NEW GST, OLD WOES

THE RECENT GST REFORMS HAVE BEEN A MIXED BAG FOR INDIA'S MSMES, EASING SOME COMPLIANCES BUT ALSO ADDING TO THEIR BURDEN BY CREATING AN INVERTED DUTY STRUCTURE IN SOME SEGMENTS

- BY SINDHU BHATTACHARYA

TARUN GOYAL MANUFACTURES aluminium cookware in Jagadhri, Haryana. He has mixed views about the recent changes to the Goods and Services Tax (GST). A lower tax on utensils under GST 2.0 is expected to result in an increase in sales during this festive season. The GST rate on utensils has been lowered to 5% from 12%. However, he will now have to contend with the new problem of inverted duty, which has already begun choking the working capital pipeline.

“So, the raw material for my product continues to be taxed at 18% while the finished product has been brought to the 5% slab. If I buy aluminium scrap at ₹200 per kg, I must pay ₹36 per kg as GST. But if I sell utensils at ₹280 per kg, I can only charge 5% GST, which comes to ₹14. This leaves me short by ₹12 per kg, an amount I then have to claim as a tax refund. This refund takes a long time,” says Goyal.

At its 56th meeting, the GST Council reduced rates on 453 goods, with nearly 295 items shifting from the 12% tax slab to the 5% or 0% categories. Additionally, several products that were previously taxed at 28% are now subject to an 18% rate. There are now two main slabs, 5% and 18%, along with a higher rate of 40%. The 12% and 28% slabs, as well as the compensation cess, which was levied to compensate states for the loss of revenue after GST subsumed value-added taxes that states levied, will go away. The 0% rate and marginal tax rates for several items continue. Goyal estimates that about 10% working capital will be held up every month due to the inverted duty structure, and he would have to take on more debt, which would be expensive (anywhere between 9-12% rate of interest). As per a survey by SIDBI in May 2025, the MSME sector has an addressable credit gap of about 24% or ₹30 lakh crore. “The gap is higher in the services sector at 27%; it is estimated to be also higher at 35% for women-owned MSMEs, indicating a need for targeted policy actions.”