MSME sector accounts for 30.1% of India’s GDP, 35.4% of manufacturing and 45.73% of exports in the country as on July 20251. As on July 16, 2024, total employment reported by the MSMEs on the Udyam Registration Portal (since July 1, 2020 to July 16, 2024) is 203.9 million2 (including informal micro enterprises registered on Udyam Assist Platform). Their growth is critical to India’s ambition of becoming a $5 trillion economy. Goods and Services Tax (GST) 1.0 regime often posed challenges for small businesses especially from complex procedures and inverted duty structures. Recognizing this, the government has introduced a series of GST reforms to simplify operations thereby reduce compliance burdens, and encourage growth for MSMEs.
Simplifying and rationalizing the GST rate structure
One of the most significant areas of reform has been the rationalization of GST rates. The move toward a fewer-slab, simplified structure aims to eliminate uncertainties that once clouded pricing and tax planning. The newly announced “next-generation” GST reforms replace the previous four‐slab structure (5%, 12%, 18%, 28%) with a simplified structure: essentially 5% for essentials (merit/priority items), 18% as the standard rate for most goods/services, and a higher rate for so-called “sin/luxury” goods. By reducing tax rates on key goods and services used by MSMEs in manufacturing, these reforms have improved predictability in taxation and eased the process of doing business.
Correcting inverted duty structures
Earlier, inverted duty structures where input taxes exceeded those on finished goods eroded profit margins and caused blocked input tax credits. Government and the GST Council undertook a series of rate rationalization measures aimed at aligning input and output tax rates. These reforms particularly relevant for MSME-driven industries such as textiles, footwear, and electronics, where input taxes historically exceeded the tax rates on finished goods, leading to blocked input tax credits and higher working capital costs. Government interventions to correct these distortions have eased cost pressures, improved cash flows, and enhanced the competitiveness of MSMEs.
Online convenience and quicker refunds
The increasing digitalization of the GST regime has been a game-changer. Mechanisms such as automated return filing, e-invoicing, and faster refund systems have enhanced efficiency and transparency. MSMEs that once struggled with delayed refunds now enjoy quicker realization of credit, leading to smoother working capital management.
Easier registration and compliance
Reforms have also simplified GST registration and dispute resolution. The streamlined registration process, along with faceless adjudication and stronger grievance-redressal mechanisms, has reduced compliance costs and litigation risks. The introduction of composition schemes and quarterly return-filing options enables small businesses to stay compliant with minimal administrative effort.
Why these reforms matter
The combined impact of these reforms is substantial. MSMEs now benefit from lower production costs, improved cash flows, and higher profit margins. Simplified compliance means less time and fewer resources diverted to tax administration, allowing firms to focus on innovation and growth. Formalization under the GST framework has also increased their credibility, making access to credit and integration into higher value chains easier. Additionally, reduced GST rates on consumer goods have stimulated demand, benefiting MSMEs catering to local and domestic markets.
In gist, India’s GST reform process remains underway, but the direction is clear- toward a more business-friendly and transparent tax system. For MSMEs, what’s at stake is not merely tax relief, but an opportunity to scale cost-effectively and compete on an even footing. By reducing process friction and compliance burdens, the new GST regime is positioning MSMEs as the growth drivers of a sustainable and inclusive Indian economy.