Simplified GST Registration Creates Compliance Trap for Growing MSMEs
The Centre's simplified GST registration scheme launched November 1 has created an unintended compliance trap for growing small businesses. While designed to enable quick registration for taxpayers with monthly B2B output GST below ₹2.5 lakh, the portal blocks return filing when businesses exceed this threshold, creating a circular problem where companies cannot file required returns to exit the scheme. Real cases show businesses forced to choose between growth restrictions or compliance penalties, highlighting implementation flaws in the system meant to ease small business compliance.
*this image is generated using AI for illustrative purposes only.
The Centre's simplified GST registration scheme, designed to ease compliance for small businesses, has inadvertently created a compliance trap that restricts business growth. Launched on November 1, the scheme allows eligible taxpayers with monthly business-to-business output GST below ₹2.5 lakh to complete registration within three days through a fully electronic process under Rules 9A and 14A, replacing the earlier document-heavy procedure.
Portal Blocking Creates Compliance Deadlock
The simplified registration process has encountered a critical operational flaw. When businesses registered under this scheme exceed the ₹2.5 lakh monthly output tax threshold, the GST portal automatically blocks their ability to generate GSTR-1 summaries, preventing them from filing mandatory returns.
"In such cases, the GST portal is blocking GSTR-1 summary generation, which means that such taxpayers will not be able to file their GST return," explained Vijaykumar Puri, partner at chartered accountant firm VPRP & Co. LLP.
Exit Conditions Create Circular Problem
The compliance trap becomes more complex due to withdrawal requirements specified in Rule 14A. The following conditions apply for businesses seeking to exit the simplified scheme:
| Requirement | Current Rule | After April 1 |
|---|---|---|
| Minimum GST Returns Filed | 3 returns | 1 return |
| Process | Apply for regular taxpayer status | Apply for regular taxpayer status |
| Trigger | Output tax exceeds ₹2.5 lakh | Output tax exceeds ₹2.5 lakh |
"If the portal blocks GSTR-1 due to the breach of the ₹2.5 lakh limit, the taxpayer is unable to complete the very return filing that is required to become eligible for withdrawal. The result is a circular and unworkable situation, where the system does not allow the business to file, yet the rules require filing before exit," Puri noted.
Real-World Impact on Business Growth
The compliance issue has begun affecting businesses practically. Uday K., a Mumbai-based manufacturer, registered under the simplified scheme in December and received his GST number within 48 hours. However, when a large January order pushed his output GST above the threshold, the portal blocked his return filing.
"Unless this is fixed, I have only two options. One, I don't file GST until April, withdraw and start filing again, but this would mean I will be penalized for non-filing. Second, I don't take the big order and not grow my business until April to keep my output GST within the ₹2.5 lakh limit," he explained.
Expert Recommendations and Workarounds
Tax experts anticipate this issue will affect more MSMEs experiencing sudden growth or seasonal order spikes. Smita Singh, partner at law firm S&A Law Offices, suggested taxpayers can raise grievances on the GST portal seeking government intervention. She recommended implementing an alert-based system to pre-notify taxpayers when tax liability approaches the threshold, rather than blocking return filing.
In the absence of systematic solutions, Puri indicated taxpayers are forced to defer B2B outward supplies to subsequent months to avoid breaching the threshold. While commercially impractical, this represents the only current workaround to enable GSTR-1 filing and prevent compliance disruption.
Shivam Mehta, executive partner at Lakshmikumaran & Sridharan Attorneys, cautioned new applicants to carefully assess expected tax liability before choosing the simplified registration route, noting many MSMEs may not fully understand withdrawal conditions and compliance implications.
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