Impact of GST on the Unorganized Sector

The introduction of the Goods and Services Tax (GST) in India was a landmark reform aimed at unifying the complex and fragmented indirect tax structure. While GST promised transparency, ease of doing business, and enhanced revenue collection, it has not been equally beneficial for all segments of the economy. One of the most significantly affected areas is the informal economy. This blog explores the impact of GST on unorganized sector, outlining its challenges, opportunities, and future implications.

Understanding the Unorganized Sector in India

Before diving into the impact of GST on unorganized sector, it is essential to understand what constitutes this sector. The unorganized sector includes small-scale traders, roadside vendors, artisans, home-based businesses, handloom weavers, small manufacturers, and agricultural workers. These businesses typically operate outside the formal tax net, lack proper registration, and often function on cash-based transactions.

According to the Ministry of Labour and Employment, over 90% of India’s workforce is employed in the unorganized sector. This makes the GST’s ripple effects on this segment particularly crucial for policymakers and the broader economy.

Key Changes Introduced by GST

GST replaced multiple indirect taxes like VAT, service tax, excise duty, and others with a unified tax system. For businesses, GST compliance includes:

• Mandatory registration beyond a specific turnover threshold

• Timely filing of returns (monthly, quarterly, and annually)

• Maintenance of proper records and invoices

• Payment of tax liabilities electronically

While these changes bring accountability and improve transparency, the impact of GST on unorganized sector has been mixed, and in many cases, problematic.

Negative Impact of GST on Unorganized Sector

1. Compliance Burden

The foremost impact of GST on unorganized sector is the increased compliance burden. Most unorganized businesses lack digital literacy, skilled manpower, or resources to manage GST filings. They often cannot afford professional tax consultants or accountants, making it harder for them to stay compliant.

2. Cost of Compliance

For many small businesses, the cost of software, internet connectivity, digital invoicing, and consultancy significantly adds to their operational expenses. This deters participation in the formal economy, defeating one of GST’s core goals.

3. Disruption in Supply Chains

GST compliance requires a fully documented supply chain. Since many unorganized businesses are not GST-registered, organized businesses are reluctant to deal with them, fearing the loss of input tax credit. This creates a ripple effect, pushing unorganized players out of established supply chains.

4. Working Capital Issues

Another major impact of GST on unorganized sector is the cash flow crunch. Input tax credit is only available if the supplier has paid GST and filed returns correctly. Many small businesses operate on thin margins and find it difficult to manage delayed reimbursements and working capital gaps.

5. Job Losses and Business Closures

There have been reports of job losses and small business closures in sectors like textiles, handicrafts, and small-scale manufacturing. The formalization pressure and lack of understanding of the GST system have driven many entrepreneurs to shut down their operations.

Positive Impact of GST on Unorganized Sector

Despite the numerous challenges, GST also presents some opportunities for the unorganized sector in the long term.

1. Increased Formalization

One constructive impact of GST on unorganized sector is the push towards formalization. Registered businesses can now access formal credit from banks, benefit from government schemes, and expand their markets through e-commerce platforms.

2. Level Playing Field

Earlier, unorganized players often enjoyed a price advantage due to tax evasion. With GST bringing all businesses under a common tax umbrella, fair competition is encouraged, particularly benefitting compliant small businesses.

3. Transparency and Trust Building

GST helps build transparency in transactions and credibility for small businesses. Over time, this fosters stronger business relationships and opens doors to new opportunities and partnerships.

4. Improved Logistics and Efficiency

With the abolition of interstate checkpoints and cascading taxes, logistics costs have reduced. This indirectly helps unorganized sector players involved in goods transport and distribution.

Government Initiatives to Support the Unorganized Sector

To mitigate the adverse impact of GST on unorganized sector, the government has introduced various relief measures:

• Composition Scheme: Businesses with a turnover below ₹1.5 crore can opt for simplified tax filing with a flat rate of tax.

• QRMP Scheme: The Quarterly Return Monthly Payment scheme eases return filing for small taxpayers.

• Exemptions and Thresholds: Businesses with turnover below ₹40 lakhs (₹20 lakhs for services) are exempt from mandatory registration.

• Digital Literacy Drives: Efforts are being made to train small businesses in digital skills and GST compliance.

Sector-Wise Analysis of Impact

a. Textiles and Handicrafts

The textile industry, employing millions, saw a sharp decline in demand and production post-GST due to compliance complexity. Small weavers and artisans struggled to keep up with documentation and online filing.

b. Agriculture

While agricultural produce is mostly exempt, ancillary services like cold storage, logistics, and machinery are under GST. This indirect impact of GST on unorganized sector has increased costs for small farmers.

c. Construction and Real Estate

Many workers in construction operate informally. GST has pushed contractors to hire through registered channels, indirectly affecting informal laborers.

d. Retail and Street Vendors

Small traders and vendors often do not cross the GST threshold. However, those who deal with large suppliers must register to claim input credits, thereby pulling them into a system they find hard to navigate.

The Way Forward

To reduce the negative impact of GST on unorganized sector, a multi-pronged strategy is required:

• Simplification of GST Filing: A user-friendly GST portal, app-based solutions, and multilingual support can ease compliance.

• Awareness and Training Programs: Regular training sessions and helplines for micro and small businesses should be scaled up.

• Financial Support: Subsidies or tax credits for digital adoption can help small businesses transition smoothly.

• Gradual Enforcement: Strict penalties should be relaxed for unintentional errors in the early stages of compliance.

Conclusion

The impact of GST on unorganized sector is a mix of disruption and opportunity. While the initial years have been challenging for informal businesses, GST has also nudged them toward formalization, digitalization, and better business practices. With continued government support and systemic reforms, the unorganized sector can not only survive but thrive in the GST regime. Policymakers must strike a careful balance between regulation and facilitation to ensure that the backbone of India’s economy—the unorganized sector—is not left behind in the journey toward a transparent and unified tax system.