Published on Apr 30, 2025Updated on May 5, 2025
The Goods and Services Tax (GST), introduced in India in 2017, has had a profound effect on businesses across the country. While it simplifies the tax structure, its impact on Small and Medium Enterprises (SMEs) has been both positive and challenging. Here, we explore the impact of GST on SMEs.
GST is a unified tax system that replaced a range of indirect taxes like excise duty, VAT, and service tax. By consolidating multiple taxes into one, GST aims to simplify tax compliance and make business operations more efficient. As per current regulations, businesses with an annual turnover exceeding INR 40 lakhs (INR 20 lakhs for service providers, and lower thresholds for special category states) are required to register under GST.
The following are the benefits of GST for SMEs:
GST simplifies the process of starting a business by offering a single tax structure across India. It eliminates the need for businesses to deal with multiple state and central taxes, making it easier to operate across state borders. This allows SMEs to expand their reach without the burden of varying tax rates in different regions.
GST lowers the overall tax burden by consolidating several taxes into a single one. SMEs can also benefit from the Composition Scheme, which offers lower tax rates and simplified filing for businesses with a turnover under a specified threshold. The filing process has also been made easier with a digital platform, reducing the complexity of tax compliance.
GST has created a unified national market, enabling smoother movement of goods across states without delays or extra costs from multiple tax authorities. This improvement in logistics benefits SMEs by lowering transportation costs and reducing the time it takes for goods to reach customers.
Under GST, the previous distinction between goods and services is minimised. This clarity helps businesses that offer both goods and services understand their tax liabilities, simplifying accounting and avoiding confusion.
The GST challenges for SMEs include the following:
While digitalisation has eased the process, GST compliance for SMEs can still be taxing. Many SMEs struggle with monthly, quarterly, and annual return filings, especially if they lack dedicated accounting resources. Delays or errors can attract penalties.
While GST has lowered taxes for many businesses, certain sectors, especially small manufacturers, have seen higher tax rates. This can negatively affect SMEs' profit margins, forcing them to adjust their pricing or absorb the additional cost, which is particularly challenging for businesses with tight cash flows.
The shift to a digital GST framework requires businesses to adapt to new technology, which can be difficult for SMEs that lack the necessary infrastructure. The need for GST-compliant software and digital invoicing systems increases operational costs and the risk of errors in filings.
GST can create cash flow issues for SMEs. Since businesses have to pay taxes on their purchases upfront and claim input tax credits only after sales, SMEs often face temporary liquidity problems. This is especially challenging for businesses with limited capital and slow-moving inventory.
Adapting to the new tax system requires SMEs to invest in GST-compliant software, professional training, and sometimes outsourced accounting services. These additional expenses can strain the resources of small businesses, increasing their overall operational costs.
To navigate the challenges posed by GST, SMEs can consider the following strategies:
The impact of GST on small businesses has been a mix of opportunities and challenges. While the unified tax regime has simplified compliance, lowered tax burdens, and streamlined logistics, it has also introduced complexities in return filing, digital adaptation, and working capital management.
To navigate these changes, SMEs must invest in the right technology, strengthen their cash flow strategies, and ensure adequate staff training. By doing so, they can harness the full potential of GST and set themselves up for long-term success.
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