2 Years of GST: What Lies Ahead? - Author Article by Parijat Garg

This July 1st of 2019 marked the 2nd anniversary of the Goods and Services Tax (GST). Heralded as India’s greatest indirect tax reform, GST aimed to free Indians from multitude of indirect taxes imposed by the Centre and the states, setting the base for a unified tax system— One Nation, One Tax, One Market. While the road to 'One Nation-One Tax' has not been an easy one, the Government has put in best efforts to address various implementation related issues such as political deadlocks, frequent amendments, clarifications and IT related challenges.

GST simplified tax regime for the businesses by subsuming almost all types of indirect taxes levied by the Centre and the states. This lowered the effective tax paid by the end-consumer on any good or service as the GST reduced the cascading effect. It also tied the Centre and various states in an unique way that they cannot move independent of each other – laying a solid foundation of cooperation. GST also brought in the unorganized sector into main fold, another major achievement.

The GST collections are now crossing Rs 1 lakh crore mark consecutively for 4 months since Mar 2019 and the highest collection so far being in April 2019 with INR 1.14 lakh crore, points towards a positive trend in GST revenue collection. Over 4 million voluntary GST registrations indicate the network benefits of being part of GSTN. Moreover, with the introduction of GST and the e-way bill, inert-state movement of goods has become easier and involves lower times, benefiting the logistics sector as well. 

The Road Ahead
The MSME sector has been known to the backbone of any growing economy, taking it from purely an agrarian to an industrialized economy. Over 60 million such enterprises operate in various industries across India, employing over 100 million people. The sector accounts for a substantial 28  % of India’s GDP and over 40 % of its exports. The sector can provide larger employment opportunities at a comparatively lower capital cost especially in the rural and remote areas, by becoming part of the industrial ecosystem and acting as a large ancillary unite for large enterprises to support the system in growth.

Any business, more so with the SMEs, require finance to sustain its existence and grow to achieve newer scales. While Banks and NBFCs serve as an important source of such funding, most SMEs still largely depend on finances from internal sources or from local moneylenders. External funding still remains an issue for them as one of the toughest tasks for financiers is adjudging the creditworthiness of a SMEs. For the absence of reliable information about SMEs, most traditional banks demand collateral or a guarantee to consider them for any credit. This is why perhaps one can hear many entrepreneurs say “you don’t get finance when you need the most”.  More complexities in the loan process, longer processing time and higher uncertainties in the underlying business of small-scale sectors make loans more expensive- higher processing cost and even higher interest rates. GST has undoubtedly, played an important role in formalization of the unorganized sector and with periodic returns filing, the business records have been getting more organized with passing times.

The need of the hour
Effective measures can be taken even when the SMEs take the center stage as the borrower. Credit Scores are now available even for SMEs and the financial institutions can check out their credit history from the credit information bureaus at a click of the button. This can instantly reduce the preliminary evaluation time in all such cases where an MSME has previously availed a formal credit.

It is important to appreciate that the credit score alone cannot reduce the information asymmetry that existing between the financiers and the MSMEs. The financiers tend to be a lot more cautious in their appraisals in the current times and look for more information about them such as the business accounts, current accounts, income statements, expense statements, sales statements, etc. before being comfortable with an application.

However, with the advent of GST and its successful completion of two years – the future looks better. Over 7.2 million GST returns were filed in May alone. Such returns include the disclosure of invoice level details for all their sales and purchase. This gives a clear picture of a business’s cycle, its turnover, revenue, and clients. Banks and NBFCs can potentially have direct access to verifiable data on the cash flow of the SMEs. Financiers can use GSTN to verify the declared turn-over. TReDS Platform in conjunction with GSTN can verify invoices to be discounted thus shortening time for decision and improving the authenticity.

GSTN filings are available in digital format. If these are made available to financiers directly or via consent of the subject, it will empower bankers with very credible data source. GSTN will not only lower the information asymmetry for bankers but also significantly lower the decision time. Lenders will, of course, have to be more creative in their credit processes and product structure to enable cash-flow based lending even for the cases with no credit history.  

GST records coupled with the credit history can certainly be a valuable resource for the lenders to consider lending to SMEs. Improved access to credit to MSMEs is imperative to help our economy grow at a healthy rate and generate much needed employment for millions of youths getting added to the potential workforce.

Original Source: SME World, Page no 18-19