MSMEs Struggle Amid Policy Changes, GST 2.0

India’s micro and small businesses play a very important role in the economy. Together, they contribute nearly one-third of the country’s GDP, more than one-third of manufacturing output, and almost half of India’s total exports. However, in the financial year 2025–26, the MSME sector faced many challenges.

Global geopolitical tensions, uncertainty in international trade, and tariff policies such as those proposed by former US President Donald Trump created an unstable business environment. Frequent policy changes also increased the compliance burden on small businesses, while their need for easier access to credit remained largely unmet.

One major change that affected MSMEs was the introduction of GST 2.0. Under this new system, the earlier multiple tax slabs of 0%, 5%, 12%, 18% and 28% plus cess were simplified into fewer rates — 0%, 5% and 18%, along with a 40% slab for luxury and “sin” goods. Because of this change, many everyday and aspirational products moved into lower tax brackets, making them cheaper for consumers.

However, this change created new problems for many manufacturers. In several cases, the raw materials they use are taxed at a higher rate than the finished products they sell. This has led to higher compliance requirements and caused large amounts of working capital to get stuck in tax credits, putting additional financial pressure on small and micro businesses.