THE GREAT INDIAN DEBATE — DAY 36 Was GST implementation a success or an avoidable disaster for small business?
THE STAKES In July 2024, the Confederation of All India Traders (CAIT) staged a nationwide protest, demanding the withdrawal of the 18% GST on life and health insurance premiums. Small traders, already reeling from compliance burdens, argued that the tax makes essential services unaffordable for their employees. Meanwhile, the Finance Ministry defended the move, citing revenue stability and the need to plug leakages. The standoff isn’t new—it’s the latest chapter in a six-year-old debate: Did the Goods and Services Tax (GST) streamline India’s economy or strangle its small businesses?
THE ARGUMENT FOR Proponents of GST argue that it was a long-overdue reform that unified India’s fragmented tax system, replacing a maze of state and central levies with a single, transparent framework. Before GST, businesses navigated 17 different taxes, each with its own compliance costs. The new system, they say, reduced cascading taxes (tax on tax), lowered logistics costs by eliminating interstate checkpoints, and expanded the tax base—from 6.4 million pre-GST to over 14 million today.
For small businesses, the benefits are tangible. The composition scheme allows firms with turnover up to ₹1.5 crore to file quarterly returns at a flat rate, reducing paperwork. E-invoicing and automated input tax credit (ITC) claims have curbed corruption and made refunds faster. The World Bank’s Doing Business report noted that GST cut the time to comply with taxes from 214 hours per year to 119. Even critics concede that GST’s digital infrastructure—GSTN—has made tax evasion harder, forcing informal businesses into the formal economy.
Finance Minister Nirmala Sitharaman has repeatedly highlighted GST’s revenue resilience: collections crossed ₹2 lakh crore for the first time in April 2024, a 12% year-on-year growth. This stability, supporters argue, funds welfare schemes and infrastructure projects that benefit small businesses indirectly. The argument isn’t just about efficiency—it’s about fairness. Why should a kirana store pay taxes while a cash-based competitor evades them?
THE ARGUMENT AGAINST Opponents of GST, particularly small business owners, describe it as a bureaucratic nightmare that disproportionately harms the informal sector. The compliance burden is crushing: even under the composition scheme, businesses must file 5 returns a year, with penalties for late filings. A 2023 survey by the All India Manufacturers’ Organisation found that 60% of micro and small enterprises (MSEs) spent more on GST compliance than they saved in tax reductions.
The real pain point is the input tax credit (ITC) system. To claim ITC, a business must ensure its suppliers have filed returns—a near-impossible task when dealing with unregistered vendors. Many small firms, unable to reconcile mismatches, end up paying taxes out of pocket. The GST Council’s frequent rate changes (over 1,000 notifications in six years) add to the confusion. A textile trader in Surat told The Hindu in 2022: “I don’t know if I’m supposed to charge 5% or 12% on this fabric. The rules change every month.”
Then there’s the issue of cash flow. GST is a destination-based tax, meaning revenue flows to the state where goods are consumed, not produced. For small manufacturers in states like Gujarat or Tamil Nadu, this means delayed refunds—sometimes for months—while they wait for buyers in other states to file returns. The Federation of Indian Micro and Small & Medium Enterprises (FISME) estimates that GST-related working capital blockages cost small businesses ₹1.5 lakh crore annually.
Critics also point to the regressive nature of GST. Essential goods like food grains are taxed at 0%, but items like packaged food (12%) or footwear (18%) hit low-income consumers harder. The 28% slab on “luxury” items—like cars or air conditioners—has been slashed, but the damage to small retailers, who lack the margins to absorb compliance costs, is done.
THE HIDDEN DIMENSION Most debates about GST ignore the elephant in the room: India’s informal economy, which employs 80% of the workforce. GST was designed to formalise this sector, but the transition was never going to be smooth. The problem isn’t just compliance—it’s culture. For decades, small businesses operated on cash, barter, and trust. GST’s digital-first approach assumes universal internet access, digital literacy, and a willingness to abandon cash transactions. In rural India, where 60% of small businesses are located, these assumptions don’t hold.
The hidden dimension is the politics of informality. States like Gujarat and Maharashtra, with strong trader lobbies, resisted GST’s rollout, fearing a loss of autonomy. Meanwhile, states like Bihar and Odisha, with weaker informal sectors, saw GST as a way to boost revenues. This divide explains why GST’s implementation was rushed—Modi’s government needed to lock in state support before opposition parties could mobilise resistance. The result? A system that works for large corporations but leaves small businesses scrambling.
WHERE INDIANS STAND A 2023 LocalCircles survey of 38,000 small business owners found that 52% believed GST had hurt their operations, while 34% said it had helped. The divide was stark: urban businesses were more likely to support GST, while rural and semi-urban firms overwhelmingly opposed it. In the 2024 general election, the BJP’s vote share among traders—a key constituency—dropped by 8% in Gujarat and 12% in Maharashtra, partly due to GST-related grievances.
YOUR VIEW If GST’s goal was to formalise the economy, why did the government design a system that assumes small businesses are already formal?
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