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Ayush Singh, a small manufacturer from Ludhiana with an annual turnover of ₹4.8 crore, experienced unexpected challenges with the implementation of the GST in July 2017. What was intended to simplify taxes instead put a strain on his operations and finances due to complicated filing procedures, delayed tax refunds, and growing compliance costs.
Compliance Area | Pre-GST Scenario | Post-GST Scenario (for SMEs) | Impact |
Return Filings | Quarterly or annual returns (VAT, Service Tax) | Monthly (GSTR-1, GSTR-3B), quarterly (GSTR-9A), annual (GSTR-9) | Avg. 37 returns/year per state vs. 13 pre-GST. |
Compliance Cost | ₹2,000–₹3,000/month for accounting & filing | ₹10,000–₹15,000/month including GST software, consultants, and training | ~400% increase in monthly compliance costs. |
Software & Infrastructure | Basic billing and invoicing tools | GSTN-compliant software, e-invoicing (mandatory if turnover > ₹5 crore) | Software cost: ₹25,000–₹50,000 initial setup |
Training & Staff Development | Minimal training needed | GST requires specialised training for filing, reconciliation | Training expense: ₹1.2 lakh for 5–6 employees |
Input Tax Credit (ITC) | Simple credit mechanism | Complex reconciliation process; delays in ITC refunds | Refund delays of 30–60 days cause cash flow issues |
Tech Adoption | Not essential | Mandatory for GST compliance (internet, systems, IT support) | 50% of SMEs lack digital infra; and heavy reliance on consultants. |
In India, small and medium-sized businesses (SMEs') operational costs have significantly increased since the Goods and Services Tax (GST) was put into effect. These increased costs primarily stem from the need to upgrade technology, hire specialised personnel, and manage the complexities of the new tax system.
To comply with GST requirements, SMEs are required to adopt GST-compliant accounting software. The cost of such software can vary:
SMEs often need to invest in training their staff to handle the complexities of the new tax system:
Many SMEs opt to hire professionals to ensure compliance with GST regulations:
The cumulative effect of these increased costs can significantly impact the profit margins of SMEs:
Example: Ayush Singh, who runs a small manufacturing business in Ludhiana with an annual turnover of ₹1.5 crore, faced a sharp rise in operating costs after GST implementation:
Expense Category | Pre-GST Cost (₹) | Post-GST Cost (₹) | Increase (₹) |
Accounting & Compliance | ₹24,000/year | ₹1,20,000/year | +₹96,000 |
This represents about 0.9% of his total turnover, which is significant for a business with tight margins. The increased costs forced Ayush to delay planned machinery upgrades, highlighting how GST compliance can divert funds from core operations.
Category | Pre-GST Scenario | Post-GST Impact | Example |
Input Tax Credit (ITC) Timing | Claimed via VAT/Excise with minimal delays | Dependent on vendor compliance (GSTR-1 filing); delays of 30–90 days | ₹10 lakh ITC stuck for 60 days = ₹16,438 interest loss (@10% borrowing rate) |
Working capital tied up due to delayed refunds
SME with ₹1.5 crore turnover may have ₹15–20 lakh blocked ITC per year
Reconciliation Burden
Minimal manual reconciliation
Manual reconciliation of GSTR-2A/2B vs books; mismatches cause ITC rejection
Reconciliation errors cost ₹30,000–₹50,000 in penalties or missed claims annually
Operational Strain
No major dependency on vendor filings
GST Software (1-time + AMC)
₹0 |
₹25,000 (setup + AMC) |
+₹25,000 |
Staff Training | ₹0 | ₹15,000 | +₹15,000 |
Total Annual Increase | — | — | ₹1,36,000 |
Cash Flow Availability
Quick utilisation of input tax |
*T&C Apply
Vendor delay in filing returns blocks recipient's ITC |
₹5 lakh of ITC blocked due to vendor non-compliance = strain on supplier relations |
Refund Delays for Exporters
Regularised refund cycle
Refund processing takes up to 90+ days despite rules promising faster turnaround
₹25 lakh refund stuck for 3 months = halted exports worth ₹75 lakh
Even a 60-day delay on ₹10 lakh of ITC could result in an opportunity cost of over ₹16,000, assuming the business relies on borrowed capital at 10% annual interest. For SMEs operating on tight margins, this can create serious cash flow bottlenecks.
The implementation of the Goods and Services Tax (GST) in India has had a profound effect on the unorganised sector and informal trade, sectors that constitute a significant portion of the Indian economy.
Between 2015–16 and 2022–23, the unorganised sector experienced a contraction of approximately ₹11.3 trillion, equating to 4.3% of India's GDP. This decline was attributed to a combination of factors, including the GST rollout, demonetisation, and the COVID-19 pandemic. During this period, about 6.3 million informal enterprises ceased operations, leading to the loss of around 16 million jobs.
The GST regime introduced stringent compliance requirements that many informal businesses struggled to meet. These included the necessity for digital invoicing, regular tax filings, and maintaining detailed records. The associated costs and the need for technological upgrades placed a significant burden on small traders and artisans, many of whom lacked the resources to comply with the new regulations .
The GST's impact on the unorganised sector also led to a shift in consumer purchasing patterns. Small grocers and retailers increasingly turned to organised wholesale suppliers, such as Metro Cash and Carry and Walmart, to ensure GST compliance and maintain business continuity. This transition further marginalised unorganised traders who could not adapt to the new system.
The adverse effects of GST on the informal sector were more pronounced in poorer states, where the unorganised sector had a larger presence. The formalisation of the economy, while beneficial in terms of tax collection, led to increased unemployment and economic distress in these regions.
Category | Pre-GST Tax Rate | Post-GST Tax Rate | Price Impact (₹) |
Telecom Services | 15% (Service Tax) | 18% (GST) | Monthly bill rose from ₹500 to ₹530 (6% increase) |
Processed Food | 5–12% (VAT + CST) | 12–18% (GST) | ₹40 snack pack increased to ₹44 due to 10% higher tax |
Restaurants (AC) | 13.5–14.5% (combined) | 18% (GST) | ₹1,000 meal cost rose to ₹1,180 (18% tax vs. earlier 14%) |
Insurance Premiums | 15% (Service Tax) | 18% (GST) | Premium of ₹20,000 increased to ₹20,600 (₹600 more) |
Textile (Unstitched) | Exempt or 0% | 5% (GST) | Saree priced at ₹1,000 became ₹1,050 post-GST |
Housing Sector | 5–8% composite tax | 12–18% (GST on materials) | ₹20 lakh construction cost rose by ₹10,000–₹15,000 |
Consumer Perception | Transparent MRP | Confusion on tax-included/excluded pricing | 60% consumers reported confusion at billing counters |
Note: Even small increases like ₹30–₹50 per service/product accumulate across monthly expenses, affecting middle- and low-income households. A ₹600 yearly hike in insurance or ₹180 more on a family dinner every weekend creates notable inflationary pressure for average consumers.
Although the GST was intended to promote formalisation and streamline the taxation system, the unorganised sector and informal trade faced significant challenges during its implementation. The following economic slump, job losses, and operational difficulties underline the necessity of policies that facilitate informal companies' integration into the formal market without compromising their ability to sustain themselves.
Q. Why do small businesses struggle with GST compliance?
Small businesses face high compliance costs and complex return filing procedures under GST.
Q. How has GST affected the informal sector?
GST has led to business closures and job losses in the unorganised sector due to strict digital and filing requirements.
Q. Did GST lead to price increases for consumers?
Yes, GST caused price hikes in services and goods like telecom, insurance, and processed food.
Q. What is a major issue with Input Tax Credit (ITC) under GST?
Delays and mismatches in ITC claims often block working capital and disrupt cash flow for businesses.
