How digital challenges are deepening economic crisis for MSMEs

The fear of infection is preventing people to go to markets even as governments have started to relax the lockdown. A survey by the Retailers Association of India (RAI), conducted with over 100 retailers between June 1 and June 15, showed that retailers in malls reported a 77% year-on-year dip in business in the first 15 days of the month; high streets saw business decline by over 60% in the same period. While governments can relax restrictions on movement, they cannot directly influence consumer preferences. As major cities record high single-day spikes, people are increasingly finding it unsafe to go out to buy the products they need and desire.

Keeping in view that to a vast majority of micro, small and medium enterprises (MSMEs), retailers and kirana shops serve as their sales outlets, closure of this vital sales window smothered demand, even when industries were allowed to open.

During this crisis, with social distancing norms in place to prevent the spread of the virus, home delivery through e-commerce platforms has become a relatively safer and convenient channel to access goods and services.

From the MSME development perspective, this has also prompted the need to actively encourage small businesses to explore online selling as a way out of this crisis. MSMEs continue to expect that the government will take measures to help them further grow and become a part of the digital economy in larger numbers. However, the current tax regulations for online sellers are far from encouraging, and in fact these will disincentivise these sellers from selling through online channels.

A cursory glance at the tax regulations for online and offline sellers highlights how the compliance burden and tax rate is considerably higher for online sellers when compared to those selling offline. There are over 6 crore MSMEs but total registration under GST including traders, retailers, service providers who have opted for non-registration of GST is around 1.25 crore. Therefore, a bulk of MSMEs having a turnover below Rs 40 lakh avoided registering under GST.

But the Goods and Services Tax Act mandates that every entity selling through online e-commerce platforms is required to obtain GST registration irrespective of annual turnover.

Further, the Composite GST Scheme for small taxpayers allows businesses earning less than Rs 1.5 crore to get rid of tedious GST formalities and pay GST at a fixed rate of turnover, i.e. 1% for traders. However, the scheme prohibits traders registered as Composite Dealers from selling online.

To add to the burden, the Union government this year introduced a 1% TDS levy on e-commerce transactions, on the gross amount of sale or service, expected to be implemented beginning October 1, 2020. This is in addition to the 1% TCS under GST which is already levied on e-commerce transactions. These TDS and TCS rules create working capital concerns especially for MSMEs who are seeking wider market access through e-commerce marketplaces.

Online resellers in categories such as electronics, toys and books typically have margins in the range of 1-2% and maintain high inventory levels to support their business. According to an industry analysis, the earnings margin before interest, tax and depreciation for retailers is in the range of 3-8%, which points to the overall issue on low net margins post interest and depreciation. The above-mentioned upfront taxes withhold much-required working capital from the entrepreneur. At a time when MSMEs are struggling with massive cash-flow issues, these compliance burdens will only ensure that offline sellers don’t come online and are unable to access the e-commerce opportunity.

A crisis presents the need to introspect on our gaps and identify ways to lead us out of the chaos. The Union government, with its capacity to drive bold reforms, must look at relaxing entry barriers for sellers to go online, as a way out of this crisis.

The inequalities in regulations have to be weeded out and our small businesses need to be encouraged to explore selling their products online. To begin with, the government can look at equally aligning the threshold for GST registration for online and offline sellers, allow composite taxpayers to at least make intra-state or city supplies on an e-commerce platform, and consider withdrawing the onerous TCS and TDS requirements applicable to small sellers selling through online platforms. These can be replaced by PAN or GST-based simplified reporting obligations on e-commerce platforms to check against any GST or income tax non-compliance by online sellers.

Industry data and trends from the past three months have spelled out the benefits and the edge that e-commerce marketplaces provide our small businesses in this pandemic. It is important for us to be cognisant of these benefits and accordingly take reforms to reduce barriers for online selling. The government must realise that in spite of the economic relief package that was announced, most MSMEs continue to worry about their survival. Many have already shut shop. Unless the ease of doing business for MSMEs is improved drastically, the sector may be headed for real tough times.

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