Simplified GST registration leaves MSMEs trapped if turnover rises

Starting 1 November, the Centre introduced a special-category GST registration to simplify compliance for small businesses, allowing eligible taxpayers with monthly business-to-business (B2B) output GST below ₹2.5 lakh to opt for a fully electronic process through Rules 9A and 14A. Small businesses can now register within three days, compared with the longer, document-heavy process they faced earlier.

However, businesses that registered using the simplified process now face a new operational challenge—the GST portal blocks them whenever their output tax exceeds the ₹2.5 lakh threshold.

“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,” said Vijaykumar Puri, partner at chartered accountant firm VPRP & Co. Llp.

This is further complicated by the exit conditions specified in Rule 14A. When the threshold is breached, the law allows the business in the optional category to withdraw and apply for registration as a regular taxpayer, provided at least three GST returns have been filed. After 1 April, this condition relaxes to one GST filing before one can withdraw.

“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,” said Puri.

While the exit conditions align with Rule 14A, the portal’s blocking of GSTR-1 is not explicitly provided for in the policy framework.

Mint‘s emailed queries to the GST department remained unanswered.

Between a rock and a hard place

This issue has begun to affect businesses on the ground. Uday K., a Mumbai-based manufacturer, registered under the simplified scheme in December and received his GST number within 48 hours. While the first month of compliance went smoothly, in January, he received a large order from a client that pushed his output GST above the ₹2.5 lakh threshold. When he attempted to file his return, the GST portal blocked the generation of the GSTR-1 summary, leaving him with limited options.

“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 said.

Experts say such cases are likely to become more common, as micro, small, and medium enterprises (MSMEs) often experience sudden growth or seasonal spikes in orders. A system designed to make entry into the GST ecosystem easier inadvertently restricts businesses’ ability to scale up smoothly within the formal framework.

Smita Singh, partner at law firm S&A Law Offices, said taxpayers can raise grievances on the GST portal seeking government intervention, and suggested that the department introduce an alert-based system to pre-notify taxpayers when their tax liability approaches or exceeds the ₹2.5 lakh threshold, instead of blocking return filing.

In the absence of a system-enabled exit mechanism or procedural clarity, Puri said taxpayers are effectively forced to defer B2B outward supplies to the next month to avoid breaching the threshold. While commercially impractical, he said, this workaround is currently the only way to enable GSTR-1 filing and prevent further compliance disruption until the portal provides a workable exit from the optional category.

For new applicants, Shivam Mehta, executive partner at law firm Lakshmikumaran & Sridharan Attorneys, cautioned businesses to exercise careful judgment before opting for registration under the scheme, noting that many MSMEs may not fully understand the withdrawal conditions and future compliance implications. A careful assessment of expected tax liability is essential before choosing this route.