MSME and GST

What are MSMEs?

MSMEs stand for Micro, Small, and Medium Enterprises.
The classification of MSMEs in India is defined under the Micro, Small and Medium Enterprises Development Act, 2006.

Originally the Classification was based only on investment. Investment in plant & machinery (for manufacturing) and investment in equipment (for services).
Over time, govt revised the thresholds to reflect inflation, sector’s growth, and for ease of doing business.

The major change in the threshold was introduced in year 2020, where definition was overhauled to include both investment and annual turnover as criteria, and the limits were also significantly raised.

Category	Investment	Turnover
Micro	₹1 crore	≤ ₹5 crore
Small	₹10 crore	≤ ₹50 crore
Medium	₹50 crore	≤ ₹250 crore

Examples of MSMEs: Small manufacturers, wholesalers, Retail shops, Kirana shops, Startups, Service providers (IT firms, consultants, transporters, etc)

Contribution of MSMEs to Indian Economy:

MSMEs contribute to about 30% of GDP and 48% of total exports. Not only that, they generate employment for over 11 crore Indians and promote entrepreneurship among young Indians.

Key Benefits

• Unified Tax System: Replaced multiple indirect taxes (VAT, excise, service tax) with one system.
• Easier Interstate trade: No need for multiple state-level registration and taxes. Eliminated state-level barriers like entry taxes allowed MSMEs to expand their customer base across India without any additional tax burdens.
• Input Tax Credit (ITC): Businesses can claim credit for GST paid on raw materials and input services. This effectively lowers the overall tax burden and production costs.
• Formalization of MSMEs: Subjecting MSMEs to GST has enabled them to transition from the informal sector to the formal economy, thereby integrating them into the regulated framework and providing legal recognition along with access to institutional support such as bank loans and government schemes.
• Market credibility: Being GST-compliant signals reliability to customers, suppliers, and investors.

The concept of Input Tax Credit (ITC) existed earlier under the VAT regime too! Whats then special about GST especially in MSME context?

Concept of Input Tax Credit (ITC) existed earlier under the VAT regime too, but with limitations.

1. Under Pre-GST era: ITC could be claimed only within the same type of tax (e.g., VAT credit against VAT, service tax credit against service tax).
   Since Cross-utilization across different taxes was not allowed, it led to cascading effect. (tax on taxes)
2. Also, Firms operating in different states had to register separately, each with its own rules.
3. Paperwork was heavy ie Claiming ITC required detailed documentation, matching invoices, and manual reconciliation often with fragmented records.

So, many small firms stayed outside the tax net to avoid compliance costs, so they couldn’t claim ITC at all.

Key Challenges:

These are some challenges faced by MSMEs in transition to GST. They are as follows:

• Technology Dependent: For a small or rural MSMEs, the concept of Online registration, returns, and payments are difficult to comprehend and execute, atleast in their initial phase.
• Cost of compliance: frequent online return filings (monthly or quarterly) often requires hiring professional tax experts, thereby increasing operational overheads.
• Cash Flow issues: ITC available only on suppliers filing the returns, the delays or mismatch can tie up essential working capital.

SCHEMES AVAILABLE TO MSMEs IN GST/ OTHER LAWS

Here are the primary schemes and concessions available to small and medium enterprises under GST and other laws:

The Composition Scheme:

It allows eligible MSMEs to pay tax at a fixed percentage of their turnover instead of the standard GST rates.

Eligibility:

-- To qualify for the GST Composition Scheme, the aggregate annual turnover (AATO) in the preceding financial year must not exceed ₹1.5 crore for manufacturers, traders, and restaurants (or ₹75 lakh in special category states).
--- For service providers, the limit is ₹50 lakh in the preceding financial year.

Scheme particulars:

• Applicable tax rates: This Scheme allows eligible MSMEs to pay tax at Fixed lower rate, instead of normal GST rates.
  The rates are : Manufacturers & Traders: 1%, Service Providers: 6% , Restaurants (non-alcoholic): 5%
• Lower Compliance: Reduces the administrative burden compared to regular GST by allowing the taxpayers to
  --- pay taxes quarterly, using Form CMP-08 by the 18th of the month following the quarter and
  --- file a single, annual return (GSTR-4) by the 30th of June following the financial year.
• Taxpayer is not required to maintain detailed, complex records of input tax credits or item-wise sales.

Restrictions:

• No Tax Invoice: The said business cannot issue tax invoice, but must issue a "Bill of Supply".
• No Input Tax Credit (ITC): They are not allowed to claim ITC on purchases.
• No Collection from Customers: They cannot collect GST from their customers.

QRMP Scheme

The QRMP stands for Quarterly Return Filing & Monthly Payment the scheme is designed for MSMEs who want to remain in the regular GST framework (to claim ITC) but find monthly filing too burdensome.

Eligibility:

Registered Taxpayers with Aggregate Annual turnover up to ₹5 crore, in current and preceding financial year, Can opt for QRMP Scheme.

Scheme particulars:

• Under the QRMP Scheme, it is sufficient for taxpayers to file GST returns GSTR-1 and GSTR-3B once in every quarter, while making tax payments on a monthly basis.
• Provided, Taxpayers must have filed their last due Form GSTR-3B return.
• Advantage for MSMEs: Less paperwork and reduced compliance workload.

Conditions:

If the aggregate turnover exceeds ₹5 crore during any quarter of the financial year, the taxpayer becomes ineligible for the next quarter and must switch to monthly filing.

IFF

IFF stands for Invoice Furnishing Facility and it is a complementary system to QRMP scheme that helps MSMEs stay competitive with larger buyers.

Context:

Large companies often avoid buying from small vendors who file quarterly because the large company can't claim their ITC until the small vendor files the GSTR-1.

Scheme particulars:

Under the Invoice Furnishing Facility (IFF), small taxpayers can upload and "pass on" credit by uploading B2B invoices every month, even though their full return is only due every three months.
Once uploaded, the details flow into the buyer’s GSTR‑2B and the buyers (large companies) can claim ITC of these invoices reflected, without waiting for the supplier’s quarterly GSTR‑1.

Little drawback:

But there’s a limit: they can upload B2B invoices worth up to ₹50 lakh in value per month through IFF.

Does this not amount to duplication of effort?

No, it does not amount to duplication of effort.
The tax payer opting for IFF, uploads select b2B invoices in IFF. In the quarterly GSTR‑1, those invoices are reported again as part of the return but they don’t need to be re‑uploaded manually. Reported again in GSTR‑1, not uploaded again.
This facility makes MSMEs attractive to large buyers who otherwise avoid quarterly filers.

Higher Exemption Thresholds

Certain small MSMEs aren’t required to register for GST if their annual turnover is below the specified limits:

No GST registration required if the annual turnover in preceding Financial year is upto ₹40 lakh for goods and upto ₹20 lakh for services. This reduces compliance costs and reporting burden for very small businesses.

If these business operates from Special category states, they are exempted upto ₹20 lakh (for goods) & upto ₹10 lakh (for services)

Simplified HSN Coding

Micro businesses are not required to provide detailed 4-digit HSN codes on invoices, which simplifies the billing process

What is the advantage?

4-digit codes only provide general classification, 6-digit codes requires more specific product details . Involves technical expertise to identify exact sub‑category, increasing the chances of classification error & resulting notices/penalties

Tabulated below is the HSN requirement details to be provided in bills:

Annual Turnover	HSN Code required	Applicability
Up to ₹5Crore	4-digit HSN code	Mandatory in B2B invoices. optional for B2C invoices
Above ₹5 crore	6-digit HSN code	Mandatory in both B2B and B2C invoices
Exporters (any turnover)	8-digit HSN code	Regardless of turnover or invoice type, 8 digit HSN is mandatory for customs clearance and international trade.

Credit facilities and Interest benefits:

There are special credit schemes available to eligible MSMEs under multiple laws.

1. Interest Subvention Scheme

Though not a scheme under GST law, Govt has launched New Interest Subvention Scheme under Export Promotion Mission (2025–2031), for Eligible MSMEs. Under this scheme, eligible MSME will receive 2.75% subsidy on the floating interest rate on Pre-shipment as well as post-shipment rupee export credit, effectively reducing the borrower’s cost of borrowing to that extent.
This benefit however is capped at ₹50 lakhs per MSME exporter per financial year.

2. Collateral free credit

Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) set up by ministry of MSME, provides collateral-free credit up to ₹10 crore for a single borrower and being GST-registered and Udyam registered is mandatory to avail this benefit.