India’s biggest job-creators – the small and medium enterprises (SMEs) — are still struggling to cope with the changes brought about by the country’s biggest tax reforms more than a month after the introduction of the single producer levy.

The swelling list of teething problems, such as dealing with unregistered vendors, cracking harmonised system of nomenclature (HSN) code, and adopting reverse charge mechanism (RCM), has compounded matters. The lack of understanding and clarity on new regulations in some areas, and the industry’s general aversion toward getting into the “system” would appear to be extending the learning curve.

“The government criteria are not clear in many areas. Smaller traders, vendors and suppliers are under stress because they don’t know how to deal with RCM. It is just an added transaction for small service providers. They feel if the amount will be reversed later why go through the pain of entering it in GSTN. A lot of small traders prefer working under the radar,” says Govind Mittal of Kota, Rajasthan-based Mittal Enterprises that deals in chemicals.

Bracketing output is another exercise at cracking the HSN puzzle.

The Kota stone, for instance, could be processed into a decorative stone, flooring stone, or finishing stone — each with a different code.

Complex codes

The complexity was highlighted by even GST Network (GSTN) Chairman Naveen Kumar. He mentioned in a recent interview that a large percentage of businesses are not in a position to comply with GST ahead of the Aug 20 deadline for filing self-assessed returns.

India has about 45 lakh SMEs, of which about a third have not registered for GST, point out experts.

Experts attribute the problems to the industry-wide lack of preparations.

“A lot of SMEs did not start preparations in time for GST, assuming it won’t happen. The government outreach program started a little late but they have done a lot to educate all types of businesses,” says Pratik Jain, Partner and National Leader – Indirect Tax, PwC.

Meanwhile, Kerala’s food businesses, a big part of local industry, are walking the tightrope between securing GSTN registrations and staying competitive.

“Earlier, most of the smaller companies in food-related businesses in Kerala were out of purview of the value added tax (VAT) and enjoyed exemption under the Small Scale Units Exemption Act. Most of them paid 5 per cent or 14 per cent excise. Under GST, very few items fall in the 5 per cent slab. So, with the new tax rates, small businesses must raise their prices in a price-sensitive market,” says Kottayam-based Xavier Thomas, MD, Sanson Chemical Industries.

And there is no clarity on how some items will be taxed. Take hollow cement bricks as an example.

Bricks that are used extensively in Kerala for paving roads and houses now attract 28% tax despite having just 20 per cent cement component.

Earlier, these attracted 5 per cent VAT and were out of excise purview.

‘Falling in line’

To be sure, some smaller businesses are also acknowledging the benefits.

“We used to buy raw material and pay CST (central sales tax) plus excise duty. We never used to get credit of CST. Now since CST has merged with GST, we will be able to get claim of full GST,” says Jitender Agrawal of Agarwal Enterprises, a chain link supplier in Solan, HP.

Similarly, Amit of Agra Shoes Mart says accepting the change is the way forward for the smaller businesses.

Source: The Economic Times