India’s Goods and Services Tax (GST) regime, introduced in 2017, was heralded as a transformative reform-“One Nation, One Tax”- that would simplify our tax system and unleash entrepreneurial energy across the country.
Eight years later, while we have made significant progress in rate rationalization and compliance simplification, small sellers continue to face a maze of regulatory requirements that drain their resources and divert their attention from what matters most: growing their businesses.
As a parliamentarian who regularly interacts with entrepreneurs and small business owners, I hear a consistent refrain: despite multiple GST reliefs in rates and processes, the compliance journey remains unnecessarily complex. It is time we acknowledge these challenges and accelerate reforms that leverage the trust already embedded in our GST framework.
The Registration Maze
Consider the journey of a small seller who wants to expand operations across India. Today, this entrepreneur must obtain separate GST registrations in every state where they operate.
This is not merely a paperwork exercise – it requires maintaining physical offices with dedicated infrastructure in each location, complete with IT systems, employees who can explain books of accounts and constraints while operating from a shared premise.
The biometric authentication requirement adds another layer of complexity. Entrepreneurs must physically visit jurisdictional GST offices in each state for Aadhaar-based verification solely for registration purposes. What the law prescribes should take 7 to 21 days often stretches beyond 60 days, with applications frequently rejected over minor documentation issues that vary from state to state.
The Compliance Treadmill
Once registered, the challenges multiply exponentially. Small sellers must maintain separate books of accounts for each state, file individual returns with different credentials for each jurisdiction and navigate the monthly reconciliation burden across multiple state-wise filings.
Despite digital accounting being standard practice today, authorities often expect physical books to be maintained in each state-a requirement that seems anachronistic in our digital age.
For e-commerce sellers, a rapidly growing segment that has democratized entrepreneurship for artisans, weavers, and micro-entrepreneurs, the situation is particularly frustrating. Delivery partners must carry physical invoices for each B2C delivery, even though digital alternatives exist and are widely used. This is not just inefficient; it contradicts our vision of a paperless, technology-driven tax administration.
The audit process compounds these difficulties. Small sellers face multiple state audits on identical transactions and issues, with each state authority examining the same matters independently. Different states may interpret the same GST provisions differently, creating compliance uncertainty.
Each audit requires dedicated personnel, extensive documentation preparation, and follow-up, diverting precious resources from core business activities. Suspensions can occur when authorized representatives are not physically present during inspections, regardless of legitimate business requirements elsewhere.
The Working Capital Crisis
Perhaps the most pressing issue is the accumulation of Input Tax Credit (ITC) that small sellers cannot utilize effectively. This problem manifests in several ways, each creating significant financial strain.
When businesses purchase inputs taxed at 18% but sell outputs taxed at 5% – common in apparel and daily-use product categories-credits accumulate with no corresponding tax liability to offset them. This is the inverted tax structure problem.
The GST law lacks systematic refund mechanisms for accumulated credits at financial year-end, which used to exist in erstwhile VAT laws in many states. The existing refund formula for inverted duty structures excludes service-related ITC entirely, despite services being essential inputs for many businesses.
This working capital blockage is not a minor inconvenience-it directly impacts the competitiveness of Indian small sellers, particularly exporters who compete in global markets. Every rupee locked in accumulated credits is a rupee that cannot be invested in inventory, technology or expansion. For businesses operating on thin margins, this can mean the difference between growth and stagnation.
The Economic Imperative
The stakes are high. Small and medium enterprises contribute 30% of India’s GDP, 45% of manufacturing output and employ 11 crore people. E-commerce has opened unprecedented opportunities for these businesses to access national and global markets cost-effectively. India’s e-commerce exports, which reached approximately $5 billion in 2023, are projected to grow to $200-300 billion by 2030.
We cannot allow compliance complexity to constrain this potential. The question is not whether we should reform, but how quickly we can implement changes that maintain revenue integrity while dramatically reducing the compliance burden.
The Trust Already Embedded in GST
Here is what many people do not realize: the GST framework already operates on a foundation of inter-state trust that is remarkable in its scope and effectiveness.
Under our destination-based taxation system, tax is collected by the origin state but accrues to the state where goods are consumed. This means one state effectively acts as an agent for another-collecting revenue that will ultimately belong to the destination state.
Think about the implications. The destination state, having no jurisdiction over the seller through whom revenue has accrued, must trust the origin state to ensure compliance with tax laws, maintain proper records, conduct necessary audits and remit the appropriate revenue.
This trust-based framework has worked remarkably well since GST implementation. States have cooperated, shared information and ensured revenue flows to the rightful destinations.
The question we must ask is: if states can trust each other in this fundamental way-trusting another state to collect and remit billions in revenue – why can we not extend this trust to create a simpler registration system for small sellers?
(The author is a Member of Parliament, Rajya Sabha; Views expressed are personal)
