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GST on accrual basis hurting MSME/ Small businesses” highlights a significant challenge in India’s GST system for MSME/ Small businesses —the requirement to pay GST based on invoice issuance, not actual receipt of payment.
Bhagat pays Goods and Services Tax on every invoice, Owner raises—even if his/her clients don’t pay for months. The result: mounting pressure on working capital, forcing her to dip into savings or take short-term loans just to stay compliant. By year-end, nearly 3% of her revenue is lost to GST on unpaid invoices.
Each month, Bhagat is taxed on income she hasn’t actually received. Owner isn’t alone. Across India, small businesses are reeling under a cash flow crunch triggered by GST’s accrual-based structure, which requires tax to be paid when an invoice is issued—not when the payment is received.
GST Accrual Rule : Under the GST law, tax liability arises at the earlier of the invoice date or payment receipt. But in practice, payments often come 40 to 90 days after billing. For service-based businesses with few input costs to offset through Input Tax Credit, this means paying GST out-of-pocket well before revenue hits the bank account.
My payments are delayed by over 60 days after invoicing. Most of my expenses are salaries, which aren’t eligible for ITC, so I end up paying GST even before receiving a single rupee.
GST must be paid at the earlier of Date of invoice or Date of payment receipt. Clients often delay payments by 45–90 days, causing a cash flow burden on the seller. Sellers pay GST before receiving money → risk of unrecoverable tax on bad debts.
When clients default, the only route for sellers to reverse GST liability is to issue a credit note for the unpaid amount. Experts saying that In the month of issuance, a credit note reduces GST liability for the seller. But this mechanism is riddled with complications:
Issuing a credit note means accepting that no supply took place—so legal recovery of dues becomes impossible, With the introduction of the Invoice Management System (IMS), sellers can now track whether a buyer has accepted or rejected a credit note. If no action is taken, it’s deemed accepted, and the buyer’s Input Tax Credit is auto-reversed via GSTR-2B. But many sellers still avoid credit notes due to legal and financial risks.
If payment isn’t received within 180 days of invoicing, Rule 37 of the CGST Rules mandates that buyers must reverse their Input Tax Credit. However, the seller still gets no GST refund—leading to what many call “tax on bad debt”.
MSME Udyam Certificate : While it legally binds buyers to pay within 45 days, big corporations often sidestep this by Avoiding MSME/ Small businesses registered vendors and Citing “defective delivery” to delay payments
QRMP Scheme (Quarterly Returns, Monthly Payments) : Introduced in 2021 to reduce compliance for small businesses, it doesn’t help much:
We technically qualify for quarterly returns, but clients demand monthly filing for their ITC. So, the benefit of reduced compliance is lost,” says Vishal Jasani, co-founder of an advertising firm.
How It Works : Seller can issue a credit note for unpaid dues. and Proportionate GST is reversed on the credit note.
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