High GST Rates and Low Margins Pose Threat to Business Survival in India

Small and medium-sized enterprises (SMEs) and several industries across India are raising alarm over the dual challenges of high Goods and Services Tax (GST) rates and shrinking profit margins, which they claim are threatening their very survival. With the economy still recovering from the pandemic-induced slowdown, businesses are struggling to cope with the financial strain, leading to fears of widespread closures and job losses.

The GST Burden

Introduced in 2017, the GST regime aimed to streamline India's complex tax structure by subsuming multiple indirect taxes into a single system. However, many businesses, particularly in the manufacturing, retail, and hospitality sectors, argue that the current GST rates—ranging from 12% to 28%—are excessively high, especially for essential goods and services. This has led to increased costs for both businesses and consumers, stifling demand and squeezing margins.

"While the GST system was meant to simplify taxation, the high rates are making it difficult for small businesses to survive," said Ramesh Kumar, a Delhi-based textile manufacturer. "Our input costs have gone up, but we can't pass the entire burden onto consumers without losing sales."

Shrinking Profit Margins

Compounding the issue is the rising cost of raw materials, logistics, and labor, which has further eroded profit margins. Many businesses, particularly in the unorganized sector, operate on thin margins and are unable to absorb these additional costs. The situation has been exacerbated by inflationary pressures and supply chain disruptions caused by global geopolitical tensions.

"For small businesses, even a 2-3% increase in costs can be the difference between profit and loss," said Priya Sharma, owner of a small handicraft export business in Jaipur. "We are already struggling to compete with cheaper imports, and the high GST rates are making it impossible to stay afloat."

Sector-Specific Challenges

Certain sectors, such as hospitality, tourism, and retail, have been hit particularly hard. The hospitality industry, for instance, faces a 28% GST rate on luxury accommodations and 18% on restaurants, which many argue is unsustainable in a price-sensitive market.

"The hospitality sector is still recovering from the pandemic, and these high tax rates are a major deterrent to growth," said Vikram Singh, president of a hotel association in Rajasthan. "We need immediate relief in the form of reduced GST rates to survive and thrive."

Similarly, the textile and handicraft sectors, which are major employers in rural India, are facing intense competition from cheaper imports, particularly from China and Bangladesh. High GST rates on raw materials like yarn and fabric have further weakened their competitiveness.

Calls for Reform

Industry bodies and trade associations are urging the government to revisit the GST structure and reduce rates for critical sectors. They argue that lower taxes would stimulate demand, boost revenues, and ultimately benefit the economy.

"The government needs to adopt a more pragmatic approach to GST rates, especially for sectors that are struggling," said Anil Agarwal, president of a leading industry chamber. "A reduction in rates will not only help businesses survive but also increase compliance and revenue collection in the long run."

The Road Ahead

As businesses grapple with the dual challenges of high GST rates and low margins, the need for urgent policy intervention has never been more critical. With the festive season around the corner, traditionally a period of high consumer spending, stakeholders are hopeful that the government will take decisive action to revive demand and support struggling enterprises.

For now, the survival of countless businesses hangs in the balance, as they await relief from a system that was meant to simplify their lives but has instead added to their burdens.