GST boost to MSMEs

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.