News: The author of this article says that to achieve a $5 trillion economy, India should boost digitalization. It will support MSMEs, ensure GST parity and empower small businesses to venture into the online ecosystem and diversify their operations.
What is the significance of digitalization?
One, Covid has caused shift in all spheres of lives, economy, education but digitalization and e-commerce have remained a common thread. For example, e-commerce, fintech, ed-tech, medical teleconsultation, online entertainment, virtual travel and work-from-home.
Two, it has encouraged innovation and led to growth of enterprises and tech startups. India is now the world’s third-biggest startup hub.
Three, digitization can help Micro, small and medium enterprises (MSMEs) to survive. For example, inventory management and interface with markets via the e-commerce ecosystem. MSMEs account for 30% of India’s gross domestic product (GDP) and constitute more than 40% of exports, but less than 10% of Indian MSMEs sell online and 85% are unregistered.
According to a report by Accenture and the Trust for Retailers and Retail Associates of India, digitizing 10% of India’s 13 million kirana stores has the potential of generating an estimated 3.2 million new jobs in the country.
How GST is acting as hurdle for MSMEs in transitioning from conventional sales to e-commerce platforms?
One, Goods and services tax (GST) rules increases compliance costs and processes. According to GST Rules, any offline seller with annual turnover under ₹40 lakh engaged in intra-state sales must obtain GST registration to sell online.
Two, offline sellers under ₹1.5 crore annual turnover with intra-state sales cannot continue with simplified GST compliance processes under the composite GST scheme if they want to sell online. Hence, even if MSME’s turnover does not cross the threshold, it would be required to register itself under GST and fulfil all compliance requirements.
Three, MSMEs operating through online platforms are burdened with time-consuming periodical compliance needs like registration and the monthly filing of returns. It prevents them from registering under the GST Network.
Four, the difference between registration thresholds for online and offline sellers stop small businesses to venture onto e-commerce platforms. This results in tax revenue loss for the government also.
What is the way forward?
First, there is a need to provide an enabling GST ecosystem in the interest of all suppliers, online as well as offline. Policymakers should focus on reducing their compliance burden.
Second, there should be similar GST rules and registration process for all MSMES whether they sell offline or online.
Three, there is a need to amend the rules to allow small offline sellers to sell online without needing a GST registration. It will increase GST and income tax collections for the government, improve transparency and efficiency of tax collection.
Four, the differentiation of essential from non-essential products and services should be removed and Section 194-O, relating to TDS on payments made to e-commerce participants, should be terminated. It only increases the compliance burden.
Source: This post is based on the article “Amplify e-commerce and help all MSMEs reach markets online” published in Livemint on 1st Feb 2022.
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