Challenges MSME face due to the accrual-based GST framework

Challenges MSME face due to the accrual-based GST framework.

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.

Accrual-Based GST is Squeezing Small Businesses’ Cash Flows

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.

How the GST Rule Works ?

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.

The Credit Note Dilemma :

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:

• Can only be used under strict conditions (e.g., goods returned, quality issues)
• Not valid simply for non-payment
• Buyer must reverse Input Tax Credit claimed on the original invoice
• Invoice is treated as cancelled, barring the seller from pursuing legal recovery

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.

The 180-Day Rule: Another Pitfall

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”.

Why Government Relief Options Fall Short

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:

• Most large clients insist on monthly returns to claim Input Tax Credit promptly
• Seller must still deposit GST monthly
• Discrepancies between IFF filings and GSTR-3B often trigger tax scrutiny

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.

GST compliance Timeline Overview

1. By 11th of next month → File GSTR-1 to declare sales
2. By 20th of next month → File GSTR-3B, pay GST & claim Input Tax Credit
3. If buyer delays beyond 180 days → Input Tax Credit must be reversed, but seller gets no refund.
4. If buyer defaults → No mechanism for seller to claim GST refund on bad debt.

Can a Credit Note Help?

How It Works  : Seller can issue a credit note for unpaid dues. and Proportionate GST is reversed on the credit note.

Different Challenges from Affected Business Owners:

• Payment cycles > 60 days
• Most expenses are employee-related → little Input Tax Credit
• 3% revenue lost in GST on unrecoverable debts
• Needs to borrow capital 3–4x to manage GST + cash flow
• Pricing structure can’t absorb this inefficiency

Other Challenges

• Credit notes can only be issued in limited cases.
• GST credit reversal by buyer is hard to track.
• Invoice becomes void, affecting seller’s ability to recover dues legally.

Policy Reforms Urgently Needed  :

Our Suggested Reform Recommendation

• GST should be on actual receipt basis for small businesses, After proof of non-payment, GST refund should be allowed without needing credit notes. Core Issue: The burden of paying GST upfront—even before receiving payment—falls on the seller.
• Allow small businesses to pay GST on a receipt basis, not accrual, especially under a specified turnover threshold. This would align tax liabilities with real income and protect MSME/ Small businesses from tax on bad debts. Small businesses and tax professionals suggest moving to a cash-based GST system—at least for firms below a certain turnover threshold.
• GST should be paid only on actual receipt of payment, not just on invoice. That would reduce the risk of paying tax on income never received. If a client doesn’t pay even after repeated follow-ups, a simple process for GST reversal—without needing a credit note—must be introduced.
• India’s GST regime was designed to be efficient, but its accrual structure is increasingly punishing small businesses. With delayed payments, no GST refunds on bad debts, and impractical remedies like credit notes, the compliance burden far outweighs the benefits. The government must explore receipt-based GST payments, especially for MSME/ Small businesses, to align tax liability with actual cash flow. Until then, entrepreneurs like Bhagat will continue to pay taxes on money they never earn.

Rule 46—What MUST Be on a GST Tax Invoice?

A GST tax invoice is not just a document. it’s the core evidence for Input Tax Credit (ITC), ensures smooth audits, and forms the basis of GST compliance. Rule 46 of the CGST Rules clearly specifies the mandatory fields that every GST-registered supplier must include in an invoice. Yet, many taxpayers still miss critical details, resulting in ITC mismatches, vendor queries, and departmental notices. Explains that a GST Tax Invoice is crucial for Input Tax Credit (ITC), compliance, and audits. Mentions that Rule 46 of CGST Rules prescribes mandatory contents, and missing details can lead to ITC mismatches or notices. Here’s a clear and simple breakdown of the requirements under Rule 46

Mandatory Contents of a GST Tax Invoice

• Supplier Details- Name, Address, GSTIN
• Unique Invoice Number- Maximum 16 characters, must be sequential and unique
• Invoice Date
• Recipient Details- Name, Address, and GSTIN/UIN (if registered)
• HSN Code / SAC Code
• Description of Goods/Services
• Quantity (for goods), Unit, Total Value
• Taxable Value & Discounts
• Tax Breakup- CGST, SGST, IGST, UTGST, Cess (if applicable)
• Place of Supply- Mandatory for inter-State transactions
• Reverse Charge Indicator- Must mention “Reverse Charge – Yes/No”
• Signature / Digital Signature
• QR Code (where applicable)- Mandatory for entities notified under e-invoice rules. A simple illustration of a GST Tax Invoice with a QR code.
• A clean and compliant invoice = smoother ITC, fewer queries from vendors, reduced risk of GST notices, better transparency in books.

This matters because a clean, compliant invoice ensures a smooth & seamless input tax credit and fewer vendor follow-up queries. Reduced risk of GST mismatches & departmental notices, better transparency, and audit readiness.

A compliant GST invoice must contain all 19+ detailed fields specified in Rule 46. Missing any mandatory element may lead to ITC rejection, Vendor disputes, GST mismatches, and compliance notices. In simple words, a checklist of mandatory items in GST tax invoice, like Supplier details, a unique invoice number (max 16 characters), Invoice date, Recipient details (GSTIN/UIN), HSN/SAC, Description of goods/services, Quantity, taxable value & discounts, Tax breakup  CGST, SGST, IGST, Cess, Place of supply (for inter-State), Reverse charge indicator, Signature/digital signature, QR Code (where applicable)