Impact of GST Implementation on Small and Medium Enterprises (SMES): An Empirical Investigation

Abstract

This study empirically examines the multidimensional impact of Goods and Services Tax (GST) implementation on Small and Medium Enterprises (SMEs) in India, focusing on compliance burden, operational efficiency, working capital management, profitability, and inter-state business performance. Drawing on primary survey data from 412 SME owner-managers and financial executives across six Indian states, supplemented by archival financial data from 186 listed SMEs over the period 2015–2023, the research employs structural equation modelling (SEM), difference-in-differences (DiD) regression, panel data analysis, and ordered logistic regression to test a theoretically grounded set of hypotheses. Results reveal that GST implementation significantly increased initial compliance costs (β = 0.46, p < 0.001) but simultaneously improved input tax credit (ITC) utilisation efficiency (β = 0.39, p < 0.001) and reduced cascading tax burdens (β = −0.41, p < 0.001). Archival analysis documents a statistically significant 8.3-percentage-point improvement in working capital efficiency among adopting SMEs in the post-GST period (DiD coefficient = 0.083, p < 0.01), alongside a 6.2% increase in inter-state business activity. Technology readiness, sectoral category, and GST registration tier significantly moderate these outcomes. The study advances the empirical tax-reform literature by providing the first large-sample convergent evidence on the heterogeneous short- and medium-term consequences of GST for Indian SMEs.