A new Deloitte India survey shows that while nearly all MSMEs support the GST framework, they are calling for urgent reforms to improve cash flow. With 89% demanding faster interest payments on refunds and 69% seeking relief on inverted duty structures, these requests highlight a growing need for liquidity management in the sector.
What Happened
A recent survey by Deloitte India on the Goods and Services Tax (GST) regime has revealed that while Micro, Small, and Medium Enterprises (MSMEs) widely accept the system, there is a clear demand for the next phase of tax reforms. Nearly 99% of the MSMEs surveyed expressed a neutral or positive view of the GST regime. However, the focus has shifted toward operational challenges, specifically liquidity and working capital, which businesses want addressed to improve efficiency and export capabilities.
Why Liquidity Measures Matter
For many smaller businesses, cash flow is the most critical factor for day-to-day survival. The survey highlighted that 89% of respondents want automatic payments of interest on delayed GST refunds. When tax authorities take time to process these refunds, the money remains locked, forcing businesses to borrow or reduce their spending on growth. By pushing for faster fund disbursement and an invoice-based system for Input Tax Credit (ITC), MSMEs are signaling that they need a more predictable cash flow environment to operate effectively.
The Inverted Duty Trap
A major pain point identified in the survey is the 'inverted duty structure.' This occurs when the tax rate on raw materials or input services is higher than the tax rate on the final product. For an MSME, this creates a situation where they pay more in taxes on what they buy than they collect on what they sell, leading to a pile-up of unused tax credits.
Approximately 69% of the surveyed businesses supported expanding the refund framework to cover input services and capital goods. Addressing this would allow companies to recover the cash tied up in these tax credits, which could then be used for business expansion or to lower debt levels.
Broader Structural Changes
Beyond immediate cash concerns, the survey indicated a desire for structural simplification. Over 70% of respondents supported a centralized audit mechanism, which would reduce the complexity of dealing with state-level compliance. Additionally, 64% of participants asked for a simpler GST rate structure with fewer, more targeted exemptions. These requests reflect a general sentiment that while the GST system has been adopted successfully, the compliance burden remains a hurdle for smaller entities.
What Investors Should Track
Investors looking at the broader economy, particularly in sectors with high MSME participation like manufacturing and services, should watch for policy announcements regarding GST compliance. Any government move to automate refund interest or simplify the tax structure for inverted duties could improve the financial health and operational margin of smaller firms. Key monitorables include updates from the GST Council meetings and any legislative changes that specifically target the reduction of working capital blockage for MSMEs.