Smallest Businesses in India Pay the Highest Cost of GST: Study The Ministry of Statistics and Programme Implementation announced the details of the National Sample Survey Office’s (NSSO) report – Annual Survey of Unincorporated Sector Enterprises (ASUSE) 2022-23 – last week.
The researchers, comprising Sacchidananda Mukherjee and Shivani Badola from the National Institute of Public Finance and Policy (NIPFP), found that the one-time and recurrent costs of GST can be as high as 3.28%-13.90% of the annual turnover for unincorporated enterprises. This works out to 4.64%-19.71% of mean annual expenditure on operations.
Smaller Firms May Have Higher Relative GST Burden
Unincorporated enterprises tend to be small, owner operated businesses, often using the form of a proprietorship or a partnership. These businesses do not often have separate finance and tax departments – or even large staffs.
Tax compliance costs, especially for recurring compliance, are therefore more important for small firms. The analysis suggests that the costs are not the same for all firms. Firms with annual sales below Rs 4.9 lakh are expected to incur a higher compliance cost relative to their sales than firms with sales of Rs 4.9 lakh and above.
For a tiny enterprise even a fairly small spend on all of the accounting, tax specialists, software program, documentation and admin could be a big proportion of the profit.
GST Registration Remains Limited
In addition, the study emphasizes the fact that the proportion of the sample businesses who were registered under GST or VAT is very low. In the sample, the proportion was 2.41% of the sample enterprises registered for GST or VAT.
For some of the very small enterprises, the increased opportunities for access to formal supply chains and input tax credit may be determined by the cost and administrative burden of remaining compliant.
This poses a key policy dilemma: while formalisation can generate economic benefits, compliance requirements should not be so high as to be beyond the capacity of businesses.
Why GST Compliance Can Be Expensive
The GST has largely digitized tax administration. Businesses could be required to file periodic returns, reconcile input tax credit data, maintain digital records and fulfill any relevant e-way bill and e-invoicing obligations depending on business and threshold levels.
Larger companies may outsource these functions to dedicated accounting and tax departments. Smaller companies can also bring in outside accountants or tax specialists that then become an addition to their operating costs.
The NIPFP report therefore adds to evidence that the smaller the firm, the more expensive it is to comply.
GST Council Expected to Examine Process Reforms
The report comes in the run up to the GST Council meeting on October 7, 2026, where reforms related to GST process are said to be on the agenda.
It is reported that the changes could relate to GST registration, refunds, penalties and input tax credit. Among possible proposals are make the GST registrations uniform and straightforward, minimize the supply mismatches and notices that are avoidable.
Further discussions have been reported to include the Council considering lowering the general penalty to Rs 10,000 from Rs 25,000 for cases where it applies and looking into some leniency on late fees for certain small taxpayers. Nothing is final until it is passed by the Council.
Revenue Collection and Ease of Doing Business Ramification
The new research contributes to the debate on how India’s tax system can support formalisation without imposing spiralling administrative costs on micro-enterprises.
For SMEs, compliance costs of GST extend beyond the GST itself. Total costs may consist of professional fees, accounting systems, staff time, record keeping and costs associated with complying with regulations.
Steps to streamline tax procedures could thus have an even wider effect. If there are lower compliance costs, formalisation could be made more accessible to small businesses and enable them to better integrate into supply chains.
Meanwhile, reforms would also have to address to safeguarding tax collection, and the avoiding of abuse through simplified procedures.
GST discussions are therefore becoming less about rates of tax and more about how burdensome and complicated the system is to apply. Simplifying the GST for India’s millions of small and unincorporated enterprises may be an important step in improving its business climate.
