GST compliance burden weighs more heavily on smaller unincorporated firms

As the Goods and Services Tax (GST) Council prepares to meet next week to discuss further process reforms, a recent study has found that the indirect tax regime places a substantial compliance burden on unincorporated sector enterprises.

The analysis, based on the National Sample Survey Office’s (NSSO) Annual Survey of Unincorporated Sector Enterprises (ASUSE) 2022-23, estimates that these firms incur compliance costs ranging from 3.28% to 13.90% of annual turnover and from 4.64% to 19.71% of average annual operating expenses.

The unincorporated sector enterprises are typically small, owner-run businesses operating as proprietorships or partnerships rather than incorporated companies.

“These findings underscore the significant challenges unincorporated enterprises face in the GST regime,” according to the paper by Sacchidananda Mukherjee and Shivani Badola of the National Institute of Public Finance and Policy (NIPFP).

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According to the ASUSE, only 2.41% of the enterprises in the sample are registered under the GST or Value Added Tax (VAT) regime. GST registration enables enterprises to participate in larger supply chains and claim input tax credit (ITC). However, the paper noted that the available data suggests that enterprises are largely reluctant to register under the indirect tax regime.

Although GST was intended to streamline the country’s indirect tax system, taxpayers must file multiple periodic returns, regularly reconcile input tax credit with system-generated statements, comply with e-way bill and e-invoicing requirements, and maintain comprehensive digital records, the paper noted.

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The analysis also indicated that GST compliance costs are regressive: taxpayers with annual turnover below Rs 4.9 lakh are likely to bear higher costs than those with annual turnover of Rs 4.9 lakh or more. “High compliance costs often discourage businesses from participating in the tax regime,” said the paper, published in the Indian Economic Review.

The findings are significant as the GST Council is set to meet on October 7 to discuss process reforms aimed at easing compliance, including faster and simpler registration and return filing. The Council is also expected to consider issues related to blocked input tax credit and refunds.