The build-up to the GST Council meeting of October 6, raised expectations from various stakeholders, primarily the SME sector, with respect to rates and concessions. While the government has been flexible on many counts, the sum of all reliefs indicates that there is much more that needs to be done.
Take for example the composition scheme. It may be recalled that the threshold for levy of GST was hotly debated in the pre-GST period with governments preferring a lower cut-off given the then existing levels in VAT and service tax rates, while economic sense, given the enormous complexities of compliance, asked for a higher threshold.
The gap between the final threshold and the desired levels ought to be filled by giving concession in the form of a composition scheme, but increasing it marginally from Rs 75 lakh to Rs one crore does not bridge that gap. The constraint to increase it further may be on account of the law, which sets an artificial limit.
It is also true that the composition scheme hurts small taxpayers as they remain outside the value-added mechanism and acts as a disincentive to do business for large tax payers on account of lack of input credit of taxes paid by such composition dealers. This inherent disadvantage of paying tax under composition scheme has not been considered.
What has been addressed for composition dealers is the removal of one area of ineligibility of provision of inadvertent exempt service. But the Group of Ministers may be well advised to also deal with another area where a dealer, otherwise eligible for the scheme also makes supplies of exempt goods, by fixing a limit of such exempt turnover beyond which the dealer shall be ineligible.
The benefit of composition levy is available only to supplier of goods in a state or Union Territory, that is to say, such benefit is not available to supplier of services other than restaurant services. Therefore, the provision discriminates against small supplier of services. He will have to register in the normal course and undertake onerous compliances. This has not been addressed.
What has been addressed here is the inter-state supplies of services by small service providers with aggregate turnover up to Rs 20 lakhs, from obtaining registration. The government will do well to extend the composition scheme to small service providers. This will work well especially if benefit of input tax credit is extended.
The GST law requires a registered tax payer to pay tax under “reverse charge” in relation to supply of goods and services or both, by a supplier who is not registered. It is most likely that such unregistered suppliers are small dealers. So a purchaser could likely feel dissuaded from discharging his tax liability by not buying from such unregistered small dealers. This will drive small dealers out of business in the long run. Mercifully this provision has been suspended till March 2018, and will be reviewed by a committee of experts. It is suggested that such provision should be curtailed by making it applicable only to certain select goods and services.
Prescribing a threshold for purchases from small unregistered dealers up to current limit of Rs 5000 was considered impractical and has not been used by most taxpayers.
Steps that have been taken to provide relief are laudable, but it is clear that for making GST acceptable to small businesses, much more needs to be done and extending small mercies from time to time needs to be replaced by a Big Bang approach that was adopted in the introduction of this tax reform.
(Prashant Deshpande is Partner with Deloitte Haskins and Sells LLP)