The following four key provisions under the GST regime spell disaster for the MSME sector:

• Taxpayer must pay the entire GST dues before filing the GST Summary Return (GSTR 3B)

• GSTR 3B cannot be filed until and unless the delayed payment interest at 18% is also paid

• Taxpayer is blocked from filing the outward supplies report (GSTR -1) if he fails to furnish GSTR 3B in the previous month

• Is denied 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

These 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 MSMEs file their GSTR-1 on 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 to filing of any other type of report. But a new circular changed this by insisting that the previous month’s GSTR 3B must be filed first. Many MSMEs who cannot file GSTR 3B 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 MSMEs. This brings us to the moot question.

Why are MSMEs unable to remit GST dues on time?

This is the unfairness of the issue. The 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 the 20th of the next month. Here, the taxpayer plays the role of the agent of the government.

But unfortunately, the government wants the MSME to pay the dues irrespective of its GST collections. This is impossible because MSMEs do not have the bargaining power to dictate the payment terms to their customers, who pay only after 60 to 90 days.

The tragedy is that even if one big customer does not pay the GST on time, the MSME will have to default because the GSTR 3B can be filed only after 100% dues are paid. A bigger tragedy is that, even if the taxpayer 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.

One-sided Issues

If you ask the GST department as to why it is insisting that MSMEs pay and then only file the GSTR 3B, the reply is: This will help us settle the IGST dues to the State governments, on time. Look at the irony. The Centre does not want to finance its GST dues to the States but wants the tiny MSMEs to finance the GST dues to the Central government.

The second one-sided matter is the interest rate. If the GST department delays its due (refund) to the taxpayer, the government will pay interest at 6% per annum. But if the taxpayer defaults on its dues to the GST department, s/he must pay 18% per annum. The GST takes the cake in terms of interest disparity compared to even income tax levy. The IT department pays interest at 12% per annum on its refund while GST will pay at 6% only! I am also surprised how the courts have allowed this one-sided and unfair dealing of the government towards its own citizens.

The third one-sided treatment is even more serious. For example, if the MSME pays the GST to its supplier and the supplier does not remit this amount to the government within the 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. The MSME will pay GST twice for no fault of its. 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, the transaction will become unprofitable – again for no fault of the MSME.

I wonder at the one-sided nature of the GST 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 the Finance Minister and the GST Council take immediate cognisance of these draconian sections and immediately issue amendments to correct all the four provisions, especially for MSMEs

Root cause of MSME GST payment problems

It is the poor payment record of MSME customers. Both the government and the private sector. According to the MSME Samadhaan portal, which was created to monitor delayed payments to MSME, 1.17 lakh applications were filed by MSMEs. 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%,” read a headline of a financial daily. Power Secretary Alok Kumar said the main reason why these six States accounted for the bulk of the dues to GENCOs is because State governments often fail to pay subsidies to the discoms on time. Also, government departments don’t clear their electricity bills promptly.

Another news report from Karnataka, in November 2021, said: “Karnataka State Contractors’ Association says bills worth Rs 17,000 crore are due at the end of October 2021”. According to a report from AP in June 2022, the AP government is saying payments timelines cannot be guaranteed and they have put a special condition in the contracts which says “note: the payment of bills will be made based on the availability of plough back funds. In case of any delay in payment, the contracting agency shall have no right to challenge in the court of law. Only such contractors who can wait till realisation of bills without approaching the honourable courts only need to bid for the works.” The question is, if the government cannot pay its dues on time, how can it expect MSMEs 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 governments, 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.