After more than 18 months of a tug-of-war over the goods and services tax (GST), numerous sops have finally been introduced for Micro, Small and Medium Enterprises.
The relief includes raising the bar of threshold up to Rs 1.5 crore, single annual return subject to payment of quarterly payment of taxes and introduction of a separate composition scheme for the service sector.
With these sops in place, some more simplification has been extended as a New Year gift from political parties as elections approach.
Let us analyse some of the decisions in detail.
Threshold For Registration
In a bid to provide relief to the businesses, the GST Council, the decision-making body, has decided to increase the present Rs 20 lakh threshold limit for mandatory GST registration to Rs 40 lakh with effect from April 1, 2019. Further, parallel increase has also been made in the threshold limit for the special category states from the current Rs 10 lakh to Rs 20 lakh.
The council also decided to give a one-time option to the states, whereby they may accept or reject the proposal of this higher threshold.
This move to double the threshold for GST registration to an annual turnover of Rs 40 lakh/20 lakh would result in more than 50 percent of the registered dealers falling out of the tax net and may have an insignificant revenue impact.
It is expected that not all the registered dealers would opt out of the scheme due to seamless flow of tax credits, which lowers the tax cost for a business. Besides, many businesses would also continue the registration due to an unsaid compulsion from big customers who have a parallel mechanism of know your customer.
Raising the bar of the threshold from Rs 20 lakh would be an ecstatic moment for millions of small taxpayers as they practically get rid of the ever-changing multiple GST compliance burden.
Sops For Composition Taxpayers Threshold for composition scheme for goods: In a move to align the GST composition limit with that of the erstwhile excise regime threshold limit, the council has decided to allow businesses with a turnover of up to Rs 1.5 crore of goods to avail composition scheme. This is up from the current Rs 1 crore and is planned to take effect from April 1, 2019. This will be a mood swinger for the MSME sector as the compliances would ease to a great extent. Single annual return instead of quarterly returns: To further ease the compliance burden for the composition taxpayer and make it more hassle-free, the council has decided to do away with the multiple return filing requirements and has provided for the requirement of only one annual return, with the quarterly tax payment procedure remaining intact. By opting for the composition scheme, small taxpayers can avoid tedious paperwork and pay GST at a fixed rate of their turnover. New composition scheme for service providers: Composition scheme for service providers would be first in the history of Indirect taxation in India. The service tax regime never had a comprehensive composition scheme applicable to all service sectors. It has been proposed and approved by council that service providers which are providing services with turnover of up to Rs 50 lakh will be entitled to the benefit of composition scheme and would be required to pay tax at 6 percent.
This composition tax rate of 6 percent for service providers is considerably lower than average GST being paid by the service providers currently.
This step would ease compliance for services industry at the cost of input tax credit, which would add to the cascading effect of taxes. Service providers would be elated in the short run, but they will find it tough to run the business in the long run due to non-availing of tax credit (which would eventually be as high as 18 percent) and depleting margins on account of global competition.
With all of the above changes newer registrations are expected and collective tax collections from sectors of composition tax payers should take a steep upward U-turn on the implementation of all proposals.
The 1 Percent Cess For Kerala
In the light of the devastating floods that took place in 2018 and to extend financial aid to Kerala for rehabilitation and flood-affected works, the GST council decided to permit the levy of a cess up to 1 percent for a period not exceeding two years on intra-state supply.
The idea of imposing an additional cess will require amendment along with certain tweaks in the GST Network (GSTN). Moreover, there are concerns that with this levy of cess, businesses might migrate to neighboring states. The idea of cess would add to cascading of tax removal, which was the prime objective behind the introduction of GST in July, 2017.
As a matter of policy, GST should not be loaded with any cess on account of natural calamities or other reasons. Funds for calamities should be pulled out from in-planned expenditure budgets of the union or state governments. The GST council needs to take a hard decision in the interests of overall economy, leaving aside political agenda of the political parties.
Rajat Mohan is partner, AMRG & Associates.