The Goods and Services Tax (GST) in India was introduced as a transformative tax reform aimed at simplifying the complex structure of indirect taxes, enhancing revenue generation for both central and state governments, and broadening the tax base(1). Recent data indicates a CAGR of 12 percent in GST revenue for June 2019 – June 2024, suggesting that the tax has largely succeeded in achieving the first two objectives: increasing revenue and simplifying the tax system for those within the taxable revenue threshold(2). However, many nano enterprises remain outside the GST framework due to the exemption rule and the disproportionate compliance cost burden(3). A key factor contributing to the success of GST among registered businesses is the input tax credit feature, which incentivizes transactions with GST registered suppliers, thereby improving compliance and streamlining the tax process.

However, while GST has made substantial progress in revenue generation and simplification, there remains significant scope for broadening the tax base. Gita Gopinath, the First Deputy Managing Director of the International Monetary Fund (IMF), suggests that broadening the GST base could yield up to 1 percent of GDP in additional revenue(4). She emphasizes that India’s path to fiscal consolidation should focus on generating more revenue rather than cutting public spending. 

Reducing the number of different GST rates could make the tax system simpler and more straightforward. Currently, India has multiple GST rates for different categories of goods and services. By reducing these rates to a simpler structure, the tax base can be broadened, as it becomes easier for businesses to understand, comply with, and participate in the GST system.

A simpler GST structure with fewer rates and a broader base could significantly boost economic benefits, so there will attract more participation from the nano enterprises and informal sector into the tax net. These enterprises, which currently operate outside the GST framework due to exemptions or the burden of compliance costs, represent a large, untapped segment of the economy. By including more of these nano enterprises under GST, India can increase its fiscal revenue while also promoting a more inclusive and equitable economic environment that supports development and growth.

Expanding the GST Base: The Role of Nano Enterprises

To understand where this broadening might take place, we turn to the Annual Survey of Unincorporated Sector Enterprises (ASUSE) for 2022-23. The ASUSE survey reveals that over 82% of Indian businesses are classified as nano enterprises with a turnover (often up to Rs. 5 lakh annually) and minimal employment but these enterprises contribute Gross Value Added (GVA) (38.2%). This data indicates the nano, unregistered enterprises are out of the GST and can be part of the formal economy.

Table 1: Status of Enterprises and Turnover and GVA

Why Many Nano Enterprises Avoid GST Registration

Many nano enterprises avoid GST registration due to the high compliance costs, which is uneven to their size and turnover. Small businesses like street vendors, local shop owners, and other nano enterprises struggle with regulatory requirements such as maintaining digital records, filing regular returns, and undergoing audits. According to the ASUSE survey, these enterprises, despite comprising 82.6% of all businesses, account for only 0.6% of total employment, indicating their limited ability to handle additional costs. 

Additionally, specific market conditions discourage registration. For example, when nano enterprises register for GST, they may not benefit from input tax credits (ITC), making compliance seem more like a financial burden than a necessity. Furthermore, e-commerce platforms requiring GST registration for all suppliers, regardless of turnover, often deter these smaller businesses from participating in the digital economy.

Why Some Nano Enterprises may Opt for GST Registration

Despite these challenges, there are compelling reasons why some nano enterprises might consider GST registration. Firstly, GST registration can provide better market access by signaling higher business credibility and compliance to potential clients and partners. Being GST-registered is often seen as an indicator of a business’s growth potential, making it more attractive to suppliers and customers.

Secondly, as Gita Gopinath emphasizes, a broader tax base would contribute significantly to India’s fiscal health, creating a more sustainable economic environment that benefits all market participants, including small enterprises. For nano enterprises engaged in business-to-business (B2B) transactions, GST registration becomes almost necessary to remain competitive, as larger clients often prefer GST-compliant suppliers.

Balancing Compliance and Market Access

The dilemma faced by nano enterprises revolves around balancing the costs and benefits of GST registration. For those engaged in business-to-consumer (B2C) activities, GST registration might not be necessary or advantageous, particularly if their turnover is below the mandatory threshold and their customers do not claim ITC. On the other hand, nano enterprises operating in B2B contexts often feel compelled to register for GST to maintain competitiveness in the market.

This dual pressure creates a situation where B2C nano enterprises may avoid GST registration to reduce costs, while B2B nano enterprises feel pressured to comply. The uncertainty about whether the benefits of registration outweigh the compliance costs complicates their decision-making process, which may result in hesitation to join the formal economic framework. To encourage wider participation, the government could consider developing automated compliance tools, such as user-friendly applications that simplify GST requirements, making the process more manageable for nano enterprises.

To truly thrive, India’s GST must balance its benefits with fairer terms for even the smallest businesses.

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(1) – Ghanchi, Durga, and Marvadi, Chetana. ”Reviewing the Six-Years Journey of Goods and Services Tax Implementation in India.” Sachetas, 3(2), 2024, pp. 6–14.

(2) –  GST Collection Data: CMIE, Economic Outlook

(3) – Nano-enterprise are not officially defined.

(4) – Gopinath, Gita.  ”Widening GST Base Could Yield Up to 1% of GDP in Extra Revenue, Says IMF’s Gita Gopinath.” Mint, August 2024 Mint, August 2024.

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Surender Kaur is pursuing her PhD from Gokhale Institute of Politics and Economics, Pune and is a Research Associate with CEED.