Effect of Goods and Service Tax System on Business Performance of Micro, Small and Medium Enterprises

Abstract

Tax and economy go hand in hand, and whenever any overhaul in tax structure takes place, it becomes essential to evaluate its effect on its sector and concerned businesses. The present study examines the effect of Goods and Service Tax (GST) on Indian Micro, Small and Medium Enterprises (MSMEs) business performance. Data were collected through a structured questionnaire from 404 registered MSMEs. The partial least square equation modeling results emphasized an overall positive impact of GST on business performance. The path model demonstrated that determinants of GST- change in the tax system, technology transition, and tax awareness and knowledge have enhanced the performance in terms of ease of doing business, operational efficiency, and increased profitability and have reduced the working capital blockage of funds. However, in contrast, the GST compliance system has increased the compliance burden on the firms, which harmed their performance. Further, the study examined that MSMEs’ size, turnover, and form impact the performance through the GST compliance system of the enterprises. The results may benefit the policymakers and other emerging economies in focusing on the tax reform factors which enhance the performance leading to better economic growth in the future with the support of MSMEs’ better performance. JEL Code: H20; M10; O33; C30