Crisil SME Tracker: GST bodes short-term pain but long-term gain for MSMEs

A simplified tax structure and a unified market will improve operational efficiencies in long run

Implementation of the Goods and Services Tax (GST), scheduled to take effect on July 1, 2017, is expected to pose challenges for micro, small and medium enterprises (MSMEs) in the short term. In the long run however, it will help them compete better.

As things stand, though there is clarity on tax rates for most goods and services, the regime could take a couple of quarters to stabilise. Indeed, a sample survey of rated MSMEs by Crisil reveals that at least a quarter of them are yet to register for the Goods and Service Tax Identification Number (GSTIN), a pre-requisite. Pendency of adherence is particularly high among enterprises in rural and semi-urban areas, where awareness on GST is low. 

What’s more, the change of tax regime could impact the profitability of MSMEs in the short run, primarily for two reasons. First, the uncertainty induced in the supply chain due to the transition will impact revenue. In the melee, there could be a slowdown in production by MSMEs till things stabilise. Second, MSMEs will have to bear the burden of non-compliance of GST by their unorganised-segment suppliers — in other words, they might need to bear the input credit cost. Further, there could also be a situation where some of the inventory is sold at a lower cost before the GST roll-out, to avoid the stock getting stuck in the change-over process, further denting profitability.

In the long run, however, Crisil believes a simplified tax structure and a unified market will improve operational efficiencies, especially of MSMEs with a wider reach. Crisil’s interactions with its MSME clients revealed optimism about increased opportunities for inter-state businesses, lower raw material and transportation costs, and reduction in tax avoidance by their competitors, helping them compete better.