GST COMPLIANCE BURDEN AND FINANCIAL PERFORMANCE OF MSMES IN INDIA: A STUDY OF TAX RATE STRUCTURE AND BUSINESS SUSTAINABILITY

According to Cryderman (2016), how the burden of tax is distributed by states using different
taxation instruments is determined based on the history of state efficiency, capacity, revenue
availability and development. By varying tax salience levels, the chosen taxation methods affect
public taxation preferences (Cryderman, 2016; Cabral & Hoxby, 2012; Finkelstein, 2009; Chetty,
Looney & Kroft, 2009; Misiolek & Elder, 1988; Pommerehne & Schneider, 1978). The broad
categorization of taxes is as ‘direct’ and ‘indirect’. Taxes that direct by nature are imposed directly
on a person’s or corporate entity’s income, while indirect taxes are borne by individuals who
purchase goods and services for personal consumption (Ramakrishnan, 2002). ‘Sales tax’ and ‘Value
Added Tax’ (VAT) are two forms of modern taxes on goods. Sales taxes are levied by states when
individuals purchase goods from suppliers, and the rate of tax is based on the cost and the nature of
the goods (Cryderman, 2016). VAT, on the other hand, is imposed on businesses whenever value
addition is made to a product, termed as the difference between sales and purchases value
(Sullivan, 2011). By incorporating the tax cost into the product price, this ingenious approach
incentivizes businesses to disclose their value-added, thereby allowing them to claim input tax
credit on their output tax charge. Moreover, it is important for the GST administration to have an
added courteous approach and strike a positive rapport with MSMEs as it helps more businesses to
make better tax compliances. There have been inconsistent approaches by tax authorities at state
and central levels on same issues (PwC, 2022), that need to be resolved at GST Appellate Tribunals,
which remain to be established. Besides, Authorities for Advance Rulings (AARs), which operate at
the state level, to provide clarifications have not been successful, as contradictory rulings have been
issued on same matters in different states (PwC, 2022). The GST council has to accelerate the
establishment of effective dispute resolution mechanisms to address concerns promptly and
maintain trust in the GST system. As well, auxiliary dispute resolving systems, alongside virtual
systems for appeals and adjudications, can help create an efficient mechanism