Perspective to Contributions Made by GST to MSME Sector

GST carries a very powerful legislative framework for flow of credit in the course of creation of value and translates into revenue where consumption takes place. There lies more potential of the system to be explored and revealed, than limiting the concentration to mere generation of revenue. GST promises more than just revenue generation. It is a deft system, especially the one we have here in India, where transactions’ trail is explicit. Here is another perspective to consider whose expectations from GST could be met in ‘facilitating and enabling’ strengthening of the MSME sector.

Expectations from GST

There have been several aspects to GST that were discussed and therefore expected to find a place in the legislation itself such as:

• Multi-point tax with credit for taxes paid;
• Borderless flow of trade and seamless flow of credit;
• Simplified revenue neutral tax structure with HSN-based classification;
• Tax on value added with refund of any overflow of credits on account of exports, rate-inversion or other specified end-uses;
• Self-assessment and simplified compliance and reporting based on online tool;
• Minimal and essential Governmental intervention and expanded in exceptions;
• Rule-based and transparent anti-evasion measures;
• Enforcement of tax avoidance minimally intrusive and based on principles of natural justice;
• Voluntary compliance ecosystem where compliance rating compels compliance resulting in minimal litigation;
• Robust advance ruling mechanism to resolve potential disputes; and
• Appellate mechanism as the arbitrator for addressing interpretational conflicts which would be few and far between.

Experience in GST

The operational realities of the GST regime diverge significantly across multiple statutory and administrative dimensions:

MSMEs Challenges

MSME segment represents a very large population of taxpayers who make a significant contribution not only to the revenues of the Government but also to some very important and efficient links in the supply chain of mega industries. Not all taxpayers absorb changes to the law in the same manner or the same pace. MSME needs more engagement before roll-out. Government’s taxpayer-engagement in certain recent changes is a glorious illustration of how to roll-out changes. Clearly, such taxpayer-engagement was missing in the past and there are non-compliances arising from that limited engagement that is still unresolved and is presenting itself in departmental audits and inquiries with interest and penalties. It is a problem that needs to be addressed and resolved on priority.

MSME industries’ experience has been the ‘inherent inflexibility’ in GST that expects all taxpayers to make every transition smoothly. Whether it is transitional credits or belated returns or interest or unpaid arrears. There are challenges that need to be resolved but not without active engagement with the Government.

This is not to say that taxpayer has not made bona fide mistakes due to misunderstanding of this new law for which the responsibility is acceptable. But this is a fact that bona fide defaults and on-compliances are lurking with need for proper solution. Any attempt at resolving these deviations should be done with due care so that they do not include and enrich ingenious fraudsters from ‘making hay while the sun shines’.

Bona fide taxpayers would like not to be ruffled by the aggressive measures that has fraudsters in the crosshairs. Fraudsters are a separate class of taxpayers and as the Government’s own paper expresses, they too lie in different sub-categories based on their ‘end game’. MSME industries seem to be burdened by the weight of the administrative machinery that challenges gullible taxpayers. Government is welcome to exercise all lawful measures and pursue fraudsters or foil their plans but not before ‘separating the grain from the chaff’. There’s so much publicity around these ‘questionable’ transactions that there is untold fear about carrying out transactions with genuine parties. Everyone is looking over their shoulders to see who is the ‘wolf in sheep’s clothing’. MSMEs are having to prove their bona fides every step of the way.

Government’s predicament about lines of distinction being blurry is understandable but it is equally true that not all non-compliant taxpayers are fraudsters. MSME sector cannot afford to engage in fraudulent activities deliberately as the price of fraud can be debilitating. To paint all non-compliance with the same brush would undo all the good work done in nurturing MSME sector and there is not a single MSME enterprise who would speak for fraudsters and the law bring such to justice.

Similar differentiation is justified in fatal and non-fatal defects in e-way bill compliance. It is seen that all deviations are met with the same rigorous penalty under Section 129. Allowing time to understand and comply with e-way bill requirement cannot be treated with ‘one size fits all’ rule when Circular 64/38/2018-GST dated 14 Sept 2018 itself admits minor offences and prescribes nominal penalties. MSMEs have borne the brunt of the e-way bill defects as this responsibility has been thrust upon them by mega industries for whom supplies, or job-work is undertaken. MSME enterprises have embraced this new requirement the fastest and are on their way to get ready with e-invoicing when thresholds are reduced further. Empathy in administration will see more than encouraging compliance and surge in revenues too.

Credit to Government for Its Responsiveness

Credit must be given where it is due and Government’s initiatives that must be commended are:

• Deferring ‘New Returns 2020’ and introduction of ‘QRMP 2021 with IFF’;
• Automating self-authenticated refunds;
• Enabling GSTR2B as a static document;
• Extending due dates, where justified;
• Upgrading technology backbone; and
• Timely amendment to rules to harmonize with the requirements of law.

It is this responsiveness that brings hope especially to MSME taxpayers that ‘where Government wills (to alleviate taxpayer’s woes) there are ways. There are many remarkable areas where the principles under earlier tax regime, which shares the same equitable jurisprudence with GST, will meet the ends of justice, namely:

Aspects that Could Greatly Advance Compliance by MSME Sector if Government Were to Consider:

• Prospective Operation and Transition Plans: All changes introduced be applied with prospective operation and clear transition plan published for taxpayer awareness including its effects for past tax periods;
• Portal Functionality Publicity: Release of new functionalities on Common Portal be published and made operational from a reasonable but future date. The suddenness of implementing new ways of doing old things makes it cumbersome for taxpayers to attend to these changes. Online service of notice was unknown until recovery action was initiated and taxpayer’s claim that notice was not served came to be dismissed in Court proceedings. New ways of doing old things are acceptable but when these new functionalities are implemented, wide publicity be given to them; and
• Appellate Simplification and Pre-Deposit: Filing appeal before First Appellate Authority needs to be simplified across agencies and across States. Phased roll-out of automation is understandable but taxpayers have multi-State operations and if practices are uniform or changes notified from a prospective date would help taxpayers adhere to changes. Pre-deposit for appeals still via DRC-03 challan but without option of ‘pre-deposit’.

Taxpayer Friendly Measures

While there may be certain measures that are common to all taxpayers, but MSME sector feels the burden the most due to the mounting interest liability along with threat to business continuity. Without delving into changes in the law, certain ease-of-doing business measures that could help administration too, namely:

Extension of Section 172 Imminent

There is no doubt that taxpayers have made mistakes and certainly all of them have been set right and errors greatly reduced. First 5 years is reasonable and certainly first 3 years begs exercise of powers that the Legislature has allowed the Executive under section 172 to ‘remove (following) difficulties’:

Taxpayers are eager to make amends where they have misunderstood or failed to realize the extent this new law differs from earlier tax regime. Remedial measures foster healthy relations and its no one’s case that GST will be able to deliver on its promises in an adversarial compliance environment.

Conclusion

There is no incentive to be non-compliant and MSME sector knows this all too well, where its margins are in single digits and GST is in double digits, this sector is all too concerned to deviate. Compliance is a journey that is best undertaken with much preparation and awareness building along with assurance of ‘no sudden changes will augur well with MSME enterprise as well as others.

It must be accepted that taxpayer-base is too large for administration to aggressively pursue and effectively implement this new law. Where taxpayers are willing, MSME sector is the one with the greatest motivation to cooperate and be compliant with law, it is important the Government joins hands to ensure self-assessment of liability in its true sense without fear of looming inquiry or demands.

MSME industry is willing, even eager, to go from ‘bullock cart to bullet train’ but only seeks time and closer taxpayer-engagement to make through every transition. But the one that brings the most value in GST is one where there is a happy partnership with Government and industry to make this journey pleasant.