The Micro, Small and Medium Enterprises Development Act (MSMED), 2006 was enacted to support the creation and development of MSMEs. It also enhances their ability to compete with other domestic and larger foreign counterparts. The recently implemented new GST return filing system brought with it many changes aimed at simplifying the process of filing returns.
Update as on 14th March 2020*
The new GST return system will be implemented from October 2020.
The present return filing system (GSTR-1, 2A & 3B) will continue until September 2020.
*Subject to CBIC notification
1. Background of the New GST Return Filing System
One of the main changes that the new system brings is the increase in the turnover limit for classification of taxpayers for filing frequency:
All MSMEs fall under the small taxpayer category. The new GST return system allows small taxpayers to choose quarterly filing of returns, whereas the large taxpayers must file returns only on a monthly basis. Further, registered buyers can take the input tax credit (ITC) in ANX-2 only on the basis of invoices uploaded by their suppliers in their corresponding ANX-1.
- Small taxpayers: Having aggregate turnover up to Rs. 5 crores in the preceding year;
- Large taxpayers: Having aggregate turnover above Rs. 5 crores in the preceding year;
2. Background of the MSMED Act, 2006
The MSMED Act, 2006 specifies 45 day credit period for the recipient of any goods or services to pay to the MSME supplier. It is included to protect the interest of the MSME business. The Ministry of Micro, Small & Medium Enterprises (MSME) launched MSME Samadhaan on 30 October 2017. It was launched to empower micro and small entrepreneurs across the country. It enables them to directly register their cases about delayed payments by Central Ministries/Departments/CPSEs/State Governments.
3. The Payment Cycle Problem
The issue arises when MSME taxpayers, who opt for quarterly filing of returns, make a supply to large taxpayers. The same is presented as follows:
- The MSME can declare the details relating to this supply anytime in the three months of the relevant quarter by the 11th of the month following the quarter.
- The recipient of the supply, on the other hand, being a large taxpayer, will claim ITC and file GST returns on a monthly basis.
- The recipient will want to ensure that the MSME supplier declares the invoice details on GST portal for such supply on a timely basis. Thereby, he can avail the ITC only after the MSME uploads the invoices.
- As a result, the recipient may choose to hold back payment of either the tax portion of the invoice or the entire invoice itself to such MSME supplier, until he declares the same on the portal.
- However, the MSMED Act does not allow the recipient to hold back the payment beyond 45 days.
- It discourages the large taxpayers from dealing with the MSMEs until they change the filing frequency to monthly or upload invoices on a monthly basis since it might create working capital issues for an MSME due to a delayed or potential non-availability of ITC.
- MSMEs may face additional compliance cost to maintain a system for uploading invoices regularly on a monthly basis rather than on a quarterly basis.
- It obligates the MSME to opt for a monthly return filing system, thus defeating the objective of the new return system to simplify the return filing process.
4. Solution offered & Conclusion
On 23 August 2019, the Hon’ble Finance Minister Nirmala Sitharaman has announced many measures to boost the economy. One of them is the intention to allow GSTN to partner with the Trade Receivables Discounting System (TReDS). TReDS is an existing platform specially created for MSMEs to sell/discount their trade receivables. This helps the MSME free up working capital faster. The TReDS platform allows for bidding of discount rates that ensure that the MSME gets the best discounting price in the market.
The partnership with GSTN helps authenticate the invoice raised by the MSME since GSTN can confirm the existence of the receivable subsequent to entering the relevant details on its portal. This would incline the MSME to file its GST returns sooner to be able to sell its receivables.
The quarterly return filing option does help to ease the burden of compliance on the MSME. However, choosing to file monthly returns makes it more attractive for large taxpayers to deal with the MSME.
While the payment cycle problem faced by the large taxpayers in dealing with the MSMEs isn’t fully addressed, it does appear to be a step in the right direction.