GST reform idea: Turn payments quarterly to unburden small businesses of a cash crunch

Payment cycles of 90-120 days are routine in most sectors. These terms are not negotiated on an equal footing. They are imposed by buyers with scale, bargaining power and access to capital. Small suppliers comply because refusal often means exclusion.

GST becomes payable on invoices, not on collections. For large firms with predictable cash flows, the distinction is immaterial. For small firms, it is decisive. Tax payments fall due monthly even when cash may arrive months later. The state is paid on schedule. The buyer preserves liquidity. The supplier absorbs the gap. Over time, this gap becomes structural.

The scale of this distortion is substantial. Delayed receivables owed to small firms amount to several trillion rupees, representing working capital that is effectively immobilized within supply chains. These funds would otherwise circulate through wages, inventory cycles and incremental investment. Many firms are compelled to bridge liquidity gaps through informal credit, short-term borrowing or deferment of statutory obligations.

This imbalance is not confined to private sector supply chains. Public sector enterprises and government-linked buyers, despite formal payment timeline rules, often delay settlements well beyond prescribed limits. Enforcement is uneven as the economic hierarchy is unmistakable. Small suppliers are rarely in a position to assert contractual rights against dominant buyers on whom future orders depend.

The policy system often assumes that statutory timelines resolve this asymmetry, but practice diverges sharply from intent. Alongside delays, there are persistent accounts of procedural friction and informal rents embedded in order processing and payment release, further extending cash cycles.

GST is a transformative reform. It unified markets, reduced cascading taxes and expanded the formal economy. But its architecture assumes that invoicing and liquidity broadly coincide. For small firms, that assumption does not hold. The introduction of quarterly return-filing for businesses below a turnover threshold acknowledged compliance fatigue, but it stopped short of addressing the core problem. Payments follow a calendar rhythm rather than cash rhythm.

For firms with access to institutional finance, delayed payments are a balance sheet choice. For their suppliers, they are a recurring constraint that compounds with every billing cycle. Tax timing intensifies that constraint.

Allowing small as well as medium enterprises and individual GST payers to pay tax quarterly would recalibrate this interaction. Such a shift would align tax outflows more closely with realized cash flows, easing pressure on working capital without altering tax incidence. Its policy strength lies in efficiency. Liquidity would be released without fiscal expenditure, without new schemes and without credit risk for the state. Revenue would be collected in full, but at a moment that reflects economic reality rather than an accounting abstraction.

The design implications are manageable. GST is a tax shared with states that rely on predictable inflows for budget management. That consideration calls for careful calibration. Turnover thresholds, phased implementation and the retention of monthly reporting would preserve fiscal visibility while offering smaller firms room to manage cash cycles more sustainably. The administrative scaffolding already exists within the GST system.

Any classification-based relief demands discipline. Turnover is the most robust filter, supplemented by receivables profiles and compliance history. Monthly reporting would maintain invoice level visibility and secure the integrity of input tax credit flows across value chains. Liquidity relief, thus, need not come at the cost of administrative confidence or auditability.

Quarterly GST payments will not resolve the deeper problem of delayed payments by dominant buyers. That challenge requires stronger enforcement of existing payment discipline laws and more credible penalties.

There is also a broader principle at stake. Tax systems shape markets, not just revenues. When their assumptions privilege scale and penalize fragility, neutrality is lost. Correcting such distortions would simply be an act of alignment.

Small and medium firms contribute roughly a third of India’s economic output and employ a significant share of its workforce. Their resilience underpins supply chain stability, employment continuity and the pace of formalization. Releasing even a fraction of the capital locked will have far-reaching effects, without relying on either fiscal largesse or regulatory forbearance.

The author is a corporate advisor and author of ‘Family and Dhanda’. X : @ssmumbai