The Impact of GST Compliance Challenges on MSMEs and Small Traders in Andhra Pradesh and Telangana

The present study has examined the impact of GST compliance challenges of MSMEs and small traders of Andhra Pradesh and Telangana on market integration, competitiveness and costs. The analysis draws some important inferences based on primary survey data of 280 respondents complemented with secondary data from government reports and academic literature. Firstly, almost all respondents rated their access to interstate markets positively, indicating that GST has achieved its goal of promoting market integration to a large extent. Nonetheless, these benefits are not evenly distributed; they are more easily captured by firms with higher organizational capacity and digital capabilities. The second reason is that the GST compliance requirements have created a distortion in competition in favour of larger enterprises, not because of the tax structure but the asymmetric compliance capabilities of firms of different sizes. Many MSMEs and small traders believe that big businesses have an advantage in the market because of easier GST compliance. They also feel that GST compliance costs lessen the ability of small businesses to compete on price and expand. The findings imply long-run competitive dynamics and structural change in the MSME sector in both states. In addition, the compliance cost burden is clearly regressive, with micro enterprises suffering a disproportionately higher share of costs relative to their turnover.  The average compliance cost as a share of turnover for micro-enterprises (1.38 percent) is approximately 15 times that of medium enterprises (0.09 per cent). This supports the already documented regressive pattern found in the findings of other Indian states and in the global literature on value-added tax compliance costs. The unjust nature of this tax not only threatens the objectives of GST but also its inclusiveness. The compliance cost burden is significantly moderated by the fourth key factor, digital literacy and access to professional accounting support. Companies that invest in digital skills and professional help have compliance costs that are much lower than turnover. Thus, it isn’t their tax design that gives rise to a compliance-related competitive disadvantage, but rather the gap in compliance capacity. This result means that the policy need not only worry about simplifications in the tax but rather about measures that can build the compliance ability of MSMEs.

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