New GST Rule Not Applicable for MSMEs

The Goods and Services Tax was implemented to help lower the total compliance burden on taxpayers and streamline the tax collection process. The government has revised its GST laws and regulations throughout time to ensure that they stay up-to-date. 

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The introduction of the Goods and Services Tax significantly changed the taxation system in India. Implementation of the GST regime helped taxpayers by reducing compliance and eliminating double-taxation. In many ways, GST has transformed India’s taxation system and economy by making it more efficient and technology-driven. Over the years, the government has made amendments to laws and regulations concerning the GST. Such moves have helped the government support Indian businesses and adapt to the times. In this article, we will talk about some guidelines which exempt MSMEs from new GST rules. 

New GST Rule Introduced

The government introduced a new rule under the GST regime regarding the payment of liabilities. As per this new guideline, businesses have to pay at least 1% of their GST liabilities in cash. However, micro, small, and medium businesses, which fall under the MSME category, have been exempt from following this new rule. This is so because the new guideline has a threshold limit of ₹6 crores. The central board of indirect taxes and customs was responsible for enacting this change. The new rule restricts the usage of the input tax credit when discharging GST liability. The limit set for the use of ITC is 99%, leaving the last 1% payment for the dealer. The primary reason for enacting this move is to prevent fake invoicing to misappropriate ITC.

Applicability of New Rule

To ensure that honest taxpayers and small businesses do not face the brunt of this new rule, the CBIC has put in place certain exemptions. They announced that the new rule will not apply to entities that have collected at least ₹1 lakh as income tax within the last two years. Additionally, the rule will also exempt registered businesses that have received refunds worth at least ₹1 lakh in the previous fiscal year. These refunds may be as a result of export trade as per the official notification. Government departments, public sector undertakings and local authorities will not have to proceed as per the new guidelines. 

Further Notification By the CBIC

Any business that runs for-profit will have to provide minimum value addition to the government. In some instances, businesses claim large amounts of fake credit resulting in zero tax payment as cash proceeds. It is to prevent such mishaps and misdemeanours that the CBIC has implemented the new rule. The amendment will help in regulating and limiting the submission of fake invoices by businesses. Such companies misrepresent their financial status and try to pass off as high turnover businesses. After such companies misuse their ITC claims to settle their liabilities, they flee resulting in several issues for the authorities. 

  • The new rule came to be after careful and thorough deliberation by several groups and advisory boards, such as the GST law committee
  • All these agencies have been looking to implement methods that will prevent, regular and evaluate fake invoices that lead to ITC misappropriation
  • The government launched a countrywide program in November to bring such fraudsters to justice
  • They arrested over 175 such miscreants as a part of this continuing drive and have booked more than 1,800 cases against 8,000 fake entities.


Impact of New GST Rule

Since the new rule will apply only to businesses that have an annual turnover of more than ₹6 crores, MSMEs will be exempt from it. The CBIC aims to target companies that show a monthly turnover of over ₹50 lakhs by implementing this new rule. As a result, the new rule will be applicable to only around 45,000 registered entities or taxpayers. The GST taxpayer base includes over 1.2 crore entities, showcasing just how specific the new rule is. It will therefore not impact a significant part of this user base, providing safety to genuine dealers and small businesses. It will also not affect the ease of doing business of any genuine company in India, as per official statements. The rule came into effect on 1 January 2021 and will help the government create a more efficient system. 

The new rule will help flush out the following type of entities and taxpayers;

  1. Risky and suspicious dealers 
  2. Entities that use massive amounts of fake credit 
  3. Entities that make no cash tax payment
  4. Dummy companies that claim fake ITC 
  5. Companies that are part of a multi-layer fake credit flow.

If you have any further queries regarding the new GST rules or want expert guidance on managing your taxes, feel free to reach out to Vakilsearch. We have a team of legal experts and lawyers who can help you manage and plan your taxes efficiently. Vakilsearch also provides a slew of services related to tax management, GST advisory and tax and compliance. So, what are you waiting for? Partner with us, and ensure that your company always stays on the right side of the law! 


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