Navigating the Road of Taxation: MSME Edition While steps like GST and digital tax systems have eased some burdens, MSMEs still face significant challenges in navigating India's tax regime. Simplified processes, targeted tax relief, and technological empowerment are key to unlocking their potential.

The Micro, Small, and Medium Enterprises (MSME) sector is a critical pillar of India's economy, contributing significantly to GDP, employment, and exports. Yet, despite their potential, MSMEs face daunting challenges, particularly in navigating the complex landscape of taxation. Tax reforms in India, especially the introduction of the Goods and Services Tax (GST), have streamlined compliance for many businesses; however, challenges persist. Complex processes, high tax rates for specific categories, and difficulties in securing refunds continue to weigh heavily on MSMEs. These issues not only deplete their limited resources but also restrict their ability to scale.

Abhishek Thakkar, CFO of Niyogin Fintech Limited, acknowledges the positive impact, stating, "GST streamlined the tax compliance procedure for MSMEs, allowing them to focus more on growth and innovation."

Cost of compliance

For MSMEs, compliance costs remain a significant burden. High costs associated with tax filing, coupled with frequent changes in regulations, strain the financial health of small businesses. Thakkar emphasizes the need for smarter tools and government-backed initiatives. "Tax software, cloud-based accounting solutions, and financial consultants can help MSMEs manage compliance efficiently. The government's support in launching user-friendly portals and offering financial assistance for technological adoption has been instrumental," he said.

However, more can be done. Subsidies for digital compliance tools, tax credits for software adoption, and simplified filing processes tailored to business sizes are potential game-changers.

The GST challenge

Although the GST regime has been a step forward, MSMEs frequently encounter hurdles in the refund process and compliance. Delayed refunds can significantly disrupt cash flow, affecting day-to-day operations. Simplifying the process is essential, as Thakkar suggests, "The GST regime can be made more efficient for MSMEs by offering simplified compliance methods based on business size. Flexible deadlines and tailored paperwork requirements are critical." Providing GST training and advisory services would empower MSMEs to navigate the system with greater confidence and efficiency.

The idea of tax holidays or reduced rates for MSMEs, especially start-ups, hold promise. Early-stage businesses often grapple with tight budgets and limited resources, making tax relief a potential catalyst for growth. Tax relief would allow MSMEs to reinvest funds into operations, product development, and expansion. This could lead to increased innovation and entrepreneurship, boosting job creation and economic growth.

Technology as a catalyst for tax transformation

Moreover, as Rohinton Sidhwa, Deloitte India's business tax leader, highlights, the transition to digital tax systems has generally improved efficiency and transparency. Yet, expectations for further technological advancements remain high, with MSMEs needing a smoother interface and better integration of tools like blockchain and AI into tax processes.

"Taxpayers expect the administration to use new technologies such as blockchain and AI/Generative AI in tax," said Sidhwa in a statement, pointing to a future where tech-driven compliance is the norm. To empower MSMEs, it is crucial to make these technologies affordable and accessible. Programs offering subsidized training and resources can bridge the knowledge gap and foster widespread adoption.

Financing and taxation

Access to finance is another critical issue intertwined with taxation. Pankaj Sharma, CEO of Religare Finvest lauds government initiatives like collateral-free loans, noting their importance in liquidity and recovery post-pandemic. "It is essential to implement effective risk assessment models to ensure that the scheme achieves its goals while maintaining financial prudence," he said.

Such initiatives, when coupled with simplified tax structures, can create a robust ecosystem where MSMEs not only survive but thrive.

"The government should focus on bringing down the cost of production, especially inputs costs like fuel, power and other raw materials, which has become a burden for MSMEs," Chief Minister of Andhra Pradesh, N. Chandrababu Naidu, said in a statement.

While steps like GST and digital tax systems have eased some burdens, MSMEs still face significant challenges in navigating India's tax regime. Simplified processes, targeted tax relief, and technological empowerment are key to unlocking their potential.

By addressing these challenges comprehensively, India can ensure its MSMEs remain a dynamic force driving economic progress and innovation. As Thakkar aptly puts it, "With continuous efforts toward process simplification and more focused relief, MSMEs will move closer to contributing significantly toward growth in India's economy."