SMEs: The Lifeblood of Global Economies, Post-GST Impact in India

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By Ashik Gosaliya and Aanya Jain

Around the world, the small and medium enterprises (SMEs) have been recognised as the engine of economic development and for advancing non-discriminatory socio-economic advancement. SMEs hold 90% of the credit in offering jobs across the globe. Alongside generating employment, it produces an extremely high rate of manufacturing growth.

Global Scenario for SMEs

While examining the global scenario of SMEs, it is widely evident that they have been enabling in diminishing technological backwardness and increasing the possibilities of job creation. SMEs play a vital role in the European economies, offering 75 million jobs and representing 99% of all the business firms. China is one of the recent examples of economic progress brought about by the contribution of the Small and Medium Enterprises.

SMEs have been playing a crucial role in China’s economic development. SMEs have been benefiting the economic growth of the United States through capital injections. The US government works on their procurement policies to increase the participation of different types of SMEs.

Taking a cue from the first world countries, the emerging economies of Asia are investing heavily in SMEs to ensure faster and inclusive growth. Resultantly, countries like Taiwan and Hong Kong are reaping the benefits of generating employment at the rate of 50%, which accumulates in jobs for 1.2 million citizens.

The scenario in India is no different for SMEs. Financial crisis or economic slowdown, Indian SMEs have always stood by the economy and have nurtured it from the roots offering sustainability. When India restructured its economic goals, SMEs adopted the new mantra of “Liberalization”, “Privatization”, and “Globalization” towards economic well-being. Despite being at the forefront of the economic changes sweating it out to improve the market sentiments, their realistic potential has remained buried behind the challenges SMEs faces in India.

Major challenges faced by SMEs in India

Despite being the major economic force of the country, challenges for SMEs in India are countless – be on the fronts of technological backwardness, the lack of market opportunities, logistic support or environment for innovation. Some major challenges are listed below:

  1. Maintaining the quality of the products
  2. Unavailability of investing capital
  3. Lack of connection with foreign clients and markets
  4. Identifying foreign business opportunities
  5. Lack of information about the international trading system
  6. Intertwined Tax Regime

SMEs face challenges continuously from various quarters, some are of the mild nature, while some are rigorous process of getting through the government License Raj. Amongst all, the challenges related to taxes are the biggest and the most tumultuous.

Taxation Reforms

Over a period of time, the Indian government has been mulling many options to ensure ease of doing business and offering leeway to SMEs by providing liberal tax regime. As was expected from the Narendra Modi government, the new tax regime was introduced to revolutionize the entire indirect tax regime and provide an environment for higher and sustainable economic growth.

What is GST?

Simplifying the entire tax regime has been a long-pending demand of the business in India, which used to pay approximately 50% taxes on products and services produced. GST was introduced to untangle the entire tax web to offer businesses with one single tax instead of paying taxes at every level.

Pros and Cons of GST for SMEs

The nature of the “change” is to break something and make something else (for better). The transformation brought through the GST has broken the spine of the black market and made the tax regime transparent and effortless. With changes come the fear of the unknown. GST did the same to the business community.

Economic incentives can’t simply be judged as black or white. There are various hurdles and arguments that are certain with any major reform. Alongside large enterprises, GST will surely offer better success rate for SMEs in due course of time.

Procedures Positive impact Negative impact
Registration It reduced the bureaucratic
interference and brought transparency through online registration and certification.
Technological backwardness is the major hurdle with the system going online needing middlemen, which will result in corruption.
Payment The system rules and regulations
become more transparent with online payment services.
The requirement of funds in order to maintain a balance of SMEs with the tax department, resulting in cash barrier.
Return Online return filing process ensures the speedy process. On the flip side, SMEs are compelled to file minimum 37 returns per year, which may increase the compliance cost.
Refund The digitization of the refund process will improve the financial liquidity for the SMEs. Compliance certificate is a major
hurdle. Only after which the refund can be claimed.

 

Despite moving forward with the tax neutrality, the fuel products are kept outside the GST net providing the government full control over the taxation. In principle, giving a free hand to the government over taxes on fuel products doesn’t satisfy the “one country, one tax” argument. Moreover, taxes on fuel products affect citizens more severely compared to taxes on goods and services.

GST Benefits for SMEs

It would be too early to point out the outcome of GST on SMEs. However, the signs of GST seem to be positive and these positives are expected to overcome the negatives in the tax regime and a healthy environment of economic growth will follow up. The following are the expected benefits of GST for SMEs:

  • Ease of starting a business: Under GST, a centralized registration will make doing business easier, simpler and the consequent expansion will be an advantage for SMEs.
  • Reduction of the tax burden on new business: The central government has increased the basic exemption limit to 20 lakhs, which is a 75 percent relaxation in limit for small traders and manufacturers.
  • Speedy logistics and Delivery: The movement of goods at check posts will be expedited. This will reduce the logistic cost and improve the speed of delivery.

SMEs and Global Exposure

Ever since the rise of the US in the post-WWII era, it has been witnessed that SMEs are the key players in economic growth. The argument does not even require data to support. It was the well-accepted truth among the developed economies that the only cost-effective avenues and access to finance for furthering the economic development is investing in locally-owned businesses. Small and medium enterprises (SMEs) have shown great potential in spurring economies in the US, Japan, and Germany in the last couple of decades.

Needless to say, it is the SMEs, which provide the financial juices to the economy during the global economic crisis or the recession. Promoting local businesses under global initiatives encourage foreign as well as domestic investments in SMEs.

So far as the Indian SMEs are concerned, they are not much behind the global trajectory. Indian SMEs have maintained a stable pace during the last decade. Evidence show that SMEs have been pivotal and can become as competitive as core business sectors in India; similar to the role SMEs play in the first world countries – the US, Germany, and the UK.

Indeed, the environment is challenging in India given the fact that SMEs have their fundamentals stuck in regulatory hurdles and financial incompetence. The potential of the SMEs in India paints a different picture compared to the reality. Up against the challenge, global opportunities are immense squaring up the losses.

When exposed to the global platform, the SMEs in India will have a vast market to serve and a developed distribution network. On the part of the labour, there is a major gain to ponder about. Indian SMEs will be able to tap the affordable skilled labour. However, blossoming in such a conducive environment isn’t easy for SMEs. This requires the government of India to shred the archaic regulations allowing Indian SMEs to deal directly with the international businesses.

Direct global connect will allow Indian SMEs the much-needed access to finance to support their business activities and to take the burden off the Indian financial system, which is any way reluctant to invest freely in SME sector.

Conclusion

The pertinent and operating question is, have we got the “New India” offered by Hon’ble Prime Minister Narendra Modi. Are we ready to be on the course towards New India? The economic stability of the last three years and the enthusiasm of the financial market on the Dalal Street suggest so.

The slowdown in the growth rate in the June quarter of the current financial year purportedly due to the impact of major economic reforms namely demonetisation and GST is expected to bottom out in due course of time. International Monetary Fund (IMF) sees a very solid track ahead for the Indian economy. The government on October 24 announced Rs 2.11 lakh crore support for public sector banks reeling under bad loans in a bid to cope with the major drag on the economy. In an effort to ease the compliance pain for SMEs, the GST council on October 6 announced various facilitative changes in the larger interests of economy.

The biggest promise of GST to usher in a corruption-free system will definitely mean boosting up India’s position as a reliable trade partner in international fora. GST will further improve India’s ranking in the Ease of Doing Business Index, thereby making it the most preferred investment destination in the world in the coming days. The cash-strapped Indian SMEs can hugely benefit from the increased flow of FDI into the economy in the long run.

Challenges, however, may lie ahead for the SMEs and it does require the government to incentivize the sector, in order to level up the economic growth; not only the financial and tax reforms would help. The reforms must be complemented by the skill development of the Indian youth for India to become a global powerhouse of knowledge and economics.

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