Economies across the world came to a standstill over the last one year as a result of the pandemic, and subsequent lockdowns. There is no denying that one of the worst hit businesses during these challenging times were the micro, small and medium enterprises (MSMEs), especially in India. The sector saw shuttered factories, kirana stores, retail shops, and experienced a strong decline in retail consumption. With negligible demand and scarcity of revenue, MSMEs were left with meagre prospects to sell goods and services physically. In the face of disrupted retail, e-commerce saw a splurge in online customer base and acted as a baton for the hard-hit MSMEs, aiding them to revive their sales and businesses. Many MSMEs took to digital platforms to re-establish themselves and sell their products; even gaining more traction and recognition beyond their local borders. Even with the digital surge experienced by MSMEs during the initial days of the pandemic, a number of these businesses hesitate transitioning to online marketplaces, owing to cumbersome taxation issues associated with the space. Selling products and services online is already very new to these businesses, and the added baggage of complex compliances under the GST Act have the potential to discourage them from exploring online marketplaces. There are certain regulations in the GST Act that are specifically levied on the sellers doing business on e-commerce platforms/online marketplaces. For example, the GST Act allows traders doing business for less than Rs 1.5 crore annual revenue to register for a Composition GST Scheme. The scheme significantly simplifies compliance for traders and allows them to pay tax at a fixed rate of 1%. However, when traders under the scheme move to sell on an online marketplace, they move to normal scheme and pay full rate on all transactions. This amounts to a disincentive for MSMEs to go online and reach customers at a time when many are unwilling to step out.Not only this, the introduction of a new tax scheme under the section 194-O of the income Tax Act 2020 in the Finance Act 2020 asks e-commerce operators to levy TDS at the rate of 0.75% while making payments to resident e-commerce participants. This percentage will be further increased to 1% from 1 April 2021. According to the Budget Memorandum, the scheme was introduced to widen the tax-net, however the revenue collected through the provision doesn’t have a direct impact on the treasury. The provision not only lags in serving its intended purpose, it often ends up providing lower working capital for small businesses. Indeed, if it is the intention of the government to counter tax-avoidance by recording online sales, this rate can be reduced to a minimal 0.25%. In an ideal world for MSME growth, this provision should be done away with altogether, it would not have any implication on government revenues.Tax reforms and schemes that ought to encourage trading and ease of business – including on e-commerce platforms – have seemingly complicated the processes, and can potentially discourage small and medium businesses to explore the online markets. A number of these provisions specifically targets business selling online – including mandatory GST Registration for online sellers – and creates a lack of parity in taxation for online and offline sellers. The tax policies not only make it a hard choice for MSMEs to switch to online marketplaces, but also deviates from India’s vision of having a digitally powered economy. Uneven requirements, burdensome and additional compliances, and stringent schemes that specifically demarcate different conditions for online and offline sellers discourage MSMEs to shift to online marketplace. The support provided by online marketplaces to MSMEs was significant during the pandemic. Furthermore, the duration and consequential events of the pandemic (i.e. lockdowns) have prompted a shift in consumer preference towards online marketplaces. This would underscore better opportunities for MSMEs on online-marketplaces. Thereby, within that context, the efforts of our policy-makers should look towards providing policies which encourage MSMEs to adopt online-marketplaces, if consumers now prefer it, rather than levying taxes that increase compliance burden.As part of the upcoming/on-going budget session, the Government may look towards making necessary changes to the GST Act, and allow Composite GST Traders to sell online, and rationalize the GST registration requirements for online-sellers, in-line with offline sellers. Furthermore, the TDS on e-commerce transactions, which is also failing in delivering the right-revenue impact, may also be rolled back, keeping in mind the financial constraints of MSMEs in the pandemic scenario. As the rhetoric has been, this budget holds significant importance for the COVID-struck India economy. By provision of correct policy measures, the Government can give a significant boost to the digitalization of MSME ecosystem, which can in-turn help get the Indian economy back on-track.(The author is the Former Chairman of the Competition Commission of India and Executive Director for India at the World Bank. He is founder Chairman of Competition Advisory Services, a strategic advisory firm.)
from Economic Times https://ift.tt/3rd6Xip
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