Small Scale, Big Challenges: GST and Nano Enterprises

Taxation has long been integral to economic systems as a form of public finance, impacting individuals directly and indirectly. The shift in 2017 from VAT to GST aimed to simplify the tax structure, aiming for a transparent, efficient, and uniform system. However, this transition posed significant business challenges, particularly at the micro and nano levels. 

This article examines the relationship between nano entrepreneurs and the Goods and Services Tax (GST) system in India. It signifies the less functioning of nano entrepreneurs who remain outside GST and also provides an overview of both registered and unregistered nano entrepreneurs within the GST framework. It highlights key facts and figures from the six-year GST statistical report, covering business-wise total collections, taxpayer numbers, and invoice counts per turnover slab. The article is divided into two main sections. The first part examines nano entrepreneurs who are registered for GST, specifically detailing the percentage based on a six-year GST statistical report. In contrast, the second part explores nano entrepreneurs who do not claim GST, focusing on insights from the Annual Survey of Unincorporated Sector Enterprises (ASUSE) conducted between 2015-16 and 2022-23.

Several barriers hinder the GST registration process for nano entrepreneurs in India. These include the complexity of compliance, unclear GST provisions, cash flow issues, lack of awareness & training, and technological barriers. While production enterprises with annual turnovers of up to ₹40 lakhs and service enterprises with turnovers of up to ₹20 lakhs are exempt from mandatory GST registration, many still choose to register voluntarily. GST offers four tax slabs—5%, 12%, 18%, and 28%—and provides input tax credit (ITC) to reduce overall tax burdens by allowing businesses to claim credits for GST paid on inputs or raw materials. However, implementing GST has increased compliance costs for SMEs, making it necessary to provide targeted support to help them navigate its complexities, as Ramli R. P. (2015) noted. An article by Madan Sabanis, the chief economist at Bank of Baroda highlights that MSMEs face significant challenges with taxes, refunds, and compliance under GST. Initially, there were expectations of a 1%-2% point increase in GDP growth and higher government revenue. The government introduced a ‘composition scheme’ to support MSMEs and adjusted GST rates for various commodities.

Source: Statistical Report on 6 Years of GST & author’s calculation

From the above Table 1.1, we can infer the percentage of total taxpayers by turnover which reveals significant differences upon reviewing taxpayer counts, underscoring the predominance of nano enterprises in tax contributions. Specifically, within the turnover brackets, up to 5 lakhs constitute 17%, whereas between 5 to 10 lakhs is estimated at only 9%. Additionally, the average count of invoices per month per taxpayer is notably low, standing at 0.66 for those within the up to 5 lakh turnover bracket, remaining below 10%. Furthermore, despite their exemption status, enterprises continue to dominate in sheer numbers, influencing voluntary compliance and potential over-claimed tax issues. We can also observe the distribution across other turnover slabs: 11% for 10-20 lakhs, 8% for 20-23 lakhs, 6% for 30-40 lakhs, 5% for 40-50 lakhs, and 7% for turnovers above 50 lakhs. The average count of invoices per month per taxpayer increases progressively across these slabs, measuring 3.04, 4.45, 5.77, and 7.10 respectively. This upward trend signifies a reasonable progression in invoice activity as turnover increases within each slab.

Source: Statistical Report on 6 Years of GST

*Note: Status as on 30th June 2023; Return period accounted up to March 20

From the Figure 1 above, reveals the business registration-wise contribution to the GST in terms of percentage of registration and percentage of tax collection in the year 2023. Proprietorships are more likely to be classified as nano enterprises, as they constitute a significant portion of GST filings by nano enterprises. It shows that 80.41 % of the registered concerns were the proprietorship, however, their contribution to the total collection accounted for only 13.32%. Also, we see for the year 2020, that 80.18 % of the registered concerns were the proprietorship but their contribution to total collection was only 10.78%. By comparing these years, we do not see many variations as the situation remains similar. Between the two periods, there was a small difference in the contribution of proprietorships to total tax collections. This was a 2.54 percentage point increase compared to the year 2020. 

We can infer by saying that Proprietorships often operate on smaller scales compared to larger corporate entities like Public Limited Companies or Public Sector Undertakings. As a result, their taxable turnover and subsequent tax contributions may be lower. They face challenges in tax compliance due to their smaller size and resources. And the burdens relative to their turnover can impact their ability to contribute proportionately to tax collections. Overall, while proprietorships constitute a significant portion of registered businesses, their contribution to tax collections reflects their smaller scale and economic constraints compared to larger corporate entities. Similarly for the Partnership Units, it shows 10.34% with the total collection of 7.27% only. Whereas for the year 2020, it is 10.78% and 7.35% respectively.

Only 0.52% of all registered Public Limited Companies contributed 34.4% to the total collection. For Private Limited Companies, the figures were 6.11% of registrations contributing 28.23% to collections, while Public Sector Undertakings represented 0.02% of registrations but contributed 9.94% to total collections.

Unlike officially defined micro, small, and medium enterprises, nano-enterprises lack a formal definition. Commentators use this term to highlight the importance of recognizing and addressing a specific subset of extremely small businesses within the broader category of micro-enterprises, which are defined as businesses with an annual turnover of less than 5 crore rupees.

Data on enterprise size distribution tells us that a large fraction of micro-enterprises is likely to be far away from the 5-crore annual threshold. Mehrotra & Giri (2019) have estimated that about 97% of enterprises in India are unorganized. As per the 2022-23 factsheet of the Annual Status of Unincorporated Sector Enterprises (ASUSE), only 15% of the non-agricultural unincorporated enterprises, including unorganized enterprises, have at least one hired worker. In other words, nearly 80% of the enterprises in India are own account enterprises, with an entrepreneur being the sole worker. Earnings of hired workers are about 2.5 lakhs per annum as per the ASUSE 2022-23. Even if we optimistically assume that own account entrepreneurs will earn 5 lakhs per annum, which is equivalent to the profit of the enterprise, and assuming profitability of 25%, the annual turnover of such enterprises will be around 20 lakhs, a level far off from the defining threshold of micro-enterprises. Without entering the debate of a definition and intricacies of data, it is evident that a seriously large fraction of the micro-enterprises are clubbed at the lower end of the turnover range.

The nano size can restrict the growth of the enterprise, limiting access to market channels and formalization prospects. The cascading nature of GST forces all enterprises to get GST compliant, nullifying the relaxation provided to such enterprises under GST. For example, e-commerce platforms often mandate GST registration from the sellers which hinders nano enterprises. Or a business refrains from sourcing from nano enterprise for the want of GST. GST poses a catch-22 challenge for these enterprises, where they can potentially grow larger by being GST compliant but they cannot take up the GST compliance burden because they are not large enough.

Source: Author’s Calculation

Table 1.2 shows the year-wise calculation of unincorporated enterprises registered and unregistered in the GST system. The figures were taken from the factsheets to calculate the total GST registrations. Total GST Unregistered provides a breakdown of unregistered enterprises for different years, focusing on the distinction between registered and unregistered unincorporated enterprises and the total count of enterprises. In 2015-16, there were 19,592,554 registered unincorporated enterprises and 43,799,421 unregistered ones, totaling 63,391,975 unincorporated enterprises. In 2010-11, there were 16,826,639 registered and 40,846,606 unregistered, totaling 57,673,245. By 2022-23, the total number of unincorporated enterprises had reached 65,048,400. For the year 2015-16, the total registered unincorporated enterprises were 2,765,915 more compared to the year 2010-11. Similarly, the number of unregistered unincorporated enterprises increased by 2,952,815 from 2010-11 to 2015-16. By 2022-23, the total number of unincorporated enterprises had reached 65,048,400.

The total number of enterprises also increased over the years, from 60,647,871 in 2010-11 to 66,905,023 in 2015-16 and 68,472,000 in 2022-23. The proportion of unincorporated enterprises remained consistent at approximately 95% each year. For enterprises with turnover up to 5 lakhs, the figures suggest counts of 1,649,238, 826,732, and 1,098,206 for different years, although specific years are not labeled clearly. For enterprises with turnover up to 20 lakhs, there were 3,574,176 GST taxpayers, while the total number of enterprises up to 20 lakhs was 54,777,600 and 51,203,424 for different periods. For the calculation of non-GST registered enterprises, an assumption was made that the total GST enterprises up to 20 lakhs turnover is calculated by 0.8, which comes to approximately 51,203,424. Thus, the total proportion of non-GST registered enterprises is 0.934751139 (approximately 93.5%).

The article illustrates the challenge of bringing smaller enterprises into the GST net. The data shows that a large number of unincorporated enterprises remain unregistered for GST, especially within lower turnover brackets. Despite the presence of many small enterprises, only a small fraction of them are registered for GST, highlighting a potential gap in compliance and formalization efforts. It emphasizes the need for targeted policies to increase GST registration among smaller enterprises, potentially through simplified processes, awareness campaigns, and incentives.

With inputs from Dr. Kiran Limaye, Assistant Professor – Research, CEED, Gokhale Institute of Politics and Economics.

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