By Gunjan Mishra
GST and Taxation for MSMEs: GST is an integral part of the government’s plan to secure India’s economic future. Two years on, the reform has been enduring, with the mantra of broad base, low-rate and tax neutrality still dominating the political landscape. The avowed GST goals of contributing to the deficit reduction effort, bring changes necessary to ensure that India can compete effectively in the world economy, and improve the overall fairness in the tax system are still work in progress. While these may take time, it is imperative that the government lays its focus on eliminating existing anomalies in the system.
The present GST structure and its implementation are an impediment to the growth of SMEs and job creation in the country. Current features of GST such as levy of GST on inter-branch transfer, multiple registrations and compliances, the extent of non-GST supplies, tax cascading, and delay in refund result in compliance burden and tax distortions in the system. As a result, businesses are forced to deploy additional resources and incur costs. This, in turn, increases the costs of production and exports, making our products less competitive in world markets. It also inhibits Indian businesses from meeting the competitive challenges posed by the international marketplace.
Need to Lessen Compliance Burden
One of the major criticisms of GST is that it imposes the compliance burden on small business. Those registered spend a considerable amount of time in obtaining state-wise registration, filing of multiple returns, generation of e-way bills and maintenance of separate books of account for each registered entity.
While very small businesses are accommodated by allowing for voluntary registration as a GST dealer below a specified annual turnover, this threshold was set at Rs 20 lacs in 2017 and increased to Rs 40 lacs in 2019 after multiple representations. However, when compared with the threshold of Rs 1 crore under the erstwhile Central Excise regime, the GST threshold remains significantly low. Also, many small businesses that do business with registered GST dealers tend to register as GST vendors even if they fall below the compulsory registration threshold; thereby triggering the compliance obligation.
GST has harnessed technology to automate the GST return process. Digitised tools are now available to allow a business to create an on-line digitized workflow to ensure that each business follows agreed best practices. SMEs are required to deploy new technologies and tools to measure the quality of processes and thereafter proactively identify areas of risk and devote resources accordingly.
In recognition of the fact that there has been an increase in compliance costs, the government should come up with an administration fee to be paid to small businesses. The fee can be made available to registrants who are carrying on a business and have revenue from taxable and zero-rated supplies up to a maximum threshold in a financial year. The administrative fee can be paid as a percentage of total revenue from taxable and zero-rated supplies annually. This will help offset compliance costs incurred by small business.
Streamlining Refund Mechanism
It could be argued that GST refunds are both the jewel and Achilles heel of a typical GST system. GST refunds properly administered ensure that the tax does not distort production decisions and eliminate the cascading effect of the tax. While the industry has been constantly working to improve its compliance processes through a mixture of enhanced IT systems and resources but that is not enough, by itself, to protect entirely from unreasonable demands being made on it by tax authorities.
One risk that must be confronted is the revenue maximization tactic of deliberately delaying wholly legitimate GST refunds to genuine businesses. This might be perceived as a deliberate attempt to obtain an unwarranted cash-flow benefit at the expense of legitimate businesses. Although the government has imposed a timeline for disbursement of refunds, the procedure for claiming refunds requires streamlining and transparency, especially with the lower rung bureaucracy. This would ensure that unnecessary hurdles are not created for SMEs while claiming GST refunds.
Changes in Penal Provision
Another risk is that of disproportionate penalties, including interest rates well above commercial levels and high penalties for administrative errors that do not lead to any loss of revenue. An example is the imposition of penalty equivalent to the tax amount for the failure to account for a “reverse charge” by a fully taxable business. This might be perceived as another form of disguised revenue-raising rather than legitimate reparation for errors leading to a loss of government revenues. A need for introducing proportionate penalty by amending the legislation is much warranted.
The fraudulent claim of input tax credit or refunds and the under declaration of output GST remains a real problem. However, drastic measures such as restriction on the availment of input tax credit only create more distortions rather than addressing the problem of fraudulent credit or refund claims. To tackle this menace, the government should focus on the mechanism for early detection of fraudulent claims and provide specific criminal sanctions besides the existing administrative sanction.
Too great a degree of homogeneity in GST structure should be weighed against the disadvantages it brings for SMEs. What is seen as a best practice now may be very different in 10 years. It is important to keep sufficient flexibility to take account of local circumstances.
(Gunjan Mishra is the Partner at L&L Partners. Views expressed are the author’s own.)