GST boost to MSMEs

Business Standard     18th May 2020     Save    

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.