18-July-2025 Daily Answer Writing

Introduction

The drive to scrutinize cash and UPI-based transactions of unregistered small businesses signifies a growing emphasis on formalizing India’s vast informal sector through Goods and Services Tax (GST). This move aims to widen the tax base and enhance revenue, but presents multiple challenges for small enterprises.

Challenges in Formalizing Informal Enterprises

• Compliance Burden: Small businesses often lack the resources, digital infrastructure, and expertise to comply with GST’s procedural requirements, such as maintaining records, timely filing, and adapting to frequent regulatory changes.
• Threshold & Awareness Issues: Many small enterprises operate close to the registration threshold and may be unaware of triggering GST liabilities, leading to inadvertent non-compliance and penalties.
• Transition Disruption: The shift can disrupt established informal networks, hampering liquidity, supply chains, and, in some cases, leading to downsizing or closure.
• Fear of Scrutiny: Heightened surveillance, recent notices, and the possibility of audits can cause apprehension among small vendors, discouraging digital payments and impacting business growth.
• Administrative Capacity: The tax authorities face operational challenges in monitoring and processing vast volumes of micro-transactions to identify non-compliant entities effectively.

Prospects and Opportunities

• Widening Tax Net: Formalization can increase government revenue and transparency in transactions, supporting long-term economic stability.
• Input Tax Credits: Registered businesses gain access to input tax credits, reducing overall tax burdens and increasing competitiveness.
• Market Access: GST registration can facilitate access to credit, government schemes, and larger supply chains, fostering growth of micro and small enterprises.
• Digital Economic Integration: Encourages digital adoption, better record-keeping, and easier business expansion across states.

Measures for Effective Transition

• Simplified Compliance: Extend composition schemes, relax norms, and introduce user-friendly compliance tools for micro and small enterprises.
• Capacity Building: Provide targeted awareness, training, and support to bridge digital and knowledge gaps among small businesses.
• Phased Enforcement: Gradually implement surveillance measures and focus on higher-value transactions initially to avoid disruption.
• Grievance Redressal: Establish responsive mechanisms for resolving compliance issues and clarifying ambiguities in GST provisions.

Conclusion

While increased GST scrutiny over informal enterprises promises to expand India’s tax base and modernize the economy, it must be balanced with support mechanisms and gradual integration to safeguard the livelihoods and growth of millions of small businesses.