The survey states that this set up minimizes their administrative burden, but also makes it difficult for them to sell to larger firms, which would not be able to secure input tax credits on such purchases.
The Goods and Services Tax (GST) has turned out to be a treasure trove of data for the Chief Economic Adviser Arvind Subramanian, as the Economic Survey 2017-18 shows more than 54.3 % of those eligible to register under the composition scheme, chose instead to be regular filers.
One of the many benefits of the GST was the voluntary compliance it would elicit. A few numbers highlight this phenomenon. There are about 1.7 million registrants who were below the threshold limit (and hence not obliged to register) who nevertheless chose to do so. “Indeed, out of the total estimated 71 million non-agriculture enterprises, it is estimated that around 13 percent are registered in the GST,” says the Survey.
Further, about 1.6 million taxpayers (17 percent of the total) are registered under the composition scheme, the current threshold for which is fixed at Rs. 1.5 crore. They pay a small tax (1 percent, 2 percent or 5 percent) on their turnover and are not eligible for input tax credits, the Survey says.
The survey states that this set up minimizes their administrative burden, but also makes it difficult for them to sell to larger firms, which would not be able to secure input tax credits on such purchases. “For this reason, about 1.9 million (24 percent of total regular filers) of the registrants sized between the GST threshold of Rs 20 lakh and the composition limit who could have opted for the composition scheme chose not to do so and instead decided to file under the regular GST. Put differently, more than 54.3 per cent (1.9/(1.9+1.6)) of those eligible to register under the composition scheme, chose instead to be regular filers,” says the Survey.
How they do business:
Knowing the nature of transactions between firms is critical to formulating policy, especially designing compliance procedures. The type of transaction that businesses engage in also holds the reason why many firms who could have been in the composition scheme, decided to be under the regular GST scheme. All firms were placed in five categories based on their annual turnover:
a. below-threshold, less than Rs. 20 lakh
b. below-composition limit, Rs. 20-100 lakhs (the current upper limit of the composition scheme is Rs. 150 lakhs)
c. small and micro enterprises (SMEs), Rs. 1-5 crore
d. medium, Rs. 5-100 crore
e. large firms above Rs. 100 crore
This classification is shown both by number of enterprises and their turnover and the Survey says unsurprisingly, the data show that the distribution of turnover is very skewed. “The registered below-threshold firms account for 32 percent of total firms, but less than 1 percent of total turnover, while the largest account for less than 1 percent of firms but 66 percent of turnover, and 54 percent of total tax liability,” says the Survey.
Registered smaller firms (the first three categories) seem to be equally involved in selling to consumers (B2C) and selling to other firms (B2B). Medium and large firms, in contrast, have a much greater presence in B2B than B2C transactions.
“Before the GST was introduced, it was expected that small dealers who sell directly to consumers would chose the composition scheme while those who sell to bigger companies would opt (or be forced) into regular registration, because purchasing firms would not buy unless they could get input tax credits,” says the Survey.
However, it turns out that about half the transactions of the below-threshold firms which nonetheless voluntarily chose to comply are actually in the B2C space. This suggests that there are, in fact, other motivations for participation, beyond simply being a supplier to larger companies.
The reason behind this unexpected move, the Survey says, is because small B2C firms want to be part of the GST since they buy from large enterprises. “In fact, 68 percent of their purchases (1.7/2.5, from the first column in table 4) are from medium or large registered enterprises, giving them a powerful incentive to register, so they could secure input tax credits on these purchases.”