News of simplification of the goods and services tax (GST) norms is welcome. Allowing composition dealers to file one annual return with a simple declaration, instead of every quarter earlier, is a relief for many small and medium-sized enterprises (SMEs). The payment of taxes still needs to be done on a quarterly basis.
According to analysts, this move would reduce the compliance burden and take some pressure off SMEs working capital cycles. And that would eventually improve their credit profiles. Tax experts say this relaxation along with increased threshold for composition scheme would encourage more SMEs to file returns and more businesses to opt for this scheme, respectively.
“Easing of compliance and relaxation in GST applicability by the GST Council in terms of the return filing process could provide some relief for SMEs. That, along with Reserve Bank of India’s one-time restructuring scheme for MSME loans could provide some breather to SMEs in terms of easing a part of their working capital requirements, having continuity in maintaining credit lines and thereby prevent defaults to banks,” said Jindal Haria, associate director at India Ratings and Research Ltd.
One would reckon that increased tax compliance led to a spike in the working capital requirements of SMEs post-GST implementation in 2017. Technology glitches while filing monthly returns led to delayed tax refunds. These factors weighed on the credit profiles of SMEs.
But as the alongside chart shows, the modified credit ratio of SMEs has improved, reflecting higher number of upgrades than downgrades. Data shared by CARE Ratings Ltd showed that the modified credit ratio for SMEs reviewed by it stood at 1.13 times in calendar year 2018. This is better than 0.99 times seen in 2017.
“The higher modified credit ratio this year shows improvement and stabilisation in performance of many SMEs post the shocks of demonetisation and GST implementation. Industry-wise, ratings improved in steel sector. Increased demand in the consumer food segment resulted in improvement in financial risk profile of those companies driving rating upgrades. Textile, ceramic and construction sectors remained stable while diamond and jewellery industry witnessed some stress due to restricted access to bank finance,” said Yogesh Shah, director (corporate ratings) at CARE Ratings.
Meanwhile, a global survey of MSMEs recently conducted by Dun and Bradstreet (D&B) showed that access to finance is the major obstacle for Indian companies in this segment to scale up.
“In India only 4% of MSMEs get access to formal finance; this is much lower than 11% in Indonesia, 18% in Sri Lanka and 20% in China. So, measures announced by the GST Council and RBI certainly help to aid sentiment towards MSMEs because of improved transparency. It helps the lender to get a complete picture. From a lender’s perspective, lending money to a business that has lower compliance is a risk that cannot be priced for. On the other hand, if one has to lend to an MSME where the risk of default is higher, one can simply lend at higher interest rate and cover for it,” said Manish Sinha, managing director of D&B India.
Of course, while these measures are positive, their impact on credit profiles of SMEs is expected to be gradual.
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