Context: The integration of GST data with bill-discounting platforms can help track MSMEs creditworthiness.
Significance of integrating GST architecture to MSME sector
Bridging information gap in MSME sector: As a significant data on financial health of MSME enterprises can be obtained through monthly returns, electronic invoices and e-way bills.
This data can be used for financing mechanisms like the TReDS (Trade Receivables Discounting System), which is an electronic platform for facilitating the financing/discounting of the trade receivables of MSMEs through multiple financiers.
Assessing creditworthiness of MSMEs: The creditworthiness of MSMEs can be judged from three data points on the GST system-
Input tax credit (ITC) being claimed by the MSME.
Trade volume as per the e-way bills (EWBs).
Trade volume as per the electronic invoices raised.
Formalisation of MSMEs: The Parliamentary Standing Committee on Finance, while reviewing The Factoring Regulation (Amendment) Bill, 2020, also recommended that the GST e-invoices above a certain threshold should flow directly to the TReDS platform.
MSMEs need to be brought into formal credit channels by integrating GST architecture with TReDS and Udyam.
Streamlining procurements from MSMEs by government departments: Integration of GeM (Government e-marketplace), will help government departments, PSUs, CPSEs, etc, finance their payments to MSME sellers of goods and services.
Provide for buyers’ acceptance: An EWB that is coupled with an e-invoice can act as a supporting document for a factoring unit, enhancing its authenticity.
It would serve as valid proof, like a goods receipt note.
Factoring agencies: GST system is supposed to develop a rating system for all taxpayers based on their tax compliance and other factors, which may prove valuable for factoring agencies on the TReDS.
Digitisation and access to finance: All these linkages will help digitize the supply chain of MSMEs, making their access to finance much easier.