India’s exemption of MSMEs from GST payments

The introduction of a goods and services tax (GST) in 2017 had the effect of vastly simplifying India’s tax landscape as it replaced numerous existing taxes at the federal and state level. This reduced the differences between tax systems of India’s many states and while the changeover period has been difficult regarding compliance, the resulting system is more straightforward to navigate.

While the introduction of the GST streamlines matters from the perspective of business being conducted across Indian states, the implementation chosen nevertheless settled on multiple different bands, or rates, of GST on various goods. This means that compliance is still considerably costly when contrasted against regimes that have only a single GST rate. Observers such as the World Bank also note that India’s taxation environment contains “a host of tax, subsidy, and protective policies for specific activities and categories of firms, whose rationale remains unclear.” Taken together, the introduction of the GST has significantly improved the compliance landscape for Indian firms but there remains room for further reform.

Many of the protective taxes, subsidies and policies referred to above relate to MSMEs, and the GST is no different. In fact, MSMEs below a certain threshold are not obligated to pay the GST at all. The threshold is either 4 million or 2 million Indian rupees in aggregate annual turnover, depending on state, and does not apply to MSMEs that are trading between states.

The task of complying with the new GST was taken seriously by the Government of India and it proactively undertook outreach programmes, set up conferences and utilized social media to inform businesses and consumers about the new system. Prior to implementing the reform, an advance ruling mechanism was available to allow stakeholders to receive advice on proposed or extant transactions that would be affected.