MSEs and Single Market

On the July 1, 2017, micro and small enterprise (MSE) sector woke up in a different India, with the introduction of Goods and Services Tax (GST) on the mid-night of June 30th. The Country now stands transformed as a single market, throwing new challenges to the sector.

A new indirect tax regime, replacing the multiple taxes and local levies, has been put in place from that date. What does this portray for the MSE sector, the largest component of the enterprise population? While the representative bodies of MSEs would articulate their concerns on the issue, I share herewith my observations on the possible scenario for the sector post GST.

While the sector is still coping with the fallouts of the November 8 night’s shock of demonitisation of Rs. 500 and 1,000 notes, it now has to brace up to new market structure. The earlier advantages of varying tax rates in the Country will no longer be available to it. This may encourage local production of products/services, which were earlier sourced from low-tax rate state/province. With uniform tax rate, manufacturing MSEs, both local and elsewhere based, will have to improve their competitiveness to survive in the market. The term ‘competitiveness’ encompass aspects such as technological up-gradation, shoring up of management and labour skills, adopting modern marketing techniques (e.g. E-commerce) and tuning operations to market dictates.

With possibility of increased competition among the MSEs due to unified market, the respective states would be compelled to revisit their MSE policy to devise such programmes that would protect and promote local entities. States may come up with strategies such as price-preference, reservation/mandated sourcing from local entities for public projects, and so on. States will have to improve the overall business environment to facilitate their smooth operations, besides providing an effective support mechanism. There could be a competition among states in safeguarding their interest! Even the Ministry of MSME would to also have to relook/reorient its policies.

Invariably all will have to maintain separate book of accounts for house-hold and business- related activities, which would require training/acclimatizing them to do so. Since the bulk of enterprises is ‘one-man’ show, and own- account enterprises, arming them with skills (including computer) required to comply with GST is a mammoth task. The exemption from GST (businesses with less than Rs. 20 lakh), like the other MSE policies, may discourage them from graduating to next level. A programme of incentives, such as additional benefits/credits for MSEs, may have to be thought of to facilitate their vertical growth.

The GST would alter a major characteristic of the sector. All those functioning as informal and unregistered entities till now will have to become part of the formal economy. Presently, the sector has about 20 million unregistered enterprises as against less than two million registered ones, as per of Ministry of MSME (Annual report 2015-16).

The GST, and earlier November 8th move, has provided an opportunity to weed out non-serious businesses; rather some may go out on their own owing to their inability –for various reasons- to adapt new of forms of business. This would help trim the bloated sector to its real size, consisting of genuine players. A large number of (i) home-run businesses - primarily a pastime activity, (ii) stop-gap arrangement enterprises set up till a more lucrative occupation is found (unemployment has been/ is a major trigger for establishing an enterprise) and (iii) income-supplementing entities are part of the sector. These include a variety of activities such as financial consultancy, trading, tailoring, catering and repair of electrical and small electronic items and so on.

No doubt, the new tax regime would cause some hiccups and apparent regulatory pressure with possible increase in compliance cost. However, this could help MSE sector modernize its operations to be competitive in the long-run. Their response, nevertheless, needs to be monitored by different stakeholders for course-corrections, as and when required.


More by :  V. N. Prasad

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