A new analysis indicates that India's Goods and Services Tax (GST) regime disproportionately burdens small, unincorporated sector enterprises. These businesses, typically owner-run proprietorships or partnerships, face compliance costs that can significantly impact their annual turnover and operating expenses.
The study, conducted by Sacchidananda Mukherjee and Shivani Badola of the National Institute of Public Finance and Policy (NIPFP), utilized data from the National Sample Survey Office’s (NSSO) Annual Survey of Unincorporated Sector Enterprises (ASUSE) 2022-23. It found that firms with an annual turnover below Rs 4.9 lakh incur GST compliance costs ranging from 3.28% to 13.90% of their annual turnover, and between 4.64% and 19.71% of their average annual operating expenses.
Regressive Impact on Smaller Entities
A key finding of the NIPFP paper is the regressive nature of these compliance costs. Smaller taxpayers, those with annual turnover less than Rs 4.9 lakh, bear a higher cost burden compared to their counterparts with turnovers of Rs 4.9 lakh or more. This disparity often discourages these businesses from fully participating in the tax regime, despite the potential benefits of GST registration, such as access to larger supply chains and the ability to claim input tax credit (ITC).
According to the ASUSE data, only 2.41% of enterprises surveyed were registered under GST or the previous Value Added Tax (VAT) regime, suggesting a widespread reluctance among smaller firms to engage with the indirect tax system.
Complexities of GST Compliance
While GST was introduced to simplify India's indirect tax system, the paper highlights ongoing complexities for businesses. Compliance requirements include filing multiple periodic returns, regular reconciliation of input tax credit with system-generated statements, adhering to e-way bill and e-invoicing regulations, and maintaining comprehensive digital records.
Upcoming GST Council Meeting
These findings come as the GST Council prepares for a crucial meeting on October 7. The council is expected to discuss process reforms aimed at easing compliance, focusing on faster and simpler registration and return filing procedures. Additionally, issues concerning blocked input tax credit and refunds are slated for consideration, potentially offering relief to businesses struggling with the current framework.