State. The Centre will transfer to the
importing State the credit of IGST used in payment of SGST. The relevant information
will also be submitted to the Central Agency which will act as a clearing house
mechanism, verify the claims and inform the respective governments to transfer the
funds. The major advantages of IGST Model are:

i. Maintenance of uninterrupted ITC chain on inter-State transactions.

ii. No upfront payment of tax or substantial blockage of funds for the inter-State supplier
or recipient.

iii. No refund claim in exporting State, as ITC is used up while paying the tax.

iv. Self-monitoring model.

v. Model takes ‘Business to Business’ as well as ‘Business to Consumer’ transactions into

account.

 Tax Rates: Owing to unique Indian socio-economic milieu, four rates namely 5%, 12%,
18% and 28% have been adopted. Besides, some goods and services are exempt also.
Rate for precious metals is an exception to ‘four-tax slab-rule’ and the same has been
fixed at 3%. In addition, unworked diamonds, precious stones, etc. attracts a rate of
0.25%. A cess over the peak rate of 28% on certain specified luxury and demerit goods,
like tobacco and tobacco products, pan masala, aerated water, motor vehicles is imposed
to compensate States for any revenue loss on account of implementation of GST. The list
of goods and services in case of which reverse charge would be applicable has also been
notified.

 Compensation to States: The Goods and Services Tax (Compensation to States) Act,
2017 provides for compensation to the States for the loss of revenue arising on account
of implementation of the goods and services tax. Compensation will be provided to a
State for a period of five years from the date on which the State brings its SGST Act
into force. For the purpose of calculating the compensation amount in any financial
year, year 2015-16 will be assumed to be the base year, for calculating the revenue to be
protected. The growth rate of revenue for a State during the five-year period is assumed
be 14% per annum. The base year tax revenue consists of the states’ tax revenues from:
(i) State Value Added Tax (VAT), (ii) central sales tax, (iii) entry tax, octroi, local body

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 tax, (iv) taxes on luxuries, (v) taxes on advertisements, etc. However, any revenue
among these taxes arising related to supply of alcohol for human consumption, and five
specified petroleum products, will not be accounted as part of the base year revenue. A
GST Compensation Cess is levied on the supply of certain goods and services, as
recommended by the GST Council to finance the compensation cess.

 E-Way Bill System: The introduction of e-way (electronic way) bill is a monumental
shift from the earlier “Departmental Policing Model” to a “Self-Declaration Model”. It
envisages one e-way bill for movement of the goods throughout the country, thereby
ensuring a hassle free movement for transporters throughout the country. The e-way bill
system has been introduced nation-wide for all inter-State movement of goods with effect
from 1st April, 2018. As regards intra-State supplies, option was given to States to choose
any date on or before 3rd June, 2018. All States have notified e-way bill rules for intra-
State supplies last being NCT of Delhi where it was introduced w.e.f. 16th June, 2018.

 Anti-Profiteering Mechanism: Implementation of GST in many countries was coupled

with increase in inflation and the prices of the commodities. This happened in spite of the
availability of the tax credit. This was happening because the supplier was not passing on
the benefit to the consumer and thereby indulging in illegal profiteering. Any reduction in
rate of tax or the benefit of increased input tax credit should have been passed on to the
recipient by way of commensurate reduction in prices. 10.6.1 National Anti-profiteering
Authority (NAPA) has been constituted under GST by the Central Government to
examine the complaints of non-passing the benefit of reduced tax incidence. The
Authority shall cease to exist after the expiry of two years from the date on which the
Chairman enters upon his office unless the Council recommends otherwise.

The Authority may determine whether any reduction in the rate of tax or the benefit of input tax
credit has been passed on to the recipient by way of commensurate reduction in prices. It can
order reduction in prices, imposition of penalty, cancellation of registration and any other
decision as may deem fit, after inquiry into the case.

 Concept of Supply: GST would be applicable on supply of goods or services as against

the present concept of tax on manufacture of goods or on sale of goods or on provision
of services. It includes all sorts of activities like manufacture, sale, barter, exchange,

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 transfer etc. It also includes supplies made without consideration when such supplies are
made in certain specified situations.
 Threshold Exemption: A common threshold exemption would apply to both CGST
and SGST. Taxpayers with an annual turnover of Rs. 20 lakh (Rs. 10 lakh for special
category States (except J&K) as specified in article 279A of the Constitution) would be
exempt from GST. The GST Act has been amended to raise threshold exemption limit
in case of six more special category States. The amendment shall be effective from a
date to be notified in the future. The benefit of threshold exemption is not available in
inter-State supplies of goods.

 Composition Scheme: An optional composition scheme (i.e. to pay tax at a flat rate on
turnover without credits) is available to small taxpayers (including to manufacturers
other than specified category of manufacturers and service providers) having an annual
turnover of up to Rs. 1 Cr (Rs. 75 lakh for special category States (except J&K and
Uttarakhand) enumerated in article 279A of the Constitution). This limit has been raised
to Rs. 1.5 Cr after necessary amendments in the GST Acts. The amendment shall be
effective from a date to be notified in the future.

 Zero rated Supplies: Export of goods and services are zero rated. Supplies to SEZs
developers and SEZ units are also zero-rated. The benefit of zero rating can be taken
either with payment of integrated tax, or without payment of integrated tax under bond
or Letter of Undertaking.

 Cross-utilization of ITC: IGST credit can be used for payment of all taxes. CGST
credit can be used only for paying CGST or IGST. SGST credit can be used only for
paying SGST or IGST.

The credit would be permitted to be utilized in the following manner:

i. ITC of CGST allowed for payment of CGST & IGST in that order;

ii. ITC of SGST allowed for payment of SGST & IGST in that order;

iii. ITC of UTGST allowed for payment of UTGST & IGST in that order;

iv. ITC of IGST allowed for payment of IGST, CGST & SGST/UTGST in that order.

ITC of CGST cannot be used for payment of SGST/UTGST and vice versa.

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 Settlement of Government Accounts: Accounts would be settled periodically between
the Centre and the State to ensure that the credit of SGST used for payment of IGST is
transferred by the originating State to the Centre. Similarly, the IGST used for payment
of SGST would be transferred by Centre to the destination State. Further the SGST
portion of IGST collected on B2C supplies would also be transferred by Centre to the
destination State. The transfer of funds would be carried out on the basis of information
contained in the returns filed by the taxpayers.
 Modes of Payment: Various modes of payment of tax available to the taxpayer including
internet banking, debit/ credit card and National Electronic Funds Transfer (NEFT) / Real
Time Gross Settlement (RTGS).

 Tax Deduction at Source: Obligation on certain persons including government

departments, local authorities and government agencies, who are recipients of supply, to
deduct tax at the rate of 1% from the payment made or credited to the supplier where
total value of supply, under a contract, exceeds two lakh and fifty thousand rupees. The
provision for TDS has been operationalized wef 01st October 2018. Exemption from the
provisions of TDS has been given to certain authorities under the Ministry of Defense.

 Refunds: Refund of tax to be sought by taxpayer or by any other person who has borne
the incidence of tax within two years from the relevant date. Refund of unutilized ITC
also available in zero rated supplies and inverted tax structure.
 Tax Collection at Source: Obligation on electronic commerce operators to collect ‘tax at
source’, at such rate not exceeding two per cent of net value of taxable supplies, out of
payments to suppliers supplying goods or services through their portals. The provision
for TCS has not been operationalized wef 01st October 2018.
 Self-assessment: Self-assessment of the taxes payable by the registered person shall be
the norm. Audit of registered persons shall be conducted on selective basis. Limitation
period for raising demand is three (3) years from the due date of filing of annual return or
from the date of erroneous refund for raising demand for short-payment or non-payment
of tax or erroneous refund and its adjudication in normal cases. Limitation period for
raising demand is five (5) years from the due date of filing of annual return or from the
date of erroneous refund for raising demand for short-payment or non-payment of tax or

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 erroneous refund and its adjudication in case of fraud, suppression or willful mis-
statement.
 Recovery of Arrears: Arrears of tax to be recovered using various modes including
detaining and sale of goods, movable and immovable property of defaulting taxable
person.

 Appellate Tribunal: Goods and Services Tax Appellate Tribunal would be constituted
by the Central Government for hearing appeals against the orders passed by the Appellate
Authority or the Provisional Authority. States would adopt the provisions relating to
Tribunal in respective SGST Act.

 Advance Ruling Authority: Advance Ruling Authority would be constituted by States

in order to enable the taxpayer to seek a binding clarity on taxation matters from the
department. Centre would adopt such authority under CGST Act.

 Transitional Provisions: Elaborate transitional provisions have been provided for

smooth transition of existing taxpayers to GST regime.

 Subsuming of taxes, duties etc.: Among the taxes and duties levied and collected by the
Union, Central Excise duty, Duties of Excise (Medicinal and Toilet Preparations),
Additional Duties of Excise (Goods of Special Importance), Additional Duties of Excise
(Textiles and Textile Products), Additional Duties of Customs (commonly known as
CVD), Special Additional Duty of Customs (SAD), Service Tax and cesses and
surcharges insofar as they related to supply of goods or services were subsumed. As far
as taxes levied and collected by States are concerned, 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, cesses
and surcharges insofar as they related to supply of goods or services were subsumed.

GST LEGISLATIONS:
Four Laws namely CGST Act, UTGST Act, IGST Act and GST (Compensation to States) Act
were passed by the Parliament and since been notified on 12th April, 2017. All the other States
(except J&K) and Union territories with legislature have passed their respective SGST Acts.

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The economic integration of India was completed on 8th July, 2017 when the State of J&K also
passed the SGST Act and the Central Government also subsequently extended the CGST Act to
J&K.

In its 28th meeting held in New Delhi on 21.07.2018, the GST Council recommended certain
amendments in the CGST Act, IGST Act, UTGST Act and the GST (Compensation to States)
Act. These amendments have been passed by Parliament and have been enacted, after receiving
the assent of the Hon’ble President of India on 29.08.2018, as the Central Goods and Services
Tax (Amendment) Act, 2018, the Integrated Goods and Services Tax (Amendment) Act, 2018,
the Union Territory Goods and Services Tax (Amendment) Act, 2018 and the Goods and
Services Tax (Compensation to States) Amendment Act, 2018, respectively. In order to ensure
that the above changes in the Centre and the State GST laws are brought into force
simultaneously, these amendments will be made effective from 01.02.2019.

On 22nd June, 2017, the first notification was issued for GST and notified certain sections under
CGST. Since then, 154 notifications under CGST Act have been issued notifying sections,
notifying rules, amendment to rules and for waiver of penalty, etc. 16, 32 and 1 notifications
have also been issued under IGST Act, UTGST Act and GST (Compensation to States) Act
respectively. Further 77, 81, 77 and 9 rate related notifications each have been issued under the
CGST Act, IGST Act, UTGST Act and GST (Compensation to States) Act respectively. Similar
notifications have been issued by all the States under the respective SGST Act. Apart from the
notifications, 85 circulars, 16 orders and 5 Removal of Difficulty Orders have also been issued
by CBIC on various subjects like proper officers, ease of exports, and extension of last dates for
filling up various forms, etc.

Medium and small scale in enterprises (MSME)

In Indian economy small-scale and cottage industries occupy an important place, because of
their employment potential and their contribution to total industrial output and exports.

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Government of India has taken a number of steps to promote them. However, with the recent
measures, small-scale and cottage industries facing both internal competition as well as external
competition.

There is no clear distinction between small-scale and cottage industries. However it is generally
believed that cottage industry is one which is carried on wholly or primarily with the help of the
members of the family. As against this, small-scale industry employs hired labor.

Moreover industries are generally associated with agriculture and provide subsidiary
employment in rural areas. As against this, small scale units are mainly located in urban areas as
separate establishments.

Definition:

The official definitions of a small scale unit are as follows:

 Small-Scale Industries:
These are the industrial undertakings having fixed investment in plant and machinery, whether
held on ownership basis or lease basis or hire purchase basis not exceeding Rs. 1 crore.

 Ancillary Industries:
These are industrial undertakings having fixed investment in plant and machinery not exceeding
Rs. 1 crore engaged in or proposed to engage in,
(a) The manufacture of parts, components, sub-assemblies, tooling or intermediaries, or
(b) The rendering of services supplying 30 percent of their production or services as the case
may be, to other units for production of other articles.

 Tiny Units:
These refer to undertakings having fixed investment in plant and machinery not exceeding Rs. 23
lakhs. These also include undertakings providing services such as laundry, Xeroxing, repairs and
maintenance of customer equipment and machinery, hatching and poultry etc. Located m towns
with population less than 50,000. No pollution is caused. Handicrafts, toys, dolls, small plastic
and paper products electronic and electrical gadgets are some examples of these industries.

Characteristics of Small-Scale Industries:

(i) Ownership:
Ownership of small scale unit is with one individual in sole-proprietorship or it can be with a few
individuals in partnership.

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(ii) Management and control:
A small-scale unit is normally a one man show and even in case of partnership the activities are
mainly carried out by the active partner and the rest are generally sleeping partners. These units
are managed in a personalized fashion. The owner is activity involved in all the decisions
concerning business.

(iii) Area of operation:

The area of operation of small units is generally localised catering to the local or regional
demand. The overall resources at the disposal of small scale units are limited and as a result of
this, it is forced to confine its activities to the local level.

(iv) Technology:
Small industries are fairly labor intensive with comparatively smaller capital investment than the
larger units. Therefore, these units are more suited for economics where capital is scarce and
there is abundant supply of labor.

(v) Gestation period:

Gestation period is that period after which teething problems are over and return on investment
starts. Gestation period of small scale unit is less as compared to large scale unit.

(vi) Flexibility:
Small scale units as compared to large scale units are more change susceptible and highly
reactive and responsive to socio-economic conditions.
They are more flexible to adopt changes like new method of production, introduction of new
products etc.

(vii) Resources:
Small scale units use local or indigenous resources and as such can be located anywhere subject
to the availability of these resources like labor and raw materials.

16
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:

 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 Enterprise are defined in terms of investment in Plant &
Machinery.
 Service Enterprises:-The enterprises engaged in providing or rendering of services and
are defined in terms of investment in equipment.

Manufacturing Sector
Enterprises Investment in plant & machinery
Micro Enterprises Does not exceed twenty five lakh rupees
Small Enterprises More than twenty five lakh rupees but does not exceed five crore rupees
Medium Enterprises More than five crore rupees but does not exceed ten crore rupees
Service Sector
Enterprises Investment in equipment’s
Micro Enterprises Does not exceed ten lakh rupees:
Small Enterprises More than ten lakh rupees but does not exceed two crore rupees
Medium Enterprises More than two crore rupees but does not exceed five core rupees

Govt. of India
Development Commissioner (MSME)
Ministry of Micro, Small & Medium Enterprises

 The Product Group Matrix

There are about twenty-one major industry groups in the small scale sector. These are listed
below :

i. Food Products
ii. Chemical & Chemical Products
iii. Basic Metal Industries

17
iv. Leather & Leather Products
v. Miscellaneous Manufacturing Industries
vi. Other Services & Products
vii. Beverages, Tobacco & Tobacco Products
viii. Repair Services
ix. Cotton Textiles
x. Wool, Silk, Synthetic Fiber Textiles
xi. Jute, Hemp and Mesta Textiles
xii. Other Services

A survey of indices of industrial production (IIP) maintained for these major industry groups
reveals what the sunrise industries are and on what segments the sun has set. SSI units produce
an amazing variety and type of products. Over 7500 products are known to be manufactured in
this sector. Even in a particular product, there would exist a wide range of qualities or
specifications catering to different market segments, particularly in consumer/household
products. Small Scale sector has emerged as a major supplier of mass consumption items like:-

1. Leather And Leather Goods

2. Plastic And Rubber Goods
3. Ready-Made Garments
4. Hosiery Goods, Sheet Metal Goods
5. Stationery Items - Soap And Detergents
6. Domestic Utensils
7. Toothpaste And Toothpowder
8. Safety Matches
9. Preserved Foods And Vegetables
10. Wooden And Steel Furniture
11. Paints And varnishes etc.,

Among the sophisticated items mention may also be made of:-

1. Television sets
2. Calculators
3. Microwave Components
4. Plastic Film Capacitors
5. Carbon Film Registers
6. Electro Medical equipment’s
7. Electronic Teaching Aids
8. Digital Measuring equipment’s
9. Air-Conditioning equipment’s
10. Optical Lenses
11. Drugs And Pharmaceuticals

18
12. Electric Motors
13. Pesticide Formulators
14. Photographic Sensitized Paper
15. Razor Blades
16. Collapsible Tubes, etc.

 Cottage industries
Definition
An industry where the creation of products and services is home-based, rather than factory-
based. While products and services created by cottage industry are often unique and
distinctive given the fact that they are usually not mass-produced, producers in this sector
often face numerous disadvantages when trying to compete with much larger factory-based
companies.

1. An industry whose labor force consists of family units or individuals working at

home with their own equipment
2. A small and often informally organized industry
3. A limited but enthusiastically pursued activity or subject

(Examples of cottage industry like Weaving, Pottery, and other cottage industries.)

 Products for Small Scale Units

In India, the present policy of encouraging growth of small scale industries is based on several
promotional measures, one of which is reservation of products for exclusive manufacture in the
small
scale sector. Large/Medium units can, however, manufacture such reserved items provided
they
undertake to export 50% or more of their production. The reason for special emphasis on this
sector is
that it plays a vital role in the growth of the country. It contributes almost 40% of the gross
industrial
value added in the Indian economy. The opportunities in the small-scale sector are enormous due
to
the following factors:-

 Less Capital Intensive

 Extensive Promotion & Support by Government
 Reservation for Exclusive Manufacture by small scale sector

19
  Funding - Finance & Subsidies
 Machinery Procurement
 Raw Material Procurement
 Technical & Managerial skills
 Tooling & Testing support
 Reservation for Exclusive Purchase by Government
 Export Promotion
 Growth in demand in the domestic market size due to overall economic growth
 Increasing Export Potential for Indian products

Growth in Requirements for ancillary units due to the increase in number of green field units
coming up in the large scale sector. Small industry sector has performed exceedingly well and
enabled our country to achieve a wide measure of industrial growth and diversification

 Role and Importance of Small Scale Industry in India :

In a developing country like India, the role and importance of small-scale industries is very
significant towards poverty eradication, employment generation, rural development and
creating regional balance in promotion and growth of various development activities.

It is estimated that this sector has been contributing about 40% of the gross value of output
produced in the manufacturing sector and the generation of employment by the small-scale
sector is more than five times to that of the large-scale sector.

This clearly shows the importance of small-scale industries in the economic development of
the country. The small-scale industry has been playing an important role in the growth
process of Indian economy since independence in spite of stiff competition from the large
sector and not very encouraging support from the government.

20
The following are some of the important role played by small- scale industries in India.

1. Employment generation:

The basic problem that is confronting the Indian economy is increasing pressure of population on
the land and the need to create massive employment opportunities. This problem is solved to
larger extent by small-scale industries because small- scale industries are labor intensive in
character. They generate huge number of employment opportunities. Employment generation by
this sector has shown a phenomenal growth. It is a powerful tool of job creation.

2. Mobilization of resources and entrepreneurial skill:

Small-scale industries can mobilize a good amount of savings and entrepreneurial skill from rural
and semi-urban areas remain untouched from the clutches of large industries and put them into
productive use by investing in small-scale units. Small entrepreneurs also improve social welfare
of a country by harnessing dormant, previously overlooked talent. Thus, a huge amount of latent
resources; re being mobilized by the small-scale sector for the development of the economy.

3. Equitable distribution of income:

Small entrepreneurs stimulate a redistribution of wealth, income and political power within
societies in ways that are economically positive and without being politically disruptive.
Thus small-scale industries ensures equitable distribution of income and wealth in the Indian
society which is largely characterized by more concentration of income and wealth in the
organized section keeping unorganized sector undeveloped. This is mainly due to the fact that
small industries are widespread as compared to large industries and are having large employment
potential.

4. Regional dispersal of industries:

There has been massive concentration of industries m a few large cities of different states of
Indian union. People migrate from rural and semi urban areas to these highly developed centers in
search of employment and sometimes to earn a better living which ultimately leads to many evil
consequences of over-crowding, pollution, creation of slums, etc. This problem of Indian
economy is better solved by small- scale industries which utilize local resources and brings about
dispersion of industries in the various parts of the country thus promotes balanced regional
development.

21
5. Provides opportunities for development of technology:

Small-scale industries have tremendous capacity to generate or absorb innovations. They provide
ample opportunities for the development of technology and technology in return, creates an
environment conducive to the development of small units. The entrepreneurs of small units play a
strategic role in commercializing new inventions and products. It also facilitates the transfer of
technology from one to the other. As a result, the economy reaps the benefit of improved
technology.

6. Indigenization:

Small-scale industries make better use of indigenous organizational and management capabilities
by drawing on a pool of entrepreneurial talent that is limited in the early stages of economic
development. They provide productive outlets for the enterprising independent people. They also
provide a seed bed for entrepreneurial talent and a testing round for new ventures.

7. Promotes exports:

Small-scale industries have registered a phenomenal growth in export over the years. The value of
exports of products of small-scale industries has increased to Rs. 393 crores in 1973-74 to Rs. 71,
244 crores in 2002-03. This contributes about 35% India's total export. Thus they help in
increasing the country's foreign exchange reserves thereby reduces the pressure on country's
balance of payment.

8. Supports the growth of large industries:

The small-scale industries play an important role in assisting bigger industries and projects so that
the planned activity of development work is timely attended. They support the growth of large
industries by providing, components, accessories and semi-finished goods required by them. In
fact, small industries can breathe vitality into the life of large industries.

9. Better industrial relations:

Better industrial relations between the employer and employees helps in increasing the efficiency
of employees and reducing the frequency of industrial disputes. The loss of production and man-
days are comparatively less in small- scale industries. There is hardly any strikes and lock out in
these industries due to good employee-employer relationship.

22
Of course, increase in number of units, production, employment and exports of small- scale
industries over the years are considered essential for the economic growth and development of the
country. It is encouraging to mention that the small-scale enterprises accounts for 35% of the
gross value of the output in the manufacturing sector, about 80% of the total industrial
employment and about 40% of total export of the country.

23
 CHAPTER 2- REVIEW OF LITERATURE

Export-Import Bank of India, 2012 studied and documented the current situation of MSMEs and
support systems setup for them in India along with select countries of Europe, Asia, Latin America
etc. It studies MSMEs in the Indian as well as global context. It explains the evolution of Indian
MSME policies over time. During 1948-1990 the objective was to increase employment opportunities
and equitable distribution of national income, during 1991-1999 it was to make the MSMEs more
competitive in the face of liberalization and 1999 onwards the objective has been development and
promotion of the sector by addressing challenges relating to credit, infrastructure, marketing and
technology. It also stated the current challenges faced by the Indian MSMEs and the strategies for
their Development based on past experiences of India and other countries such as China, Japan,
Malaysia, Thailand, Mexico, Philippines etc. . It suggests that Indian MSMEs must have access to
alternative sources of capital like angel funds/risk capital etc., the existing legislatures need to be
toned up to handle insolvencies and bankruptcies; the ceiling limits need to be redefined to encourage
MSMEs to move up the value chain; the policies need a cluster development approach to increase the
level of competitiveness; emulating Japan, Korea and Malaysia technological innovation and R&D
must be encouraged among MSMEs and entrepreneurship must be encouraged via skill formation and
learning mechanisms.

Grimsholm & Poblete, 2010 conducted a detailed qualitative study of external and internal factors
hampering the growth of Small and Medium Enterprises in Thailand. It reproduced quite generalized
results applicable to most of the south Asian countries producing low cost, low value added and labor
intensive products. Significant factors hampering growth according to the study are lack of access to
finance, competition, barriers to trade, management competence, lack of skilled labor, low investment
in R&D and new technology.

Ministry of Micro, Small and Medium enterprises, 2013 published the Inter Ministerial Committee
for Accelerating Manufacturing in MSMEs’ paper reporting slow down in the overall growth of
MSMEs in recent years, especially post 2009. It highlighted the significance of MSMEs, changing
trends in employment growth in this sector and addressed concerns regarding establishing an
enterprise and running it successfully. It also recommended support systems for encouraging start ups,
doing and expanding business and ease of closure and exit and also drew light on the need to do so. It
also suggested changes in labor laws and gives product specific recommendations.

24
Abdul Naser.V, 2013 critically evaluated the contributions made by the micro, small and medium
enterprises in the balanced growth of the Indian economy. The study says that since 55% of the total
enterprises operate in the rural areas they promote inclusive growth and regional equity. They play a
very important role in employment generation and contribute a commendable portion to the GDP,
industrial production and export of the country. The paper also highlights the challenges faced by the
sector and its need for structural support.

Srinivas K T, 2013 studied the performance of micro, small and medium enterprises, their
contribution in India’s economic growth, identified the number of enterprises, employment in MSMEs
and concluded that MSMEs play a significant role in inclusive growth of Indian economy.

25
 CHAPTER 3- RESEARCH METHODOLOGY

Dictionary terms research as a careful investigation or inquiry specially through search for new facts in
any branch of knowledge. Research in a common parlance mean the search of knowledge. In order to
make the voyage of discovery of knowledge successful, there needs to be a lot of attention and
devotion towards the research work done so as to derive an outcome which is accurate, reliable and
facilitates adequacy of results. Research Methodology is a type of guideline and an idea to the
systematic and detailed study which would be inculcated in the research problem. It helps the
researcher to be clear about what would be his plan of action to communicate the findings to his
problem. It also is an initial step towards designing the research. In order for the research work to be
fruitful, the researcher should have a clear and descriptive Research Methodology made so as to
answer all the critical questions asked by the user to the research work and to judge whether the
research work was done according to the methodology listed. A phenomenological approach to study
of the research would give a comprehensive picture to the problem and help obtain the adequate and
necessary results and findings.

RESEARCH MEANING

Many tend to term the act of coming to a conclusion or any finding an answer to a problem without
any relevant evidence as a research. An individual, before even thinking of research should get his
basics clear of what exactly a research is. There is a specific set and pattern or trends in a research to
call a research as valid.

The Oxford Encyclopedic English Dictionary defines it as:

a. the systematic investigation into the study of materials, sources etc. in order to establish facts
and reach new conclusions,
b. an endeavor to discover new or collate old facts etc. by the scientific study of a subject or by a
course of critical investigation.

Research is the systematic investigation and study of material and the elements associated with the
study and coming out with relevant findings and reaching new conclusion. Research is an art which
involves methods and techniques to draw out relevant knowledge to reach to an amicable conclusion.
Research comprises

a. defining and redefining problems,

26
 b. formulating hypothesis or suggested solutions
c. making deductions and
d. reaching conclusions

to determine whether the hypothesis is justifiable. Researchers have to spend a large amount of time
into complex activities of obtaining information, brainstorming into the information as about what
angle to look into and also to realize that whether or not there is a need for research.

The idea of this study would be to understand the concept of goods and service tax (GST) of India and
then analyzing the same on the medium and small scale enterprises (MSME) of India.

RESEARCH DESIGN
Research design is the overall strategy that is chosen to integrate the different components of the study
in a coherent and logical way, thereby ensuring effective addressing of the research problem. It
constitutes the blueprint for the collection, measurement, and analysis of data. It is the conceptual
structure with in which research is conducted. A research design is a framework for the study and is
used as guide in collection and analyzing the data.

TYPES OF RESEARCH DESIGN:

 Exploratory research design

 Experimental research design
 Descriptive research

Exploratory Research Design: This research design is preferred when researcher has a vague
idea about the problem the researcher has to explore the subject.

Experimental Research Design: The research design is used to provide strong basis for the
existence of causal relationship between two or more variables.

Descriptive Research Design: It seeks to determine the answers to who, what, where, when and
how questions. It is based on some previous understanding of the matter.

27
 RESEARCH DESIGN USED IN THIS PROJECT

The research design chosen for this study is a Descriptive Research Design.

DATA COLLECTION SOURCES

The entire data required for the study will be collected through secondary sources of data from
various Reports, Books, Reputed Journals, Research Papers, Official Government websites, online
sources.

OBJECTIVES
I. To understand the concept of GST in India.
II. To understand the concept of medium and small scale enterprises.
III. To understand and analyze the implications of GST on MSME’S of India.

LIMITATIONS

I. The data sources, through from reliable and authentic government sites and reputed journals or
reports or research papers, being secondary data the authenticity of the data remains questionable
and flexible in nature.
II. In all the reports and research papers, it is unclear about the data from where they have taken it
and also in which situation of Indian economy or which government was there in our country
makes it all the more untrustworthy for the data analysis.

28
 CHAPTER 4- ANALYSIS

A. GOODS AND SERVICE TAX (GST)

GST will have a multiplier effect on the economy with benefits accruing to various sectors as
discussed below.

Benefits to the exporters: The subsuming of major Central and State taxes in GST, complete and
comprehensive setoff of input goods and services and phasing out of Central Sales Tax (CST) would
reduce the cost of locally manufactured goods and services. This will increase the competitiveness of
Indian goods and services in the international market and give boost to Indian exports. The uniformity
in tax rates and procedures across the country will also go a long way in reducing the compliance cost.

Benefits to small traders and entrepreneurs: GST has increased the threshold for GST registration
for small businesses. Those units having aggregate annual turnover more than Rs 20 lakh (10 lakh in
case of North Eastern States) have be registered under GST. Unlike multiple registrations under
different tax regimes earlier, a single registration is needed under GST in one State. An additional
benefit under Composition scheme has also been provided for businesses with aggregate annual
turnover up to Rs 1 Cr. With the creation of a seamless national market across the country, small
enterprises will have an opportunity to expand their national footprint with minimal investment.

Benefits to agriculture and Industry: GST will give more relief to industry, trade and agriculture
through a more comprehensive and wider coverage of input tax set-off and service tax set-off,
subsuming of several Central and State taxes in the GST and phasing out of CST. The transparent and
complete chain of set-offs which will result in widening of tax base and better tax compliance may also
lead to lowering of tax burden on an average dealer in industry, trade and agriculture.

Benefits for common consumers: With the introduction of GST, the cascading effects of CENVAT,
State VAT and service tax will be more comprehensively removed with a continuous chain of set-off
from the producer’s point to the retailer’s point than what was possible under the prevailing CENVAT
and VAT regime. Certain major Central and State taxes will also be subsumed in GST and CST will be
phased out. Other things remaining the same, the burden of tax on goods would, in general, fall under
GST and that would benefit the consumers.

Promote “Make in India”: GST will help to create a unified common national market for India,
giving a boost to foreign investment and “Make in India” campaign. It will prevent cascading of taxes

29
and make products cheaper, thus boosting aggregate demand. It will result in harmonization of laws,
procedures and rates of tax. It will boost export and manufacturing activity, generate more employment
and thus increase GDP with gainful employment leading to substantive economic growth. Ultimately it
will help in poverty eradication by generating more employment and more financial resources. More
efficient neutralization of taxes especially for exports thereby making our products more competitive
in the international market and give boost to Indian Exports. It will also improve the overall investment
climate in the country which will naturally benefit the development in the states. Uniform CGST &
SGST and IGST rates will reduce the incentive for evasion by eliminating rate arbitrage between
neighboring States and that between intra and inter-State supplies. Average tax burden on companies is
likely to come down which is expected to reduce prices and lower prices mean more consumption,
which in turn means more production thereby helping in the growth of the industries. This will create
India as a “Manufacturing hub”.
Ease of Doing Business: Simpler tax regime with fewer exemptions along with reduction in
multiplicity of taxes that are at present governing our indirect tax system will lead to simplification and
uniformity. Reduction in compliance costs as multiple record-keeping for a variety of taxes will not be
needed, therefore, lesser investment of resources and manpower in maintaining records. It will result in
simplified and automated procedures for various processes such as registration, returns, refunds, tax
payments. All interaction shall be through the common GSTN portal, therefore, less public interface
between the taxpayer and the tax administration. It will improve environment of compliance as all
returns to be filed online, input credits to be verified online, encouraging more paper trail of
transactions. Common procedures for registration of taxpayers, refund of taxes, uniform formats of tax
return, common tax base, common system of classification of goods and services will lend greater
certainty to taxation system.

B. MICRO SMALL MEDIUM ENTERPRISES’s POSITION

No matter its effect on different sectors, the implementation of GST may want to propel the
growth of Indian SMEs by using selling the authorities-led "Make in India" initiative and
helping small-scale enterprises in terms of ease of doing enterprise. Not like country precise
taxes, the GST regime will introduce a centralized registration device, which can help new
businesses through allowing them to check in themselves on file. Moreover, decreased tax on
new businesses can also spare such firms from the usual tax burden. Moreover, for the reason
that GST is a destination-primarily based tax, regionally synthetic items can pay the equal

30
quantity of tax as imported items, encouraging agencies to attain out to local units, and inside
the system, notably gain small scale industries.

Goods and Service Tax (GST) is the talk of the city today as MSME’s play an important role
inside the improvement of Indian economic system. Upcoming government plan introduced
GST bill need to similarly boost the ease of doing business in India. The government is
likewise planning to provide ratings to MSMEs on some 50 parameters so as to enable the
world to improve the nice of producing and may provide an additional advantage in the
international market. Different projects which include setting up of bankruptcy bill may also
help SMEs to do commercial enterprise with less complexity. A majority of these reforms
paired with the government pushing for passing the GST invoice this monsoon consultation
of Parliament must carry a sturdy backing to the SMEs in India.

MSMEs are the predominant contributor in promoting balanced economic improvement. It

negates the outcomes of large enterprises and provides all spherical development for the
country. They have helped in industrializing the rural and backward areas via providing
employment and different opportunities to lessen local imbalance that has assured a same
distribution of income. The following reasons of GST impact small-scale producers like
SME in India:

 Excise and VAT, with different taxes, might be merged into GST.
 GST will offer tax credit score gain at each degree in the chain
 Small businesses may also break out GST, if they may be under the brink limit.
 This will permit SME section to amplify their reach past their cutting-edge borders.
 GST will now not distinguish between income and services.
 GST is aimed to simplify such tax hurdles and could be in the long run borne with the aid of the
customer.
 Manufacturing gets greater competitive.
 GST could be relevant at all ranges from production to consumption.
 Makes India one common market.
 Lower logistic and tax cost is expected because of this new GST bill.

31
India’s paradigm shift to the Goods and Services Tax (GST) regime will growth their
compliance fees and snare a majority of them into the oblique tax internet for the first time.
to date, unorganized MSMEs have grown faster than organized peers because of lower cost
systems stemming from tax avoidance, and no longer having to pay social security benefits
to employees (such as provident fund and gratuity), and excise duty (if turnover is less
than1.5 crore). Some MSMEs also understate employee base or installation multiple ventures
to keep away from breaching tax thresholds. Such sharp practices helped them charge
products and services competitively during the last few many years and additionally preserve
operating margins at organized player ranges. The vicissitudes because of the impact of GST
are many. To wit, for producers, the discount inside the threshold for GST exemption to 20
lakh from 1.5 crore approach tens of thousands of unorganized MSMEs will quickly be cast
into the tax internet. And digital transaction trails created by way of twin authentication of
invoices underneath GST will improve tax compliance. Additionally, a decrease tax burden
below GST will reduce the fee of uncooked substances and logistics.

The increasing formalization of the Indian economy, especially through digitization, is an inexorable
advance that will upend the business model based on the twin arbitrage of labor and cash transactions
of micro, small and medium enterprises (MSMEs).India‘s paradigm shift to the Goods and Services
Tax (GST) regime in July will increase their compliance costs and snare a majority of them into the
indirect tax net for the first time.

 Sharp practices:-

So far, unorganized MSMEs have grown faster than organized peers because of lower cost structures
stemming from tax avoidance, and not having to pay social security benefits to employees (such as
provident fund and gratuity), and excise duty (if turnover is less than Rs.1.5 crore).Some MSMEs
also understate employee base or set up multiple ventures to avoid breaching tax thresholds. Such
sharp practices helped them price products and services competitively over the past few decades and
also maintain operating margins at organized player levels.
The vicissitudes resulting from the impact of GST are many. To wit, for manufacturers, the reduction
in the threshold for GST exemption to 20 lakh from 1.5 crore means tens of thousands of unorganized
MSMEs will soon be cast into the tax net. And digital transaction trails created by dual authentication
of invoices under GST will strengthen tax compliance. Additionally, a lower tax burden under GST
will reduce the cost of raw materials and logistics.

32
  Different for services:-

For the services sector, though, the tax burden will increase. Hence, organized players with the ability
to hold their price-lines, or pass on any increase in cost to customers, will be able to maintain or
improve profit margins. We believe a simplified tax structure and a unified market will improve
operational efficiencies, especially of MSMEs with a wider reach. Then again, there was
demonetization. Last fiscal, MSMEs were expected to record on-year top line growth of 14 to 16 per
cent.
However, the impact of demonetization has been severe in the second half and they would have
closed the year with an increase of just 6 to 8 per cent. But as the effects of demonetization fade,
growth will pick up in the current fiscal.

 A peep into outlook:

Positive for light engineering: Light engineering MSMEs rated by Crisil saw 15 per cent compound
annual growth rate in topline between fiscals 2014 and 2016, with demonetization causing just a blip.
GST is expected to provide a boost to this segment because of lower tax incidence. The
Government‘s thrust on “Make in India” will also lead to continued investments, helping the sector
maintain growth momentum.
Positive for electrical equipment: Sales in companies rated by Crisil grew way faster at about 23 per
cent in fiscal 2016 compared with 16 per cent in 2015. The sector will benefit from lower freight
costs and tax rates. Though growth is expected to be strong this fiscal, cheaper imports, especially
from China, remain a challenge.

 Neutral for pharmaceuticals:

Sales in companies rated by Crisil grew 11 per cent in fiscal 2016 compared with 15 per cent in
2015.Demonetization had a limited impact as the Government had allowed extended use of the banned
Rs.500 and Rs.1, 000 currency notes for purchasing medicines. We do not foresee any significant
difference in tax rates under GST. This fiscal, too, we expect similar growth.

 Neutral for auto components:

Between fiscals 2014 and 2016, sales by unorganized auto component makers rated by Crisil grew at
14 per cent annually compared with 7 per cent for their organized peers. However, demonetization led
to a short-term drop in sales to original equipment manufacturers (OEMs), or vehicle makers. This
fiscal, OEM sales are expected to normalize. Organized players will benefit and record moderate

33
growth given the thrust on digitization and lower tax rates under GST. Unorganized players catering
mostly to the non-OEM replacement market will be forced to move into the organized domain.

 Marginally negative for textiles:

Sales growth in the textiles-related MSME segment had already declined from 15 per cent in fiscal
2015 to 8 per cent in 2016. GST will have a marginally negative impact because of higher tax rates
expected. During Crisis‘s interactions with clients, some of them raised concerns that a unified
market would create more competition in an already crowded and price-sensitive arena with a large
number of unorganized players. Organized players dealing in branded apparel are expected to fare
well, though. The sector is expected to record below-par growth of 5 per cent or lower.

 Marginally negative for leather and footwear sectors:

Companies Crisil rates in this segment have seen muted growth and have borne the brunt of
demonetization. With competition, including from Chinese players being strong, the operating margin
has fallen to as low as 6 per cent for organized players. We do not expect GST rates to vary much from
the current indirect tax rates. Crisil expects overall growth and margins of players to remain subdued
this fiscal.

The present ceilings on investment for enterprises to be classified as micro, small and medium
enterprises are as follows:
Classification Manufacturing Enterprises*. Service Enterprises**
(Investment limit in Plant & Machinery) (Investment limit in equipment)

Micro Rs. 2.5 million / Rs. 25 lakh Rs. 1 million / Rs. 10 lakh
Small Rs.50 million / Rs. 5 crore Rs. 20 million / Rs 2 crore

Medium Rs 100 million / Rs 10 crore Rs. 50 million / Rs 5 crore

C. IMPACT OF GST ON MSME

At present, the total tax collection in India is around 14.5 Lakh Crore, of which 34% is indirect tax.
Indirect taxes include service tax, stump duty, customs duty, VAT, etc. It refers to the collection of tax
indirectly by the Government of India. In most of the developing countries, the share of indirect tax is
higher than the direct tax. However, in the developed countries the share of indirect tax is much lower.
Therefore, the new GST implementation will allow the government to have a better grip on the
taxpayers. This should be capable of evolving the entire tax system.

34
 Small and Medium Enterprises (SMEs) have been considered as the primary growth driver of the
Indian economy for decades. It is further evident from the fact that today we have around 3 million
SMEs in India contributing almost 50% of the industrial output and 42% of India‘s total export. For a
developing country like India and its demographic diversity, SMEs have emerged as the leading
employment-generating sector and has provided balanced development across sectors. Let‘s examine
what would be the impact of GST on Small & Medium Enterprises.

All the compliance procedures under GST — Registration, Payments, Refunds and Returns will
now be carried out through online portals only and thus SMEs need not worry about interacting with
department officers for carrying out these compliances, which are considered as a headache in the
current tax regime.

Below we have provided a high level impact analysis of GST on small and medium businesses in
India.
Compliance Positives Negatives
Procedure
Registration Online registration will ensure Not all the SMEs have technical expertise to deal with
timely receipt of certificate of online systems, thus most of them will need
registration and minimal intermediaries to obtain registration for them. This will
bureaucracy interface add to their registration cost.

Payment Electronic compliance will bring Since funds are required to be maintained in the form
transparency and will also reduce of electronic credit ledger with the tax department, it
the compliance cost. may result in liquidity crunch.

Refund Electronic refund procedures will Refunds can be claimed only after filing of relevant
fast track the process and enhance returns. Also it depends on the compliances done by
liquidity for SMEs the supplier and his rating.
Returns All returns are required to be filed Minimum of thirty-seven returns are required to be
electronically and input tax credit filed by every registered taxpayer during a financial
and tax liability adjustment will year. Thus SMEs will have to deploy additional
happen automatically on the basis of resources and eventual cost of compliance will increase
these returns

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1) Positive Impact of GST

I. Ease of starting business

Today, companies in other countries require VAT registration. Different tax rules in different states
will cause complications and companies will receive higher procedural rewards. GST provides
centralized registrations that make it easier to start a business and give the benefits of adding the
resulting expansion to a small business.
II. Market expansion
SMEs limit their customers within states as they will bear the ultimate burden of tax on interstate sales,
which reduces their customer base. With implementation of GST, this will be nullified as tax credit
will be transferred, irrespective of the location of the buyer and seller. This will allow startups, SMEs
and MSMEs to expand their reach across borders.

III. Reduction of tax burden on new businesses

As per the current tax structure, businesses with an annual turnover of over Rs 5 lakh need to pay a
VAT registration fee. The basic exemption limit under GST is Rs 20 lakh and Rs 10 lakh for special
states, which will bring relief to a large number of small dealers and traders.

IV. Elimination of distinction between goods and services

GST ensures that there is no ambiguity about what constitutes goods and services. This will simplify
various legal proceedings related to packaged products. As a result, there will no longer be a
distinction between the material and the service component, which will greatly reduce tax evasion.

V. Improved logistics and faster delivery of services

Under the GST bill, no entry tax will be charged for goods manufactured or sold in any part of India.
As a result, delivery of goods at interstate points and toll check posts will be expedited. According to
a CRISIL estimate, the logistics cost for manufacturers of bulk goods will get reduced significantly by
about 20 percent. This is expected to boost e-commerce across the nation.

VI. Removal of multiple taxation

GST will ease transfer of goods across states and reduce the cost of doing business, as the reform will
cut down multiple taxes imposed by state and central government.

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2) Negative Impact of GST
I. Registration woes
Under the GST law, every supplier of goods or services is required to be registered under the GST Act
in the state or union territory from where they operate, if their turnover in a financial year is Rs. 20
lakh or more (for special category states such as those from the northeast, this threshold is Rs 10
lakh). Thus, one would think that there is no need for smaller players to register under GST(12).

However, if small suppliers (of goods or services, or both) make an inter-state supply, they must
register (their turnover is immaterial). And an inter-state supply may even denote a supply from
Gurgaon to Delhi, the commute between which is only a few hours.

II. Concept of ‘Casual Taxable Person’

This means that someone who occasionally undertakes transactions involving supply of goods or
services or both, in the course or furtherance of business, whether as a principal, agent, or in any other
capacity, in a state or union territory where he has no fixed place of business, also needs to register.
Other than registering under the GST Act, the casual taxable person also has to pay tax at the time of
applying for registration on an estimated basis.

Since he or she doesn’t have a place of business in that state, there would be no output tax in that state,
thus the state GST cannot be adjusted as an input tax credit. To that extent, the GST is a sunk cost for
such individuals.

III. Composition levy mechanism is very restrictive

It is an alternative method of levy of tax designed for small taxpayers whose turnover is up to Rs 50
lakh. Those who opt for this mechanism are not allowed to take input tax credit, or collect any tax from
the recipient. To such an extent, it seems fair.

After all, the rate of GST under the composition levy is low. It is 2.5 percent of the turnover in case of
a manufacturer or 1 percent for dealers. But there are restrictions attached. For instance, once again no
inter-state supply is permissible. Or for that matter, a person opting for a composition scheme, cannot
sell via an e-marketplace (GST requires e- marketplaces to collect tax at source).

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IV. The draconian reverse charge mechanism

If a small businessman (who as per the threshold limits is not required to obtain GST registration)
supplies goods or services to a customer who is registered under the GST Act, the customer (buyer) is
liable to pay the GST on such a purchase. Not only this, but the buyer also must self- invoice. In other
words, the buyer must issue an invoice for the purchase made by him from the unregistered seller.
This invoice is to be uploaded onto the GST system.

V. Technological challenge
Not all SMEs have the technical expertise to deal with online systems. Thus, most of them will need
intermediaries to take them through the registration process. This will add to their registration cost.

VI. Working capital blockage

Since GST requires businesses to maintain funds in the form of electronic credit ledger with the tax
department, it may result in liquidity crunch. Also, the harsh ‘input tax credit’ mechanism will also
lead to working capital blockage.

VII. Harsh mechanism of ‘Input Tax Credit’

Input Tax Credit is available to a buyer only if the supplier has paid tax inside a given window. This is
one problem which a reasonable percentage of small businesses will face in their life-cycle. Most (if
not all), will have no bad ‘intent’ of evasion or not paying. Sometimes, the choice of ‘paying salary to
the workers on time’ and ‘paying a penalty to the government for delayed payment’ is a conscious call
which small businesses invariably must take.

VIII. Compliance rating

Another interesting provision is the ‘Compliance Rating’, a system which assigns ratings to businesses
based on their discipline, so you will know whether your supplier has a ‘good or poor’ rating before
buying from them. Thus, businesses will try to avoid buying from people with ‘poor’ rating, which
means that people will do everything they can to AVOID a poor rating. And the rating becomes ‘poor’
not just due to a delay in filing data, but also due to delays in payments.

IX. Added compliances for exports

Hundreds of Startups / SMEs earn revenue by exporting their services mostly in the technology sector.
Now, with GST they have to mandatorily register and file returns. Yes, there is an option to claim
refunds of input taxes.

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 D. Challenges for SMEs

A sizeable portion of SMEs are of the opinion that GST is not all good for the sector and their fears
may not be totally vacuous. The tax neutrality that the SMEs enjoy may be one of the prominent
benefits. However, reduction in duty threshold is one of the key concerns that have led them to be wary
of the GST bill. Under the existing excise tax, no duty is paid by a manufacturer having a turnover of
less than rupees 1.50 crores. But, post GST implementation; the exemption limit will get significantly
lowered. During a speech at a news conference, Finance Minister, Arun Jaitley estimate said, the limit
can be as low as rupees 25 lakh. As a result, a large number of SMEs and startups will be mandated to
come under the tax net and will have to pay a large chunk of their earnings towards tax.

Furthermore, there are other flipsides to the proposed tax neutrality. GST regime won’t differentiate
between luxury goods and normal goods; these will it hard for the SMEs to compete against large
enterprises. GST that is ultimately levied on supply will not be available for input credit. This will lead
to an increase in the cost of the products for businesses that supply directly to end users.

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 CHAPTER 5- CONCLUSION

MSME is a growing sector where enterprises enter and exit the market frequently, so the
implementation of GST has had a great effect on the survival in the market. Some enterprises found it
beneficial but majority faced difficulty in accepting it. For existing enterprises, GST simplified the tax
structure, unified the market hence improved the overall operational efficiencies of MSME, so far the
unorganized MSMEs were growing fast than the organized ones because of the tax avoidance, with
GST in effect, it has made the taxation system transparent thus making the entities liable for tax
payment. For a new entrepreneur, the application of GST, made the registration for taxation easy,
relieved them from previous VAT registration. The Government has implemented GST with a view of
long-term better prospect for the country by various aspects. The goods and services tax (GST) makes
the tax system easy and thus contributing in the growth of the country. The Government applied GST
by summing up of various taxes under CGST & SGST, transparent taxation, reduced raw material cost,
to bring down the cost of goods and services and the ease of doing business in India. Initially there was
huge chaos regarding the enactment of GST, but many successful businesspersons supported it and
considered it as a boon for the long-term development of the nation.

GST being the big step of Government of India to simplify the previous tax system has both positive
and negative impact on business regulations of Micro, Medium & Small Enterprises. The fundamental
of ‘ONE NATION, ONE TAX’ was created with an intention to easy tax filing, ease of doing business
in other states, reduction in the prices of goods, relieving the burden of logistic overhead from small
enterprises. On the contrary, it has increased the technology dependency of every enterprise, as every
transaction is made online. It will take some time for the people to get used to the new taxation regime,
only then will the nation start to see the fruits of ‘ONE NATION, ONE TAX’ – the GST.

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 BIBLIOGRAPHY

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