The Goods and Services Tax [GST] Council – all powerful body which has the mandate to develop the GST architecture and determine tax slabs, rates etc – has adopted a liberal stance towards small businesses keeping in mind their huge employment generating potential and increasing income of the workers.
The liberal stance is particularly reflected in (i) exempting businesses having turnover below a certain threshold Rs 2 million from registering under GST and pay tax; (ii) allowing a trader/manufacturer having turnover less than Rs 10 million to opt for ‘composition scheme’ under which it pays tax @1% and faces minimal compliance viz. returns to be filed quarterly against monthly for regular assesses; (iii) bring service providers under composition scheme under which an entity with turnover less than Rs 5 million pays tax @6%
The decision with regard to bringing service providers under the composition scheme was taken in the 32nd meeting of the Council [January 10, 2019] which also increased the threshold for exemption from registration and payment of tax to Rs 4 million and hike in turnover limit for availing of ‘composition scheme’ by trader/manufacturer to Rs 15 million. Effective from April 1, 2019, the relaxed limits give small businesses good reason to rejoice.
But, there is a flip side to such a liberal dispensation for small businesses. A cardinal principle behind indirect taxation is that all consumers pay tax at the same rate irrespective of the entity offering goods and services. Further, unlike direct tax which is levied on the income of an entity, by nature, an indirect tax is payable by the user of goods and services. The supplier is required to collect GST from the users and give to the government.
In this case however, the entity opting for composition scheme pays tax at a lower rate than for normal assesses. Thus, a service provider pays tax @6% as against normal 18% [slab rate applicable to most of the services]. Further, the rules bar it from raising a tax invoice and charging tax from the user. Both the stipulations are in contravention of the guiding principles.
Where do we go from here? What is the situation on ground zero? An illustration will help in unraveling the intricacies.
Take the value of services as Rs 100,000/-. For a normal service provider, with GST @18%, the tax included value is Rs 118,000/-. He raises a ‘tax invoice’ which includes Rs 100,000/- plus Rs 18,000/- as tax. On the other hand, a service provider under composition scheme [CS] does not raise a tax invoice but charges Rs 118,000/- which includes tax component of Rs 18,000/-
In sync with the rule, the person under CS may not appear to be collecting tax from the customer but he gets it as part of the price. After depositing tax @6% [on Rs 118,000/-] or Rs 7080/- with the government, he will be left with Rs 10,920/-.
The person under CS does not get offset for the tax paid on purchased inputs. However, for a service provider not purchasing inputs, this is not relevant even as he retains the entire surplus. In case, he buys inputs say worth Rs 40,000/- and pays GST @18% or Rs 7200/- [for which he does not get offset] then also he will end up with net gain of Rs 3720/- [10,920-7,200].
In case of a trader/manufacturer, an entity under CS is even more favorably placed as it he gets away by paying a mere 1% tax on his turnover. Even with denial of input tax credit, he will end up with net gain. For dealers not paying tax at all [having turnover < exemption limit], the gain will be even higher.
In short, even as all dealers/service providers collect GST at the same/uniform rate [this fundamental point can’t be camouflaged by sheer innovation in documentation technique viz. tax invoice versus simple sale invoice], those under CS give to the government a lesser tax amount e.g. @ 6% in case of services – against 18% collected from users – thereby pocketing the differential. Correspondingly, the tax department incurs revenue loss. No wonder then, small businesses contribute little to the tax kitty.
For instance, businesses having turnover in Rs 2 million to 10 million range constitute about 25% of those registered under GSTN but their contribution to revenue is only 5%. Further, more than 50% of registered firms have turnover less than Rs 2 million [this being the erstwhile exemption limit, as per rules, they need not]. Yet, their share in total revenue is a meagre 1.5%. In other words, 75% of registered entities contribute a mere 6.5% of the revenue.
The government’s intent to help small businesses/enterprises is indeed laudable. But, a brazen attempt to increase their profitability by letting them retain a good portion of the tax collected from the consumers is illogical and unacceptable. All tax collections ‘in their entirety’ must flow into the state coffers.
To sum up, the decision of the Council to let businesses under composition scheme pay flat tax [albeit miniscule] on the turnover is flawed. It is nothing but a cover-up for the untenable practice of letting them make money at the cost of exchequer. Prior to GST, traders were evading tax payment by not billing sales [reinforced by cash transactions]. Under GST, this is being legitimized!
The exemption or concessional tax rate for small businesses which essentially means their giving to the government less than what they collect from consumers/users is an anathema to the very concept of indirect taxation. This needs to go. However, the government should continue to encourage them by ensuring hassle free return filing, minimal documentation and ease of doing business.