Source: This post is based on the article “Policy harmonization will help our MSMEs create jobs” published in Business Standard on 1st September 2021.
Relevance: e-commerce in India, Flaws in GST structure, challenges faced by MSMEs
Synopsis: India’s indirect taxation needs immediate harmonization to put offline and online business transactions on par.
Only 27% of online small and medium businesses were using e-commerce channels in 2015. After the pandemic, customer behaviour across the globe has shifted towards purchases through e-commerce platforms, irrespective of product category.
To make the most of this trend, India must reverse all policies that disincentivize MSMEs.
Problems posed by GST
GST is creating problems for the adoption of e-commerce platforms by MSMEs.
- First, we have no regulatory clarity on recognizing part-time workers, and this hinders quick expansion.
- Second, a reduced GST of 1% on turnover applies to offline sellers that are selling their wares within a city or state, but no such provision is available for MSMEs using e-com platforms.
- Third, there is a new 1% tax-deducted-at-source levy on e-com transactions, over and above GST’s 1% tax-collected-at-source, that businesses using e-com platforms are subject to. Thus, a straight 2% upfront tax deduction on sales disincentivizes the use of online avenues to expand market reach.
- Tax refunds can take up to two years, which affects their cash flows for operations.
- Heavy compliance burden and contradictory provisions in Income Tax Act and labour laws, foreign direct investment (FDI) norms, Drugs and Cosmetics Act of 1940.
- There are also concerns over India’s draft foreign trade policy, which is inadequately geared for an online export thrust that would offer MSMEs a significant opportunity.
- FDI 2018 rules stopped online platforms from offering products made by entities in which they had a significant direct stake. These stalled investments would have ensured the standardization of quality and packaging, apart from other such market enablers.
- Need a proper understanding of term wages for extended work hours.
- Allow for collective discussions with managements in case of any violation of these rights.
- Address the need of part time workers in labour codes.
- The industrial relations code also needs to be harmonized to ease the adaptation of MSMEs to automation-rich business realities.
To sustain and encourage growth, the entire ecosystem needs to be changed so that MSMEs achieve their potential. It will help shape a new Indian growth story in terms of both GDP and jobs.