The rollout of goods and services tax (GST) is expected to level the playing field for small and medium enterprises (SMEs) by reducing the tax arbitrage. True, at least in the immediate term, compliance costs will shoot up as GST requires registration and filing of returns in multiple states. Also, short-term working capital requirements will increase as interstate stock transfers will attract IGST, though the amount can be claimed back as input tax credit later.In the long run, however, GST offers two major benefits to businesses. First, it subsumes multiple tax and ushers in a uniform and transparent tax regime. Second, it mitigates the ill effects of cascading by offering input tax credit across the supply chain, ensuring wider coverage of taxpayers in the supply chain.
As supply from registered taxpayers alone will be allowed for input tax credit, businesses and stakeholders will insist on registration of their suppliers and traders. Furthermore, failure to comply with the GST returns timelines will impact suppliers’ compliance ratings.
To gauge the impact of GST at a more granular level, CRISIL Research looked at 18 sectors where the SME presence is above 50 per cent. Companies with turnover up to Rs 250 crore were considered. Of the 18, as many as 14 sectors are expected to see positive or neutral impact.
Manufacturing SMEs have good augury
Among the manufacturing sectors studied, auto components, ceramic tiles, chemicals, dyes and pigments, edible oil, electronic heavy and light engineering, paper, plywood and laminates and steel-non-integrated/rolled/structural products are expected to see positive or neutral impact.
Taking into account the pre-GST abatements, the rates on most services sectors are in line with the current effective incidences. However, some sectors could take a hit.
Transport services, which mainly compete on local market knowledge and proximity to customer, are likely to be impacted as the operations are mostly cash-based and tax evasion is high. Post-GST, due to efficiency improvement in the supply chain, the smaller players will be impacted more.
In hospitality sector, the tax rate on booking rooms in hotels has changed from 18-20 per cent earlier to 12-18 per cent. Thus, there will not be a major impact in terms of pricing. However, for travel agents, who fall under SME and operate largely in the B2C segment, it would be difficult to pass on tax benefits.
Earlier, the tax rate was 15 per cent on ticket booking and 9 per cent of commission on travel package. Under GST, the rate is 18 per cent for travel agents and 5 per cent for tour operators. However, SME travel agents may continue to take commission in cash. For ticket booking for retail segment, after the airline prints the ticket, no separate bill is given by the travel agent. Hence, these transactions are difficult to trace, leading to tax evasion.
(Opinion Piece by Binaifer F. Jehani, Director-Industry & Customised Research at CRISIL Research)
Source: Business Today
