GST Compliance Burden On MSMEs In India: Assessing The Role Of The Quarterly Return Filing And Monthly Payment Scheme And Recent Reforms

Policy Update
Mannat Abbot

Background

Against this backdrop, the introduction of GST in July 2017 represented a significant restructuring of India’s indirect tax system and created new incentives for businesses to participate in the formal economy. By replacing a fragmented system of central and state-level indirect taxes with a common framework, GST sought to reduce tax cascading and improve the traceability of transactions.

A particularly important mechanism was the input tax credit (ITC) system. Under Section 16 of the Central Goods and Services Tax Act, 2017, eligibility for ITC is subject to conditions including possession of prescribed documentation and, in specified circumstances, the reporting of invoice details by the supplier. This creates a link between tax compliance across firms: registered buyers have an incentive to procure from suppliers whose transactions are properly documented, potentially encouraging previously informal enterprises to register and participate in formal supply chains. 

Recent empirical evidence also suggests that firms with greater exposure to the cascading taxes of the pre-GST regime increased documented input purchases following GST, indicating a possible formalisation effect within business-to-business transactions. However, increased GST registration or documentation does not necessarily imply complete economic formalisation. The extent to which GST has translated into broader changes in enterprise behaviour, supply-chain participation, digital compliance and access to formal economic institutions therefore requires closer examination.

Functioning

An uninterrupted chain of Input Tax Credit (ITC) is one of the central features of GST, designed to eliminate the cascading effect of taxation. Under the previous indirect tax regime, taxes levied by the Central Government could not generally be offset against those imposed by State Governments, and vice versa. GST addresses this fragmentation by allowing eligible businesses to claim credit for taxes paid on inputs against their output tax liabilities, subject to prescribed conditions. This mechanism also encourages formalisation, as registered businesses have an incentive to purchase from compliant suppliers who issue valid tax invoices and maintain proper transaction records.

GST documentation and return filing further strengthen transparency and accountability in business transactions. Registered businesses are required to maintain prescribed records of supplies, tax liabilities, input tax credits and other relevant transactions. These records enable tax authorities to verify claims during audits, assessments and refund proceedings. Proper documentation, supported by invoices, payment records and accounting entries, helps businesses reconcile their financial statements with GST returns and reduces the risk of compliance-related disputes. The digital filing of returns also creates an electronic record of transactions, encouraging systematic accounting practices and strengthening financial governance.

The introduction of the E-Way Bill system has further digitised the movement of goods across India. Generally required for consignments exceeding ₹50,000, E-Way Bills generate electronic records of goods transportation, replacing much of the paperwork associated with the earlier system of interstate movement. By providing tax authorities with greater visibility into goods in transit, the system facilitates transaction monitoring and helps identify potential tax evasion. It also supports more efficient logistics by reducing documentation requirements and delays associated with physical checkpoints. Consequently, the E-Way Bill system strengthens the traceability of transactions across supply chains.

E-invoicing represents another important component of GST’s digital compliance framework. Introduced in phases, mandatory e-invoicing currently applies to specified businesses with an annual aggregate turnover exceeding ₹5 crore, subject to applicable exemptions. Under this system, eligible invoices are electronically authenticated through an Invoice Registration Portal (IRP), which generates a unique Invoice Reference Number (IRN) and QR code.

Standardised invoice data facilitates integration with GST returns and the E-Way Bill system, reducing manual reporting and improving transaction verification. Additionally, from April 2025, businesses with an annual aggregate turnover of ₹10 crore or more must report applicable e-invoices within 30 days of issuance. Together, these digital mechanisms strengthen tax administration, improve transaction traceability and encourage businesses to adopt formal accounting and compliance practices.

Performance

GST revenue collections have increased considerably since the introduction of GST in July 2017. Since the introduction of GST in 2017–18, revenues have grown by more than 200%, while the number of registered taxpayers has increased by more than 100%, according to Shashank Priya, Special Secretary and Member (GST), CBIC, at the ASSOCHAM National Conclave on GST 2.0.

The figures of revenue collected through GST in India suggest that revenue increased from ₹7.41 lakh crore in 2017–18 to ₹22.09 lakh crore in 2024–25. However, certain fluctuations can also be observed since the introduction of GST. In 2020–21, GST revenue collection declined due to the economic slowdown caused by the COVID-19 pandemic, which affected business activities in India. From 2021–22 onwards, GST revenue collection has been on a high growth trajectory, reflecting economic growth and better tax administration.

According to the Press Information Bureau (2026), the number of GST taxpayers increased from 66.5 lakh in 2017 to 1.65 crore as of May 2026, reflecting an expansion of the registered tax base. However, registration figures alone do not establish whether businesses are actively filing returns or paying taxes, nor do they conclusively demonstrate broader economic formalisation. They should therefore be considered alongside evidence of documented transactions and actual tax compliance.

Recent reports also indicate the importance of digital monitoring tools in controlling tax evasion under GST. According to data presented in Parliament, GST authorities detected tax evasion amounting to about ₹7.08 lakh crore between 2020–21 and 2024–25, including significant cases related to input tax credit fraud. Such developments highlight the growing role of digital systems such as the e-way bill in improving compliance and identifying irregularities in the movement of goods.

 Annual Gross GST Collections in India, FY 2017–18 to FY 2024–25 (₹ crore)

Source: GSTN (2024), 7 Years of GST, p. 15.

Note: Figures represent gross GST collections, including CGST, SGST, IGST and Compensation Cess, before refunds and IGST settlement. CAGR is calculated over seven annual intervals, while the mean represents the arithmetic average of eight financial years. FY 2017–18 covers only July 2017 to March 2018, following the introduction of GST.

The Udyam Registration Portal, launched in July 2020, and the Udyam Assist Platform, launched in January 2023, have contributed to the registration of micro, small and medium enterprises (MSMEs). The Udyam Assist Platform was introduced to bring informal micro enterprises into the formal system and facilitate access to priority sector lending. As of 23 September 2026, the two platforms together recorded approximately 9.65 crore registrations, comprising 5.38 crore Udyam registrations and 4.28 crore Udyam Assist registrations.

Impact

GST has changed the way small businesses manage taxation, pricing, accounting, procurement and interstate trade. Its impact has been particularly visible in the shift towards digital record-keeping and formal business practices.

Formalisation of Supply Chains: The Input Tax Credit (ITC) mechanism creates a financial incentive for businesses to purchase from registered suppliers. Buyers generally cannot claim ITC on purchases from unregistered dealers, potentially raising their effective costs. Registered firms therefore demand GST invoices from vendors to offset their own output tax liability. Suppliers must also comply with applicable return-filing and tax-payment requirements so that their buyers can claim credits. This creates pressure on suppliers to comply with GST requirements and encourages previously informal businesses to enter formal supply chains.

Empirical evidence supports this shift towards formal procurement. Patnaik (2026), using data from 12,024 firms, found that businesses with average pre-reform exposure to non-creditable taxes increased their documented input purchases by approximately 6% following GST implementation. The effects roughly doubled over five years, suggesting that the incentive to purchase from registered suppliers gradually extended through supply chains.

Digitalisation of Business: GST has increased the use of online registration, return filing and digital invoicing, encouraging small businesses to maintain better financial and transaction records. The Economic Survey 2025–26 reported a 21% year-on-year increase in e-way bill volumes during April–December 2025, indicating growth in digitally documented goods movement. However, increased digital compliance has also raised the need for digital knowledge and proper accounting systems.

Access to Formal Credit: Systematic financial records can also help small businesses demonstrate their turnover and financial activity to formal lenders, potentially improving their access to institutional credit.

Support for Small Businesses: Measures such as higher exemption thresholds, the Composition Scheme, quarterly return filing and NIL return filing through SMS have helped reduce compliance pressure for eligible small taxpayers. Businesses can also claim ITC on eligible purchases and inputs, subject to GST rules and conditions. This helps reduce the cascading effect of taxes and can lower the effective tax cost.

Uneven Impact Across Businesses: The impact of GST is not the same for every small business. It depends on the sector, turnover, type of customers, use of inputs, eligibility for ITC and the business’s ability to manage digital compliance. Besides the tax base, tax rates and tax efficiency, tax compliance also influences tax collection. High compliance costs can discourage businesses from participating in the tax regime and paying taxes voluntarily.

Overall, evidence of increased documented purchases and digitally recorded transactions points towards greater formalisation of business activity. However, increased GST registrations and transaction documentation do not necessarily establish that previously informal enterprises have become fully formal. Compliance costs, digital barriers and differences in firms’ capacities continue to influence the extent of formalisation.

Emerging Issues

For a large, well-resourced company with a dedicated accounting department, GST compliance is a manageable administrative requirement. For a micro-enterprise — a small manufacturer, a neighbourhood retailer, a single-person service provider — the same compliance requirements impose a fixed cost that does not scale down proportionally with business size. Monthly and annual filing obligations, reconciliation requirements between a business’s own filings and those of its suppliers and customers, and the technical complexity of the GST portal itself have created a compliance burden that many small business owners report spending a disproportionate share of their limited time and resources managing, often by hiring intermediaries they cannot easily afford.

Vishnuhadevi and Hima Bindu (2022), in a study of GST compliance costs for small businesses in Tamil Nadu, find a sharply regressive pattern: the smallest firms (annual turnover below ₹40 lakh) bear compliance costs equal to roughly 1.45% of turnover, compared to about 0.02% for the largest firms — a more than 70-fold difference in relative burden. Ghosh (2022), surveying MSMEs on their experience of the GST regime, similarly finds that compliance costs were cited as a major constraint by 82% of respondents, with unfamiliar bookkeeping and invoice-matching requirements weighing especially heavily on micro-enterprises.

This dynamic has produced a counterintuitive consequence: rather than incentivising small businesses to formalise and grow, the structure of compliance thresholds has in some cases created an incentive to deliberately remain below the registration threshold, foregoing growth opportunities to avoid the compliance burden that growth would trigger.

A second, related issue is working capital strain. The input tax credit mechanism, while elegant in design, requires businesses to pay GST on their purchases upfront and claim credit only after filing and reconciliation, a process that can take weeks. For small businesses operating on thin working capital margins, this lag between cash outflow and credit recovery has tightened liquidity in ways that disproportionately affect the smallest, least capitalised enterprises.

Deloitte India’s GST@9 survey of over 1,000 senior executives finds that a majority of MSMEs want faster processing of input tax credit (ITC) refunds and simpler rules for claiming credit, with strong support for automatic interest payments on delayed refunds. A 2026 Business Standard analysis of the ITC system describes how it has shifted from a ‘trust-based’ to a ‘verification-based’ model, where a buyer’s credit depends on every supplier further up the chain correctly filing and paying tax; when any link fails, the buyer’s credit is blocked, creating working-capital strain that is felt most by firms with long or informal supply chains.

Yadav and Bari’s (2025) study of micro-enterprises finds that GST’s effects vary sharply between urban and semi-rural areas: businesses in cities adapted more easily, while enterprises in less-connected districts were held back by limited digital connectivity and a shortage of tax professionals or GST facilitation centres (Suvidha Kendras). Refund delays were reported to be especially common for micro units in remote regions and for exporters, and mismatches between a firm’s own filings and its suppliers’ returns often caused input tax credit to be delayed or denied.

However, Nagaraj and Kapoor (2022) caution that registering on a digital platform is not the same as genuine formalisation: they show that although enrolment in various government digital schemes rose sharply after 2016, only about a tenth of the workforce had access to even one social security benefit as of 2018–19, and informal employment’s share of the workforce continued to rise between 2017–18 and 2019–20 despite the registration drive.

According to MoSPI’s ASUSE survey, the number of unincorporated enterprises rose slightly, from 6.33 crore in 2015–16 to 6.5 crore in 2022–23, while the number of employees in the informal sector fell slightly, from 11.13 crore to 10.96 crore. Together, this means the average number of workers per enterprise fell — enterprises became somewhat more numerous but, on average, smaller.

Way Forward

Simplification of GST Compliance Procedures: Policymakers should prioritise the simplification of GST compliance procedures for small enterprises by reducing the frequency of return filing, introducing simplified tax forms and streamlining documentation requirements. A graduated compliance regime that scales filing complexity and frequency more smoothly with business size could help reduce the burden on micro-enterprises.

Strengthening the Composition Scheme: Expanding the eligibility criteria and increasing the turnover threshold for the Composition Scheme could encourage more MSMEs to register under GST.

Enhancing Digital Literacy and Infrastructure: The government should expand digital training programmes for MSME entrepreneurs and invest in improving digital infrastructure across regions. Integrating GST compliance platforms with user-friendly accounting tools can help small businesses manage tax obligations. Government agencies, industry associations and financial institutions should collaborate to conduct training programmes, workshops and awareness campaigns that educate MSME entrepreneurs about GST compliance requirements.

Improving Access to Credit for MSMEs: Financial institutions should leverage GST data to develop innovative credit assessment models that rely on transaction records rather than traditional collateral requirements. In addition, expanding credit guarantee schemes and promoting supply chain financing mechanisms can help reduce financial constraints faced by MSMEs.

Stabilising the GST Policy Framework: Establishing a stable and predictable GST policy framework would improve business confidence and enable MSMEs to plan their operations more effectively.

Measuring Actual Formalisation: Policymakers should look beyond GST registration figures and revenue collections to assess whether businesses are becoming genuinely formalised. Indicators such as access to institutional credit, enterprise growth, formal employment and social security coverage should also be considered. This would help distinguish the expansion of formal tax registration from broader economic formalisation and provide a more comprehensive assessment of GST’s impact on India’s informal economy.

References

Federation of Indian Chambers of Commerce and Industry, & Konrad-Adenauer-Stiftung. (2017). Informal economy in India: Setting the framework for formalisation. https://www.kas.de/c/document_library/get_file?uuid=990d673f-e202-4e36-00da-d2f32f0e14cb&groupId=252038 

Goods and Services Tax Network. (2026). 9 years of GST: A statistical report on the completion of nine years of GST, 2017–2026. https://tutorial.gst.gov.in/offlineutilities/gst_statistics/9YearsReport.pdf 

IGC Research on India. (2026, April 6). How the GST created a formalisation cascade. Ideas for India. https://www.ideasforindia.in/topics/macroeconomics/how-the-gst-created-a-formalisation-cascade 

Mallesh, K. (2026). Performance and effectiveness of the e-way bill system in controlling tax evasion under GST: An empirical study of Telangana. Journal of Advance and Future Research, 4(4). https://doi.org/10.56975/jaafr.v4i4.507795 

Mehta, R. (2026, June 4). The informal economy’s formal problem: Why GST compliance costs are crushing India’s small businesses. The Analysis. https://theanalysis.in/the-informal-economys-formal-problem-why-gst-compliance-costs-are-crushing-indias-small-businesses/ 

MYND Editorial. (2026, August 12). Simplifying GST compliance: A technology guide for Indian businesses. MYND Integrated Solutions. https://www.myndsolution.com/simplifying-gst-compliance-a-technology-guide-for-indian-businesses/ 

PHD Chamber of Commerce and Industry. (2025, November 3). How GST reforms are simplifying business for MSMEs. https://www.phdcci.in/blog/how-gst-reforms-are-simplifying-business-for-msmes/ 

Press Information Bureau. (2026, August 13). Building a business-ready India. Government of India. https://www.pib.gov.in/FactsheetDetails.aspx?id=150871&ModuleId=16&reg=3&lang=1 

Sharma, H. (2026). The impact of GST on the Indian economy and informal sector. Oxford Journal of Student Scholarship, 10(5). https://www.oxfordjss.org/_files/ugd/a9c49e_16c1a6a3ac7240fcb645f587020ecb03.pdf 

SMFG India Credit. (2026, February 16). Input tax credit (ITC) under GST: Meaning, benefits & how to claim. https://www.smfgindiacredit.com/knowledge-center/input-tax-credit-under-gst.aspx 

Team MyGov. (2017, July 2). Input tax credit mechanism & documents required in GST. MyGov. https://blog.mygov.in/editorial/input-tax-credit-mechanism-documents-required-in-gst/ 

Vajiram & Ravi. (2026, September 14). GST impact on small business, benefits, challenges and GST 2.0 reforms. https://vajiramandravi.com/current-affairs/gst-impact-on-small-business/ 

Ministry of Statistics and Programme Implementation. (2024). Annual Survey of Unincorporated Sector Enterprises (ASUSE), 2022–23: Operational and economic characteristics. Government of India. https://mospi.gov.in/sites/default/files/publication_reports/ASUSE_2022_23_Report_FinalN.pdf 

de Paula, Á., & Scheinkman, J. A. (2010). Value-added taxes, chain effects, and informality. American Economic Journal: Macroeconomics, 2(4), 195–221. https://doi.org/10.1257/mac.2.4.195 

Vishnuhadevi, S., & Hima Bindu, D. (2022). Compliance costs of GST for small business enterprises in Tamil Nadu (Working Paper No. 229/2022). Madras School of Economics. https://www.mse.ac.in/wp-content/uploads/2022/10/Working-Paper-229.pdf 

Ghosh, S. (2022). Formalising the informal through GST: Evidence from a survey of MSMEs. Review of Development and Change, 27(2), 150–169. https://doi.org/10.1177/09722661221130138 

Yadav, R. K., & Bari, B. K. (2025). GST and the growth prospects of MSMEs: A study of pre and post-GST scenarios. International Journal of Progressive Research in Engineering Management and Science, 5(7), 1361–1374.https://doi.org/10.58257/IJPREMS42946 

About the Contributor

Mannat Abbot is pursuing a B.A. (Hons.) in Economics at the College of Vocational Studies, University of Delhi, and serves as a Research & Editorial Intern at IMPRI. Her interests include public policy, economics, macroeconomics, economic policy, and evidence-based policymaking, with a particular focus on research and data-driven analysis.

Acknowledgements

The author sincerely acknowledges the guidance and constructive feedback provided by Anamika P K and Ninchen throughout the preparation of this article. Their valuable suggestions and thoughtful observations contributed to strengthening the analysis, improving the organisation of ideas, and enhancing the overall quality of the manuscript.

Disclaimer

The views and interpretations expressed in this article are those of the author. Any remaining errors or omissions are solely the responsibility of the author and do not necessarily reflect the views of the reviewers or IMPRI.

Read more at IMPRI:

Urban Flood Management Programme (2024): Assessing Flood Resilience in India’s Seven Most Populous Cities

CyTrain: Building India’s Digital Human-Capacity Infrastructure for Cybercrime Investigation