A Study on the Impact of GST Regime on India's MSME Sector

Abstract

This research examines the transformative impact of the Goods and Services Tax (GST) regime, specifically focusing on "GST 2.0," on India’s Micro, Small, and Medium Enterprise (MSME) sector. As a cornerstone of the economy, MSMEs contribute 31.1% to India's GDP and 48.58% to exports as of the Economic Survey 2025-26. Utilizing a mixed-methods approach, the study analyzes how the shift toward a simplified tax structure and increased digitization has fostered formalization and long-term competitiveness.

Key findings highlight significant improvements in credit flow, with MSME credit growth outpacing large industries. While the transition has introduced challenges such as higher compliance costs and cash flow constraints, the move toward "GST 2.0" offers relief through streamlined Input Tax Credit (ITC) processes and reduced tax slabs for essential goods. Ultimately, the study concludes that GST is a pivotal driver in reshaping the MSME landscape, supporting sustainable growth within the Viksit Bharat@2047 economic trajectory.

Keywords: GST, Viksit Bharat, MSME

1.Introduction

As the Indian economy moves closer to its objective of Viksit Bharat, the MSME sector is well-positioned to emerge as one of its most powerful motors. Women's entrepreneurial and sustainability projects have seen tremendous growth in this field. The remaining credit shortages will be addressed in part by the sector's growing formalization and an increasing proportion of digital lending. However, with government assistance in areas like digital adoption, skilling, labor availability, and infrastructure, MSMEs must concentrate on expanding their market access and increasing their productivity.

The Goods and Services Tax (GST) system has dramatically altered the Indian Micro, Small, and Medium Enterprise (MSME) sector by streamlining tax structures and encouraging digitization, despite early compliance issues. In addition to encouraging long-term competitiveness and formalization, the shift has led to higher compliance costs, cash flow constraints, and technological difficulties for smaller businesses.

2.Facts of Msmes: Economic Survey 2025-26

MSMEs, or micro, small, and medium-sized enterprises, are the foundation of India's industrial sector. MSMEs make up 35.4% of manufacturing, 48.58% of exports, and 31.1% of GDP, according to the Economic Survey 2025–2026. During the first half of FY 2025, MSME credit continued to be the main driver of industrial credit growth. The self-sufficient India fund provides investments totaling Rs. 15,442 crore to support 682 MSMEs. as of November 30, 2025. Within the larger Viksit Bharat@2047 economic trajectory, India might advance job-rich industrialization by a calibrated deepening of participation in global supply chains:

3.Objectives of the Study

1. To understand the significance of MSMEs in Indian economic scenario

2. To analyse the contribution of the MSME sector to a country's GDP, Employment etc. 

3. To analyse the impact new GST regime on Indian MSME sector

4.Methodology

This study uses a mixed-methods approach, combining quantitative and qualitative strategies to examine the role of the GST regime on India’s MSME sector growth. The methodology integrates secondary macroeconomic analysis with insights from policy reviews and industry reports. Data on GDP growth, MSME registrations, and employment are compiled from economic survey, RBI Bulletin, the World Bank, NITI Aayog, the Ministry of Commerce and Industry, and academic sources. The economic impact of GST on MSME related variables is measured using simple statistical tools.

5.Contribution of Msme Sector to GDP, Employment and Economic Output

Based on the Economic Survey 2025-26 and recent reports from the Ministry of Micro, Small and Medium Enterprises (MSMEs), the MSME sector continues to be a cornerstone of the Indian economy, exhibiting resilience and contributing significantly to national economic output. 

According to the Economic Survey 2025-26 presented in Parliament by Union Minister for Finance and Corporate Affairs Minister Smt. Nirmala Sitharaman, Micro, Small, and Medium Enterprises (MSMEs) are the foundation of India's industrial sector. According to the survey, it contributes roughly 35.4% of manufacturing, 48.58% of exports, and 31.1% of the nation's GDP. The industry continues to be the second-largest employer after agriculture, with over 7.47 crore businesses and over 32.82 crore workers.

Approximately 90% of enterprises worldwide are MSMEs, and they account for more than 50% of all jobs. The MSME sector plays a crucial role in facilitating efficient supply-chain involvement and promoting local value addition, since India's manufacturing industry is poised for increased global integration. Due to favorable market conditions and increased participation from internet retailers, the SME public marketplaces have also seen a significant growth in the last two years.

As of November 30, 2025, 682 MSMEs had received investments totaling ₹15,442 crore from the Self-Reliant India (SRI) Fund, which was established to provide ₹50,000 crore in equity capital for MSMEs. The MSME-Innovative component, which supports IPR protection, design interventions, and incubation, is another way that innovation is being institutionalized. With an expected 2.9% of the world's manufacturing GVA and 1.8% of the world's product exports in 2024, India has significant room to grow its global manufacturing presence.
Within the larger Viksit Bharat@2047 economic trajectory, India may be able to advance job-rich industrialization through a controlled deepening of engagement in global supply chains, especially in labor-intensive and assembly-linked sectors.

6.Key Economic Contributions at Current Prices

MSME credit has maintained a positive trajectory in recent times, bolstered by several government interventions aimed at enhancing credit flow to the sector. 

The Survey mentions, MSME credit remained the primary driver of industrial credit growth during H1FY26. The overall MSME credit growth year-on-year (Y-o-Y) has significantly outpaced the Y-o-Y growth observed in large industry credit and supporting inclusive regional growth.

Table 1:Growth in deployment of gross bank credit to MSMEs (Y-o-Y per cent), select periods

• GDP Contribution: About 31.1% of India's GDP comes from MSMEs.
  Manufacturing Output: Approximately 35.4% of India's manufacturing GVA (Gross Value Added) comes from this industry.

Formalization: More than 7.47 crore businesses were registered on the Udyam and Udyam Assist portals as of early 2026, indicating a growth in formalization.
Sectoral GVA Trends (Recent Reports): There has been an increase in the proportion of     

MSME GVA to India's overall GVA.

• 2022–2023: 30.1% Highlights of Current Policy (2026–2027): • A ₹10,000 crore SME Growth Fund was suggested in the Union Budget 2026–2027. • As of November 30, 2025, 682 MSMEs had received investments totaling ₹15,442 crore from the Self-Reliant India (SRI) Fund, which seeks to inject ₹50,000 crore as equity.

• Export Performance: MSMEs make up over 48.58% of India's total exports, making them an essential component of international trade. MSME-related items increased in value from ₹3.95 lakh crore in 2020–2021 to ₹12.39 lakh crore in 2024–2025.
  Employment Creation: With approximately 32.82 crore workers, the industry is the second-largest employer after agriculture.

7.GST Regime (2.0)-A Brief View    

GST 2.0 aims to do more than just facilitate compliance. The pricing of goods in the market will also be determined by changes in tax slabs. Businesses can increase their profit margins by cutting expenses through lower or more equitable tax rates. Simpler slabs also allow brands to maintain price consistency, increasing their competitiveness in a congested market.                

1. Cereals, fresh fruits, vegetables, fish, meat, and raw materials including cotton, raw jute, and khadi fabric are all subject to the zero percent GST rate.  Shovels, spades, and homemade musical instruments are examples of basic tools and instruments.
2. A 40% tax on luxury and sinful goods
The government has implemented a 40% tax rate specifically for luxury and sin items under GST 2.0, whereas the majority of categories have moved to a more straight forward two-slab structure (5% and 18%). By preventing the use of dangerous goods and guaranteeing equitable taxation, this higher slab aims to strike a balance between revenue collection and social responsibility.

The 40% rate applies to:

• Tobacco products, such as beedis, chewing tobacco (zarda), and cigarettes.

• Pan masala and gutkha are regarded as high-risk foods. 

• Sugary and aerated beverages are associated with lifestyle conditions like obesity and diabetes. 

• Premium vehicles, SUVs, yachts, private planes, and other non-essential luxury things are examples of high-end luxury products. 

Products that pose a threat to public health or represent luxury consumption contribute more to the exchequer, but this system guarantees that necessities and mass-consumption goods are made more affordable.

8.Impact of GST 2.0 on Various Industries

GST 2.0 may not affect all sectors in the same way, its impact  varies across the industries.

• E-commerce & D2C brands

With a single GST number, pre-filled returns, and faster reimbursements, GST 2.0 simplifies compliance and saves founders time and work. The drastic reduction of freight taxes to 5% and modifications to road and multimodal transportation, which greatly reduce logistical costs, are notable reforms. Lower logistics costs translate into higher margins and more market competitiveness for e-commerce and direct-to-consumer (D2C) firms, where delivery time and cost are crucial.

• FMCG & Retail

Initiatives like GST Bachat Utsav 2025 demonstrate the practical implementation of GST 2.0 savings over the holiday season. Under GST 2.0, FMCG products have benefited greatly, with only 5% tax. The 5% tax slab will now apply to bakery goods, which were previously subject to an 18% tax. This reform has the potential to greatly increase profit margins. This also means that businesses can retain strong margins while providing customers with more competitive rates.

• Manufacturing

In the past, companies had trouble filing ITC claims since completed goods and raw materials frequently came under distinct slabs, which caused delays and additional expenses. This is fixed by GST 2.0, which reduces the overall tax burden, simplifies ITC requests, and reclassifies them into more understandable categories.
For example, a bakery formerly paid 18% GST on materials like milk or cocoa yet sold its cakes at 12% or 18%, leading to inconsistencies in ITC claims. Both inputs and finished baked goods are now subject to the 5% slab under GST 2.0, which facilitates credit claims and increases profit margins.

• MSME

Since small taxpayers will now file returns on a monthly basis rather on a quarterly basis, GST 2.0 provides some relief for MSMEs. The new slabs would also result in lower tax rates for businesses with annual revenue under ₹5 crore. However, as the reform takes effect,
Although the effects of GST 2.0 vary by industry, compliance and return filing are two areas where all businesses are impacted.
Despite early compliance challenges, the Goods and Services Tax (GST) regime has significantly changed the Indian Micro, Small, and Medium Enterprise (MSME) sector by simplifying tax structures and promoting digitization. For smaller enterprises, the change has resulted in increased compliance costs, cash flow restrictions, and technology challenges while also promoting long-term competitiveness and formalization.

Conclusion

The sector is currently undergoing a structural shift towards higher-value production and deeper digital integration. GST has played a pivotal role in reshaping the MSME landscape by simplifying the tax structure, enabling seamless interstate trade, and fostering formalisation. It has enhanced transparency, improved compliance, and opened wider market access, allowing small businesses to compete on a national scale. While challenges like compliance costs and procedural complexities remain, the long-term impact of GST lies in its ability to drive efficiency, boost competitiveness, and support sustainable growth for MSMEs in India.

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