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Economy

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September 25, 2017

Contribution of MSME’s to the Indian economy in terms of employment generation, containing regional disparities, and enhancing export potential has been quite phenomenal. Discuss how implementation of GST will impact this.

Refer - The Hindu

 

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IAS Parliament 7 years

KEY POINTS

·        Micro, Small and Medium Enterprises (MSME’s)— a sector comprising self-funded proprietary firms, private self-help groups, private cooperatives, khadi, village and coir industries.

·        MSME’s - accounts for 25% of employment, 40% of industrial output and 45% of exports of the country.

·        GST aims at simplified tax structure and a unified tax market. 

Positive impact of GST on MSME’s

·        Lower freight costs.

·        Lower cost of raw materials.

·        Lower tax burden.

·        Increases market base for MSME’s due to complexities of interstate sales disappear.

·        No tax burden on interstate sales will help Original Equipment Manufacturers (OEM)’s to procure components from MSME’s irrespective of its location.

·        This will boost up quality in production.

·        GST treats sales and services equally. So, no excess tax burden on MSME’s operating in sales and service model.

·        Improves ease of doing business for MSME’s because of its transparency in registration, as most of GST’s compliance process is online.

·        Increased threshold from 1.5crore turnover to 20lakhs for compliance to GST will increase the tax base and support the needy MSME instead of all MSME’s.

Negative impact of GST

·        Cost of compliance to GST is high, because most MSME staffs are not familiar with using computers and web portals.

·        Varying impact on different segments of MSME. (Boosting one sector and have no impact on another sector).

·        Reverse charge mechanism which forces the customer to buy inputs only from GST compliant supplier.

·        Because, the customer (buyer) is liable to pay the GST on such a purchase from the under threshold MSME’s.

·        GST requires businesses to maintain funds in the form of electronic credit ledger with the tax department; it may result in liquidity crunch.

·        The harsh ‘input tax credit’ mechanism will also lead to working capital blockage.

·        If the government can take corrective measures in a proactive manner, the GST system will prove to be a boon for industry in general, and MSMEs in particular.

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