Leaving politics aside, Srinivasan’s explanation of how a bun attracts no GST while the same – if sold with cream – is taxed at 12 per cent, reflects just a fraction of the hydra-headed GST issues that small and mid-sized businesses face.

Issues related to delayed GST refund payments, especially from state governments, and input tax credit (the GST paid on the purchase of goods and services for business purposes which can later be reduced from the total tax liability) to businesses in several cases have further created a liquidity crunch for the already cash-starved MSMEs.

Many of these enterprises had to wind up operations in the last few years due to this lack of liquid cash. Issuance of notices related to GST non-compliance has also spiked, causing more pain points for the tax assesses and businesses, especially those in micro and small segments.

“The entrepreneurs run from one department to another to resolve these issues. This is time-consuming and adds to the complexities of doing business,” Neeraj Kedia, Managing Director of Chakradhra Chemicals Ltd, based in Uttar Pradesh’s Muzaffarnagar, told The Secretariat.

GST collections during August stood at Rs 1.75 lakh crore. While it was a tad lower compared to Rs 1.82 lakh crore in July, it registered a 10 per cent year-on-year growth.

However, these growth data are often unable to reveal the shortcomings of the GST structure, touted as a one nation, one tax system when introduced in 2017.

In fact, GST-related complications have aggravated further since it was launched and the number of non-compliance notices from tax authorities has grown in years.

“There has been a surge in notices from the tax authorities and once those are issued, the cascading effect is felt across the value chain, impacting the vendors and customers alike,” Kedia said.

“For example, I purchased goods from a vendor, who was later declared ‘bogus’ by the authorities. Now, I am not supposed to know that the vendor I am purchasing from is involved in fraudulent activities. However, the regulatory spotlight on him meant I was denied my legitimate input tax credit,” Kedia said.

He pointed out that the responsibility of playing the cop on vendors cannot be thrust on individuals and other business units.

Several tax assessees also complained that they have been forcefully made to pay additional tax under the DRC-03 rule of the GST during searches or surveys. The irony is that DRC-03 is essentially a form of voluntary payment of taxes if there are any tax shortfalls computed after the time limit to file returns.

"The officials insist on depositing an ad hoc amount during searches or surveys undertaken under the DRC-03 rule which is for tax deposited voluntarily. The refund is denied in the name of voluntary deposit even after completion of assessment," Kedia said, adding that the government should introduce a challan form for such deposits which are made "under protest."

This particular section is now widely used by the local tax authorities in states to arm-twist small businesses.

While GST was aimed at simplifying the indirect tax structure, raising compliance and reducing evasion, individual cases of corruption and fraud are also on the rise. 

Rising GST Fraud Cases

Going by official data, it seems that the Centre has an arduous task in hand if it has to weed out corruption.

According to data released by the Directorate General of GST Intelligence (DGGI) this week, frauds amounting to Rs 2 lakh crore came to light in the financial year 2023-24, which is double of Rs 1.01 lakh crore identified in FY23 across 4,872 cases.

There has been a sharp increase in cases related to tax evasion since 2017. In 2017-18, the amount was Rs 7,879 crore, and in 2028-19 it went up to Rs 19,319 crore.

“Though GST was aimed at reducing frauds and corruption, the Centre has little to boast on this. Even the honest businesses that may have transacted with corrupt vendors without any knowledge get impacted as well,” Kedia said.

The GST rates for several essential items are periodically brought out by the GST Council. However, the problems get multiplied for tax filers and assesses due to the complex process of computation.

Sitharaman, however, has assured simplification of the tax structure.

Anil Bhardwaj, Secretary General of the Federation of Indian Micro and Small and Medium Enterprises (FISME), pointed out that the GST-related problems for MSMEs along with credit shortage and geo-political uncertainty have led to the closure of several enterprises.

The geopolitical risks and a global slowdown have impacted exports as well. According to data portal Statista, the contribution of MSME-related exports as a share of total exports from India in FY23 stood at around 42.6 per cent. The share was around 49 per cent during FY20 and FY21. 

Rising raw material costs, lack of adequate credit, logistics issues and compliance costs have affected a large number of MSMEs in the country.

Shortage Of Bank Credit

Despite several ongoing schemes such as PM Vishwakarma Scheme, Prime Minister’s Employment Generation Programme and Emergency Credit Line Guarantee Scheme, the MSME sector continues to face a cash crunch.

Banks are wary of extending loans to the MSMEs, many of which are unable to provide strong credit records. The credit gap in the MSME sector is estimated to be around a whopping Rs 20-25 lakh crore.

"The MSME sector needs to be adequately supported so that the businesses have access to credit and other regulatory issues which involve the GST-related problems must be addressed to improve the ease of doing business ecosystem," Bhardwaj added, pointing to the success of the SME sector in China.    

In China, the SME sector accounts for more than 95 per cent of all businesses contributing 60 per cent of the GDP. Till 2021, about 80 per cent of non-governmental employment was provided by the SME enterprises.

According to China’s National Bureau of Statistics, until 2018 more than 95 per cent of businesses in the country were categorised as SMEs, which have been powering China’s economic growth.

MSMEs Key To Viksit Bharat Status

A study by McKinsey Global Institute (MGI) pointed out that in India only 11 per cent of entities – categorised as MSMEs in 2000 – managed to scale up to the big league, while in Indonesia it was 31 per cent, in the UK 18 per cent and the US 17 per cent. This should bother the policymakers.

The credit shortage has also led to these MSMEs shying away from upgrading their technology. A Crisil report, quoting a World Bank study, said that India's allocation for research and development stood at 0.6 per cent of GDP in 2023, well below the global average of 2.6 per cent, “indicating an urgent need for further investments to upgrade domestic technological and digital capabilities.”

While MSMEs are the key for economic growth and employment generation, they continue to remain the most vulnerable link.

The immediate challenge for the central government is to ensure that the country’s MSME sector, employing more than nine crore people, gets the necessary support. The government must work to ensure that credit availability increases while rolling out an effective mechanism to remove the many tax-related complications.