In the past eight years, GST may have simplified the country’s indirect-taxation system. But MSMEs still continue to face difficulties in complying with the regime. Stakeholders Moneycontrol spoke to say compliance costs are increasing day by day, even as some efforts have been made in recent years to smoothen the process.
The inability to claim input tax credit (ITC) on time, complexities in identifying the accurate HSN code while filing returns, and delay in receiving refunds are some of the key issues MSMEs want resolved soon. HSN stands for Harmonised System of Nomenclature. Each HSN code is linked to a specific GST rate. Using the correct code ensures that the appropriate GST rate is applied to goods, minimising errors in tax calculation.
“There are times when we are unable to claim ITC even after paying our rightful share of (input) tax to our suppliers. If the supplier doesn’t pay my share of tax, how am I (manufacturer) at fault,” an industry expert said. “In such cases, ITC takes time to get approved, sometimes it is denied.”
The ITC is a cornerstone of the GST regime, and is designed to eliminate the cascading effect of taxes. In simpler terms, it allows businesses to reduce their tax liability by claiming credit for the GST they have already paid on their purchases of goods or services that are used for their business operations.
Another industry expert said: “On the GST Network (GSTN), while filing GSTR-1 every month, we need to fill the details of products sold, with respect to their HSN codes…it’s very difficult for an ordinary/small business owner to do it correctly.”
He says the work is complex, and typically requires the help of consultants, who are too expensive and occupied. “If the correct codes are not filled, ITC can’t be availed,” he said, adding the process needs to be simpler for a common person.
MSME stakeholders suggest the government should relook at the GST systems and make it easier for small businesses to comply with. “There are many forms that need to be filled monthly…they should be reduced/clubbed. The compliance is costly and time consuming. In the past seven years, fees of consultants have risen 10x,” he said.
Moreover, some small businesses face issues with registration into GST. The GST-registration process, while designed to be uniform and online, poses several practical challenges for MSMEs.
Many of these businesses lack formal documentation such as lease agreements or utility bills, which often leads to rejection of applications. The lack of digital literacy —uploading scanned documents, verifying through OTPs or digital signatures — also creates a barrier for those in rural or semi-urban areas, note tax experts.
To address this, authorities should consider simplifying their registration process, they say. “Integrating data from the Udyam portal, accepting self-declared documents as proof of business address would significantly ease the burden. Mobile-friendly registration tools and regional language support on the GST portal would further improve accessibility,” an tax expert noted.
Some stakeholders, however, say that while the initial years of GST saw small businesses grappling with digital adoption and compliance overload, progressive reforms have steadily eased their journey.
“GST has streamlined our operations by bringing uniformity across states and improving input credit tracking. While there has been an initial investment in digital systems and skilled resources, over time it has enhanced our compliance efficiency and reduced delays, especially in logistics and inter-state transactions,” another industry expert said.
Further reforms should be ’empowering’
So far, GST registration with Aadhaar authentication has made MSMEs entry into the formal economy faster and more secure. But the next leg of reform must go beyond simplification — it must be empowering, say experts.
“Faster GST refunds, real time compliance scorecards, priority lending framework for GST compliant businesses and limiting department audits on exceptional basis are the next big levers to unlock MSME competitiveness,” another tax expert said.
Another tax expert said, “In the next reforms, liquidity-focused measures should play a pivotal role, with continued support from the sector for timely ITC availability based on invoice receipt and quarterly payments coupled with monthly invoice uploads.”
One MSME owner, not wishing to be identified, said the government can consider making the filing of GSTR form 6 quarterly and annually, as against monthly right now.
GSTR-6 is specifically designed for Input Service Distributors (ISDs), that is, typically the head office of a business that receives invoices for common input services (such as advertising, legal, auditing etc), which are used by multiple branches of the same business. The ISD then distributes the ITC on these common services to its various units based on their turnover or other agreed-upon criteria.
He also said that sometimes the ITC is not distributed according to their turnovers, because it’s done internally by ISD based on its accounting. “If not distributed correctly, it comes to the attention of authorities, and they serve the notice. If filed quarterly, accounting issues don’t normally arise.”
Less paperwork, easier compliance
Earlier this week a release by the Finance Ministry highlighted the major reforms carried out under GST. For instance, earlier thresholds (to file returns) under value added tax (VAT) and other state taxes were very low, making compliance difficult for small businesses. “GST changed this by setting a higher exemption limit. Initially fixed at Rs 20 lakh, the threshold for goods was later raised to Rs 40 lakh, giving breathing space to many small traders and manufacturers,” the release said.
To ease the burden further, GST introduced a composition scheme, which allowed small businesses to pay tax at a fixed rate on their turnover, with minimal paperwork. The scheme covers goods up to Rs 1.5 crore and services up to Rs 50 lakh in annual turnover.
The government also allowed small taxpayers with turnover up to Rs 5 crore to file returns every quarter instead of monthly, which made compliance easier and helped them focus more on their businesses, said the release. And to make return filing faster and simpler, MSMEs can now file ‘nil’ returns through SMS.
