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Title: Examining the Impact of Goods and Service Tax on Business Performance: Evidence from Micro, Small and Medium Enterprises of Punjab
Authors: Bhalla, Neba
Supervisor: Sharma, Rakesh Kumar
Kaur, Inderjeet
Keywords: Key words;Tax Reform;Goods and Service Tax; Micro, Small and Medium Enterprisess;India, SEM
Issue Date: 3-Feb-2023
Abstract: Tax reforms are imperative for an economy and its businesses. In India, the major tax overhaul took place on July 1, 2017, with the implementation of Goods and Service Tax (GST). Before GST, multiple indirect tax systems prevailed in India, which harmed businesses. The consolidation of the indirect taxation system into GST provided an opportunity to examine its impact on business performance, particularly Micro, Small and Medium Enterprises (MSMEs). MSMEs play a crucial role in industrial development and have more growth potential than large units in terms of increased sales, profits and productivity. Moreover, they are the largest generator of employment globally; they create seven out of ten jobs. However, they are sensitive to new reforms due to their limited resources. Therefore, the present study has been undertaken to examine the impact of GST on the business performance of MSMEs. The primary aim of the study is to examine the impact of GST, for which we have used the key variables, namely tax system changeover, GST compliance system, time spent complying with the system, and technological transition (Goods and Service Tax Network). The present research also examines MSMEs' tax awareness and knowledge of GST and their impact on business performance. MSMEs are slow adapters to reforms and after a major tax overhaul, altering the business processes without proper tax awareness and knowledge is the recipe for failure. Further, the factors of tax system changeover from Value Added Tax to GST are also mapped. For gauging business performance, the parameters used for the study are operational performance, profitability, financial position, and managerial and operational efficiency. The study has been conducted in one of the emerging states- Punjab. The sample has been collected from 605 registered MSMEs through a structured questionnaire. We applied Exploratory Factor Analysis (EFA), Analysis of Variance (ANOVA), and stepwise regression using IBM-SPSS to achieve the objectives. Furthermore, the two structured equation models (SEM) were developed using IBM-AMOS- I) for operational performance and profitability II) for financial position and managerial and operational efficiency. The empirical findings highlighted that tax system changeover prevented fraudulent tax practices and improved tax system efficiency. In addition, the results further verified that after the GST, the problem of the input tax credit mechanism would be resolved, and rational tax rates and threshold limits would prevail. A unified GST tax structure led to smooth tax jurisdiction. Further, the factors of changeover were explored using Analysis of Variance (ANOVA), whether or not any difference in perception exists based on firm's characteristics- type (firm size), the form of enterprises, business turnover and nature of business. The results from ANOVA emphasized that they all agree that GST has brought efficiency to the tax system and rationalized the tax rates and threshold limits throughout the country. Further, the results emphasized that MSMEs have moderate tax awareness and knowledge of GST. Information sources like tax consultants, television, internet and experts positively influence tax awareness and knowledge levels. A strong association is verified between age, educational level and tax awareness of MSMEs. Finally, the two SEM models were developed. The models highlighted that tax system changeover and technological advancement positively impacted all four business performance parameters. In addition, the firms’ characteristics have also shown a positive influence on all four parameters as well. Moreover, in-depth tax awareness and knowledge augmented the operational performance of MSMEs. However, the compliance system has negatively impacted the firms’ profitability. Further, the model stressed that the cumbersome compliance system of GST has enhanced the burden on the firms, whereas the technological advancement in the tax system has reduced the burden on the firms. The findings may prove beneficial to MSMEs, policymakers and investors. Firstly, the study provides an in-depth view of the tax reform determinants that impact business performance. Through empirical results, MSMEs can become more vigilant about tax system changeover, compliance system and technological transition and can plan their business strategies accordingly to enhance their performance. Secondly, the results may benefit the investors, particularly foreign institutional investors (FII) and credit rating agencies, as they are concerned about firms with high profits and remain interested in investing in the MSME sector. Lastly, the study has practical implications for the government and policymakers. They should focus on formulating simple, straightforward and non-cumbersome compliance processes and procedures to enhance business performance.
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