Does GST help small businesses, or crush them with compliance?

For many small businesses, GST does not feel like the “good and simple tax” it was sold as. In July 2025, a vegetable seller in Haveri, Karnataka received a GST notice for ₹29 lakh. The tax department had added up four years of UPI payments into his account, about ₹1.6 crore, and assumed he owed tax on it, never mind that fresh fruit and vegetables are exempt. He was not alone. The state sent thousands of such notices, traders across Bengaluru pulled down their UPI scanners and put up “cash only” signs, and the government eventually backed off.

That is GST at its most heavy-handed. Like every VAT, GST works through a paper trail: it matches invoice against invoice and follows the digital money trail. That self-policing lays a compliance burden on every firm that files, and it weighs most on the smallest, which is why the designers carved them out. A business turning over less than ₹40 lakh a year (₹20 lakh for services) need not register for GST at all. Beyond this threshold, up to ₹1.5 crore, firms can choose a “composition scheme,” paying a flat rate on turnover, about 1% for a trader, instead of running the full system. In return, they cannot charge GST to customers or reclaim tax on their own purchases. This is why the roadside chaiwala, the thela, and the tiny kirana hand you no tax invoice. A firm that sells to bigger companies, by contrast, registers in the normal way rather than opt for composition, because its buyers want an invoice they can claim credit on, and a composition dealer cannot give them one.

The squeeze falls on the firm in the middle. Once turnover tops ₹1.5 crore, composition is no longer allowed, so the firm must run the full machinery, yet it is still too small to hire a tax team. GST is run state by state, so a business operating in five states files in five places, and a normal taxpayer files around two returns a month plus a yearly one, in each state it operates. The rules themselves never sit still either. Rates, forms, and thresholds shift almost every year, so a firm pays twice over: once to comply now, and again to rebuild when the tax changes next year. Predictability, the thing that makes a tax cheap to live with, is what GST has most lacked.

The credit rules do the most damage. Input tax credit is what makes GST a tax on consumption rather than production, but the law lets the taxman deny it to a buyer when the seller fails to deposit the tax he collected. So a shopkeeper who has paid GST on his stock can still lose the credit because a supplier down the line vanished or defaulted, with the money tied up in disputes for a year or more. The rule exists for a reason: fake invoices are a real epidemic, with authorities detecting more than ₹1.1 lakh crore of bogus credit claims between 2020 and 2025. But it effectively deputises every small buyer as an enforcer against fraud he cannot see, and several High Courts have said a good-faith buyer should not be punished for another’s cheating.

That is the price of a self-policing tax. The paper trail of matched invoices that makes GST work also carries a compliance cost, and that cost falls unevenly on firms of different sizes.