GST boost to MSMEs

Business Standard     18th May 2020     Save    
QEP Pocket Notes

Context: Changes in the provisions of GST for MSMEs in India could help them avoid the problem of ‘dwarfism’.

Problems of MSME in India

  • Half-hearted Investment: 
  • Outstanding bank credit to MSMEs remained constant for 3 fiscal years from 2015-16 to 2018-19.
  • Collapse of the Infrastructure Leasing & Financial Services (IL&FS) led to a subsequent fall in the flow of credit from NBFCs to MSMEs.
  • Declined exports: MSME sector contribution to exports declined from nearly 50% in 2015-16 to 48.6% in 2017-18.
  • Adverse GST provisions: 
  • The removal of Reverse Charge Mechanism (RCM) for small units hinders their growth and hurt large units having no provisions for availing input credit. 
  • Dwarfism of MSMEs: as the policies incentivize small units, it leads to a situation where the micro units employing less than 10 persons constitutes more than 90% of the MSME universe.

Steps to be taken:

  • Restoring RCM: This would ensure that the large units pay GST duty on behalf of unregistered small units by raising input invoices and then availing of the credit.
  • Using Trades Receivables Discounting System (TReDS): persuade the larger units to both accept and raise GST invoices on the TReDS platform so that payment to MSMEs are made in a time-bound manner. 

Conclusion: The growth of the MSMEs depends on larger units embracing them in the supply chain. This requires the units to have better access to markets capital and technology.

QEP Pocket Notes