GST and the Informal Sector: A Barrier or a Bridge to Formalization?

Introduction

The introduction of the Goods and Services Tax (GST) in India was hailed as a landmark reform aimed at simplifying the tax structure and fostering economic growth. However, for the informal sector, which comprises nearly 80% of India’s workforce, the GST regime has posed both opportunities and challenges. One of the primary hurdles unregistered businesses face is navigating the GST registration process. While formalization under GST brings benefits such as access to credit and legal recognition, compliance challenges, cost burdens, and lack of awareness have deterred many small traders and entrepreneurs from registering.

Understanding the GST Registration Process

The GST registration process is mandatory for businesses whose annual turnover exceeds the prescribed threshold limit (currently ₹40 lakh for goods suppliers and ₹20 lakh for service providers). However, many small and unregistered businesses continue to operate outside the GST framework due to the complexity of the GST registration process and fear of increased tax liability.

Key Steps in the GST Registration Process:

1. Online Application: Businesses must visit the GST portal and fill out an application form (GST REG-01).
2. Document Submission: PAN, Aadhaar, bank details, business address proof, and other necessary documents must be uploaded.
3. Verification and ARN Generation: Once submitted, an Application Reference Number (ARN) is generated for tracking.
4. Approval or Query by Authorities: The GST department reviews the application and may seek clarifications or additional documents.
5. GSTIN Issuance: Upon successful verification, a unique GST Identification Number (GSTIN) is issued, enabling businesses to operate under the GST regime.

While this process appears straightforward, many small businesses struggle with digital literacy, lack of documentation, and procedural complexities. Understanding the GST registration process is crucial for overcoming these barriers.

Challenges Faced by the Informal Sector Under GST

1. Lack of Awareness and Understanding

One of the biggest challenges is the lack of knowledge about the GST registration process and its benefits. Many small traders, street vendors, and home-based businesses remain unaware of how GST can facilitate business growth and compliance.

2. Complexity of Compliance

For informal businesses accustomed to cash transactions and minimal record-keeping, GST compliance involves significant procedural changes. Filing returns, maintaining invoices, and adhering to tax regulations can be overwhelming without a clear understanding of the GST registration process.

3. Increased Cost Burden

The cost of compliance, including hiring accountants and investing in technology, adds financial pressure on small businesses. Many prefer to stay unregistered to avoid these costs, even at the risk of losing business opportunities. The GST registration process often requires additional expenses, making it difficult for small businesses to comply.

4. Fear of Tax Liability

The perception that GST registration will lead to higher tax liabilities and scrutiny from tax authorities discourages small businesses from registering. This fear stems from historical distrust of tax authorities and lack of clarity in regulations related to the GST registration process.

5. Disruption in Supply Chain

Unregistered businesses find it difficult to collaborate with registered entities, as they cannot claim Input Tax Credit (ITC). This puts them at a disadvantage, forcing many to either formalize through the GST registration process or lose business to competitors.

Is GST a Barrier or a Bridge to Formalization?

The GST registration process can act as both a barrier and a bridge, depending on how it is perceived and implemented. While it imposes new challenges, it also offers opportunities for growth and development. Here’s how:

GST as a Barrier

• Complicated Registration and Compliance: Many small businesses find the GST registration process too complex and burdensome.
• High Cost of Compliance: Hiring tax professionals and investing in technology is an additional expense.
• Fear of Legal Scrutiny: Some businesses avoid registration to escape potential tax audits and compliance checks.

GST as a Bridge

• Access to Credit and Government Schemes: Registered businesses can avail of loans, subsidies, and government incentives through the GST registration process.
• Market Expansion and Business Growth: GST allows businesses to trade across states without tax barriers.
• Better Business Credibility: A GST-registered business is seen as more reliable, helping it attract bigger clients.

Encouraging Formalization: The Way Forward

To make GST a true bridge to formalization rather than a barrier, the government and industry bodies must take proactive steps:

1. Simplification of the GST Registration Process: Reducing paperwork and making the GST registration process more user-friendly can encourage more businesses to register.
2. Awareness and Education Campaigns: Conducting workshops and providing free resources can help small businesses understand the benefits of GST registration.
3. Financial Assistance for Compliance Costs: Offering subsidies or incentives to cover initial compliance costs can ease the burden on micro-businesses and simplify the GST registration process.
4. Relaxed Compliance for Small Traders: A special simplified GST filing mechanism for micro and small enterprises can be introduced to streamline the GST registration process.
5. Stronger Digital Infrastructure: Ensuring seamless online registration and compliance through mobile-friendly applications can help businesses adopt GST smoothly.

Conclusion

The GST registration process plays a crucial role in determining whether informal businesses perceive GST as a barrier or an opportunity. While challenges exist, a structured approach to awareness, simplification, and financial support can help bridge the gap. If implemented effectively, the GST registration process can drive small businesses toward formalization, enhancing their credibility, market reach, and long-term growth.

By addressing these challenges and creating a supportive ecosystem, India can move closer to an inclusive economy where both small and large businesses thrive under a unified tax regime.