GST Knowledge, Digital Literacy, Compliance Cost, Working Capital Pressure, and Government Support as Determinants of GST Compliance Challenges: A SEM Study of Indian Small and Medium Enterprises

Abstract

The Goods and Services Tax (GST) reform in 2017 has integrated the indirect tax regime across India, but the practical and financial implications of GST on small and medium enterprises (SMEs) continue to be a policy worry. This study is based on compliance-cost theory, technology-adoption reasoning and tax-morale and administrative-burden perspectives to develop and empirically test a structural model consisting of GST Knowledge, Digital Literacy, Compliance Cost, Working Capital Pressure, and Government Support as the predictor variables for GST Compliance Challenges among Indian SMEs. The survey data has been collected from 653 traders, service providers and manufacturers who are registered with the GST but have turnover of less than ₹20 lakh to ₹1-2 crore and have been registered under the GST for 1-8 years. The validation of the measurement model was carried out using exploratory factor analysis and confirmatory factor analysis, while the test of the hypothesized relationships was performed by structural equation modeling (SEM) with a covariance-based approach using maximum likelihood estimation. The six constructs were found to be reliable (Cronbach's alpha: 0.86-0.91) and to have convergent and discriminant validity as indicated by the Fornell-Larcker and heterotrait-monotrait (HTMT) criteria. The structural model was a good fit with the data (CFI = 1.000, RMSEA = 0.000, SRMR = 0.024) and accounted for 42.8 percent of the variance in GST Compliance Challenges (Q² = 0.354). Compliance Cost (β = 0.276) and Working Capital Pressure (β = 0.274) were the most significant positive predictors, while Digital Literacy (β = -0.203), GST Knowledge (β = -0.167), and Government Support (β = -0.141) were significant negative predictors at p < .001. The results indicate that structural and liquidity barriers have a stronger impact on SMEs' compliance actions than informational and support barriers, which have implications for the simplification of the GST return filing process, processing of Input Tax Credit refunds, and policy to educate taxpayers.