How GST 2.0 Could Revolutionize the Indian MSME Landscape

The Micro, Small, and Medium Enterprises (MSME) sector plays a vital role in driving India’s economic growth, job creation, and supply chain integration. Over the past seven years, the Goods and Services Tax (GST) has provided MSMEs with numerous benefits, including a unified tax system, improved logistics, and enhanced business transparency.

A recent survey reveals that 78% of MSMEs now view GST positively, up from 66% in 2023. A majority (70%) find quarterly return filing advantageous, while 69% highlight the importance of automation in tax compliance and the introduction of e-invoicing as key improvements. These changes have significantly optimized supply chain efficiencies for businesses in the sector.

The much-anticipated 53rd GST Council meeting, held in June 2024, introduced several new initiatives to make the tax regime more MSME-friendly. These include waivers on interest and penalties, extensions for input tax credit (ITC) claims, the launch of GSTR1A for returns amendments, and rate rationalizations on specific products. The implementation of Aadhaar-based biometric registration for businesses across India is also on the horizon, which is expected to further ease credit access for MSMEs and reduce fraudulent ITC claims.

Additionally, the reduction in the Tax Collected at Source (TCS) rate for e-commerce operators—from 1% to 0.5%—is expected to ease the working capital strain on small and medium enterprises using digital platforms. This move demonstrates the government’s commitment to addressing MSME challenges in the e-commerce space and facilitating smoother financial operations.

Despite these gains, MSMEs continue to push for further reforms. A significant 88% of survey respondents seek further ITC liberalization, particularly the removal of restrictive conditions that prevent businesses from fully benefiting from tax credits. MSMEs are calling for the ability to claim ITC based on received invoices without requiring reconciliation with auto-generated GSTR 2B forms.

Additionally, 79% of MSMEs are advocating for broader GST rate rationalization across their entire supply chain, while 74% seek mechanisms to improve working capital availability. Another 73% are calling for the government to address the inverted duty structure, which negatively impacts the cost competitiveness of MSMEs.

E-commerce operators, in particular, are hoping for the elimination of GST TCS on zero-rated supplies, such as exports, which would alleviate cash flow issues for small exporters.

However, challenges persist. MSMEs face aggressive audits, pro-revenue stances from authorities, and complex documentation requirements. There is a growing demand for simplified processes and clearer documentation requirements for audits, which would particularly benefit smaller businesses.

Another area of concern is the composition scheme. While it offers simplified tax compliance for small businesses, restrictions on inter-state trade and a turnover cap of ₹1.5 crore prevent many MSMEs from opting into the scheme. Relaxing these conditions would allow more businesses to take advantage of its benefits.

The MSME sector is also pushing for the expansion of the Production Linked Incentive (PLI) scheme to industries such as textiles, apparel, and furniture—industries driven by MSMEs that are significant job creators.

As India moves towards GST 2.0, MSMEs are hopeful for consistent reforms that align with the “Atmanirbhar Bharat” initiative. The goal is to reduce operational costs, improve customer experiences, and foster long-term growth for MSMEs, which remain critical to the country’s economic prosperity.

Disclaimer: This article is for informational purposes only and should not be construed as financial or legal advice. The developments discussed are based on current data and proposed changes that may be subject to revision. Readers are encouraged to consult tax professionals or legal advisors for advice tailored to their specific circumstances.