Learning about GST and SME issues….

Here is a superb interview Anil Bhardwaj, Secretary General of Federation of Indian Micro and Small and Medium Enterprise. He explains how GST has hit the SME sector.

More importantly,  he also tells you how these units actually function, the several constraints and challenges. This is something which most of us neither understand nor care to understand. Most of the articles dubs the SME sector as unorganised (which has come to mean corrupt of late) failing to realise that it forms 90% of economic activity in India (and other parts of the world as well). Most of our economic debates are for 10% of the Indian economy.

Weren’t there problems arising from the conception of GST itself?
One of the problems MSMEs [micro, small and medium enterprises] encountered pertained to those dealing with engineering items. In the B2B [business-to-business] sector, I get an advance, meaning that if you want me to customise a machinery costing, say, Rs 10 lakh, I will take an advance of Rs 2 lakh to Rs 3 lakh at the time you place the order for me. You will pay me another Rs 3 lakh at the next inspection and the remaining amount at the time of delivery.

The funny thing about GST is that you have to pay tax on an advance also. Most machines come under the 28% tax slab. So out of Rs 3 lakh paid as installment, 28% of it would go to the government. But I am not earning anything, I have to buy raw material to customise the machine you want. A little less than one-third of my working capital is gone.

What about the issue of reverse charges?
According to the reverse charge mechanism, if I am buying from a non-GST compliant entity, I have to prepare his invoice and pay the tax and then file yet another document to claim it back.

Though the charges are reversed next month, your capital is locked nevertheless.
You have hit the nail on the head. GST has put pressure on working capital. Typically, the payment schedule in the MSME [micro, small and medium enterprises] sector is two to three months. But I have to pay tax monthly. Big companies, unlike MSMEs, are in the B2C [business-to-consumer] sector. As soon as they supply to the distributor, they take a draft.

But those manufacturing machinery parts get their payments in two to three months. In GST, the moment I supply I have to create an invoice and pay tax. But I haven’t yet received my payment. I will receive it three months later. I am therefore paying the tax out of my working capital. And to think, the biggest problem of MSMEs is working capital.

Superb stuff. Lots of stuff in the entire interview…

3 Responses to “Learning about GST and SME issues….”

  1. Linkfest - Kairos Capital Says:

    […] Mostly Economics – GST and SME issues […]

  2. Anantha Nageswaran Says:

    Thank you for the link. But, I just thought I would take the liberty of pointing out that you fall into the trap of conventional narrative that bemoans the dominance of the so-called 10%. 6.34 crores of unincorporated non-agricultural enterprises generate GVA of 11.6 lakh crores. Just 190, 000 Factories generate the same amount of GVA (ASI, 2014-15). Incredibly, just 4% of 190,000 generate 60% of that GVA. Our problem is that we have far too many subsistence enterprises that generate far too little for the economy. They are not employment generators.

    There is a social obligation not to leave them in the lurch. But, policy should provide the right motivation and environment for the capable, the motivated and skilled among them to grow bigger. The policy and regulatory environment is against firms becoming bigger.

    There is a difference between supporting existing big firms and encouraging smaller firms to grow bigger. Former is cronyism and the latter is economically efficient. I am calling for the second.

    Further, there is also empirical literature that has documented the fact that seldom do firms start small and then go on to grow. They are uncommon.

    I stress, while the State has an obligation to the small guy or lady entrepreneur (who are mostly one person enterprises), there needs to be no romanticism or illusion about their usefulness for generating the many million jobs that would need to be created.

  3. GST and small enterprises – The Gold Standard Says:

    […] zestful blogger that he is, Amol Agrawal had pointed to a very insightful interview of  the Secretary General of the Federation of Indian Micro, Small […]

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