Ironically, the Centre does not want to part with its GST dues to States but wants it from tiny MSMEs, on time

Four key provisions under the GST regime spell total disaster for the MSME sector:

• 1. Tax payer must pay the entire GST dues before filing the GST summary report (GSTR 3B)
• 2. GST Summary Return (GSTR 3B) cannot be filed until and unless the delayed payment interest @18% is also paid
• 3. Tax payer is blocked from filing the outward supplies report (GSTR-1) if he has failed to furnish the summary GST return (GSTR 3B) in the previous month.
• 4. Tax payer will be denied the Input Tax credit (ITC) if the supplier of the MSME does not remit the amount to the government, after receiving the GST payment from the MSME

All the three are one-sided and draconian for the MSME sector. Let me explain why?

MSMEs are suppliers to many large corporates who are now insisting that the MSME file their outward supplies report (GSTR –1) in time so that they can claim the input credit. Till recently GSTR-1 was filed by most MSMEs on time because it was not linked to any payment or linked to filing of any other type of report. But a new circular changed this by insisting that the previous month Summary GST report (GSTR 3 B) must be filed first. Very soon, many MSMEs who cannot file their GST summary report will be blacklisted or penalised by the large companies, in addition to being penalised by the GST department in the form of huge interest and penalties This will kill the MSME unit.

The Moot Question: Why can’t MSMEs pay on time?

This is the unfairness of the issue. GST is a levy charged by the government and the MSME taxpayer is supposed to collect this levy, deduct the Input Tax Credit and pay the dues to the government by 20th of the next month. Here the tax payer plays the role of the agent of the Government. But unfortunately the GST wants the MSME to pay the GST dues irrespective of GST collections from its customers.

This is impossible because MSMEs do not have the bargaining power to dictate the payment terms with their customers who pay only after 60 to 90 days. The tragedy is that even if one big customer does not pay the GST in time, the MSME will have to default because the GST summary report can only be filed only after 100% dues are paid. The bigger tragedy is that, even if the tax payer pays part of the dues, the government will use that part money but will not reduce the interest for the part payment. The biggest tragedy is that the MSME must pay the draconian 18% interest along with GST dues, every month.

All of this are one sided. If you ask the GST department as why are you insisting that MSMEs pay and then only file the GST summary return, their reply is this: This will help us settle the IGST dues to the state governments, on time. Look at the irony. The central government does not want to finance its GST dues to the States but want the tiny MSMEs to finance the GST dues to the central government.

Disparity in Interest Rates

The second one sided affair is the interest rate. If the GST department delays its due (refund) to the tax payer, Government will pay interest @ 6% per annum. But if the tax payer defaults its dues to the GST department, tax payer must pay interest @18% per annum. The GST takes the cake in terms of interest disparity compared to even Income tax levy. Income tax department pays interest @12% per annum on its refund while GST will pay @ 6% only. God knows why? I am also surprised how the courts have allowed this one sided and unfair dealing of the Government towards its own citizens.

Double Taxation for No Fault

The third one sided treatment of GST regime is even more serious. For example, if the MSME pays its GST to its supplier and the supplier does not remit this amount to the government within a specified period, the MSME will be denied the Input credit and has to pay again the entire GST amount to the department with interest and penalty. This is the ultimate. The MSME will pay GST twice for no fault of the MSME. Typically the GST is not a small amount. Many of the items are taxed at 12 to 18% which is more than the profit earned by the MSME. By paying the GST twice, transaction will become unprofitable – again for no fault of the MSME.

I wonder at the one sided nature of the GST legislation in this matter. What is the basis for arriving at the deadline for claiming GST? What is the basis for denying the Input credit just because the GST payment is delayed? It is essential that Finance Minister and the GST council take immediate cognisance of this draconian sections and immediately issue amendments to correct all the four provisions, especially for MSMEs.

Root cause of all MSME GST payment problems

Now let me discuss what is the root cause of all MSME payments to GST. It is poor payment record of MSME customers. Both government and private sector. According to MSME Samadhan portal, which was created to monitor delayed payments to MSME, 1.17 lakh applications were filed by MSME for delayed payments. But these applications were only for disputed payments requiring arbitration. This does not cover undisputed delayed payments.

The largest defaulters are Central and state governments. For example “At Rs 1.23 trillion, dues to power producers up 17%; six states account for 70%. Union power secretary Alok Kumar said the main reason why these six states accounted for the bulk of the dues to GENCO’s is because state governments often fail to pay subsidies to discoms on time. Also, government departments don’t clear their electricity bills promptly.” This was the headline in a leading newspaper in April 2022.

If the government departments don’t clear the electricity bills on time, imagine the fate of MSME contractors to the government. According to another newspaper report from Karnataka of November 2021, “Karnataka State Contractors’ Association says bills worth Rs 17,000 crore are due at the end of October. 2021”. According to another report from AP, in a news daily in June 2022, AP government is saying payments timelines cannot be guaranteed and they have added a special conditions in the contracts which says:

The question is – if the government cannot pay their dues on time, how can they expect the MSME entrepreneur to pay their government dues, on time.

It is time government and PSUs be asked to pay 18% per annum interest

The only way forward is to penalise the government and private parties for delaying payments and make it mandatory for all government, PSU and private contracts to add a clause on payment to MSMEs as “all MSME payments and interest will be as per the MSMED Act 2006”. This must be supplemented by Online portals where the MSMEs can upload their invoices, and the government must approve the invoices within 30 days so that pending payments dues are transparently displayed online. And the interest can be calculated transparently. Until this is done, the government has no right to demand timely payments for its dues.