GST to enhance SMEs' efficiency

The input credit mechanism under goods and services tax will help price products more competitively

The proposed goods and service tax (GST), which has seen the main political parties adopt opposing views, spells a mixture of good news and some restrictions for small and medium enterprises (SMEs), industry experts said.

Venu Srinivasan, chairman and managing director of TVS Motor Company, a leading two-wheeler manufacturer, believes that GST will enhance the competitiveness and efficiency of the manufacturing sector (which houses a substantial number of SMEs) and mitigate the cascading effect of the current tax system.

“GST will give a huge fillip to SMEs in my view,” said Srinivasan. “There will be many benefits, and though there are also concerns, they can be removed.”

Srinivasan said GST will help in “normal tiering”. Speaking of TVS Motor’s experience, he said, “We have Tier-I, -II and -III suppliers. When you go from sub-contracting to bought-out, the four per cent Central sales tax makes it uneconomical to do a complete bought-out. Therefore we have hybrid models, which are not efficient, and quality suffers in the process. Once the GST comes in, there will be tier-I units to make complete assemblies, tier-II units to make sub-assemblies and tier-III units to make ‘child’ parts.”

Sachin Menon, head of indirect tax at professional services firm KPMG, said the GST is a “mixed basket” for SMEs: “Like any other tax law, it brings good news for this sector along with some restrictions as well.”

Once GST is introduced, he added, SMEs would be in a position to avail themselves of the complete input credit for taxes paid (other than basic Customs duty) on procurement from various sources such as import, inter-state purchases and local purchases.

Both Menon and Srinivasan spoke to Business Standard on the sidelines of a seminar on GST, which was recently organised in Chennai by the Confederation of Indian Industry.

Under the current value-added tax (VAT) regime, the ability of SMEs to reach potential consumers across India is limited because of the Central sales tax (CST) on inter-state sales, which is not available as input credit to the buyer and thereby increases the purchase cost in the hands of the buyer.

Menon said unlike larger players, SMEs lack the infrastructure to open depots in other states and stock-transfer the goods to avoid the impact of CST. Under the proposed GST regime, despite this handicap, this cost will get neutralised through the input tax credit mechanism, thereby increasing the competitiveness of products.

The input credit mechanism under GST does away with the cascading impact of input taxes in product pricing completely, and hence products are likely to be more competitive, depending upon the rates of tax applicable currently and in the GST regime.

However, on the downside, according to Menon, the turnover threshold for tax exemption may come down from the current Rs1.5 crore to Rs10 lakh. In any case, in those sectors that cater to businesses, the reduction in the exemption threshold at worst, could call for increased working capital to finance the tax payment until receivables are realised.

To the SME customer the tax is a flow-through, since the GST levy will be available to him as input credit and hence the reduction in exemption threshold may not impact SMEs significantly. However, SMEs that manufacture consumer goods which are sold directly to end-customers may face a challenge in the face of reduction in exemption threshold, since no credit is available to consumers and this will add to the cost of goods sold to consumers.