The government's recent demonetisation drive and the introduction of GST are contributing to the increasing formalisation of economy.
However, the plight of SMEs as a result of these large scale reforms is highly uncertain given their nature of operation.
What are the positive outcomes of recent reforms?
Given the record on suspicious deposits after the demonetisation drive, there is optimism with tackling black money.
This is because those claiming that the money they deposited was genuine income would pay taxes on this additional income.
More importantly, demonetisation and the various policy measures such as the GST have changed peoples’ attitudes in using cash.
While cash continues to be used for small purchases, many more big ticket purchases are being done in the digital mode.
Evidently, transactions via pre-paid instruments and usage of debit cards at PoS machines are increasing.
Along with these, the new tax procedure under the GST regime is expected to bring more firms into the formal economy.
Resultantly, there is greater awareness that the government was monitoring larger transactions and it was getting harder to not pay taxes or file returns.
All these reforms and the resultant developments should certainly help boost tax revenues.
What do these mean for the SMEs?
Cash Shortage - The economy has been disrupted, first by the acute shortage of cash in the economy and subsequently by GST reforms.
The operations of small and mid-sized units which typically transact in cash were almost paralysed by the cash shortage.
TaxCompliance - The GST rules are now being changed to accommodate the interests of smaller businesses as well.
However, there are many firms that were earlier not paying a central excise duty, a VAT or a service tax, but will now need to do so.
If these tax incentives and exemptions offered the main competitive advantage for these firms in the past, their future in the business space now seems to be at risk.
Formalisation - The process of formalisation means that SMEs would find it easier to get credit, and at lower rates.
However, being in the formal economy also entails other unfavourable costs such as higher wages, EPFO deductions, etc.
They could choose not to get formal, but in a post-GST world the larger companies may stop sourcing supplies from them.
In the long term, it is obvious an economy cannot afford to have enterprises outside the tax bracket when the system is being increasingly formalised.
However, it is evident that the cost of timely disruption is huge for the SMEs and, this will have an impact on both output and jobs.
