GST Compliance Perception and SME Profitability in India

Abstract

This study investigates the perception of Goods and Services Tax (GST) compliance and its impact on the profitability of Small and Medium Enterprises (SMEs) in India across six financial years (FY 2017-18 to FY 2022-23). Grounded in an integrated theoretical framework synthesising the Fischer et al. (1992) Multi-Dimensional Tax Compliance Model, Kirchler's (2007) Slippery Slope Framework, and Davis's (1989) Technology Acceptance Model (TAM), the study employs a mixed-method explanatory sequential design. Primary data were collected from 380 GST-registered SMEs across six Indian states using a validated 61-item structured questionnaire analysed through Partial Least Squares Structural Equation Modelling (PLS-SEM) with SmartPLS 4.0, supplemented by secondary institutional data from GSTN, RBI, CMIE Prowess, and Ministry of MSME. Results confirm that GST compliance cost burden is the dominant negative predictor of net profit ratio (β = −0.421, t = 8.34, p < 0.001), while digital readiness constitutes the most significant positive predictor (β = +0.367, t = 7.12, p < 0.001). Compliance behaviour fully mediates the tax rate perception-cash flow relationship (β = +0.512, 95% CI [+0.41, +0.61]). A strong negative correlation (r = −0.87) between compliance cost and net profit margin and a 4.4 percentage-point Q1-Q4 NPM differential confirm systematic compliance-profitability suppression. The liquidity channel — operationalised as ITC reconciliation-induced working capital cycle elongation — emerges as the most financially consequential mediation mechanism. Firm size moderates the compliance-profitability relationship (β = −0.198), producing a 5.8 percentage-point NPM gap between micro (3.4%) and medium enterprises (9.2%). The study generates evidence-based recommendations for GST compliance simplification, digital infrastructure investment, and differential compliance architecture targeting micro enterprises.