ALSO READGST on beedi: High tax rate could help Naxalites, fears RSS affiliate GST roll-out: Traders greet tax with nationwide protests, strike on Friday GST: To pass on tax benefits, first tabulate them, say experts GST rates fixed: 3% tax on gold, 5% on clothes costing less than Rs 1,000 Sale of scrips under export promotion schemes to attract 12% GST
The government on October 6 announced some changes to the rules governing the goods and services tax (GST). These brought some cheer to exporters, and small traders and manufacturers alike. But are these enough to address the concerns around GST hurdles? A K Bhattacharya analyses for Business Standard the timing of the changes.
The changes to the rules governing the goods and services tax (GST), announced last Friday, have brought cheer to exporters as well as small traders and small manufacturers. But the question that arises now is why these corrective measures were taken only after trade and industry suffered pain due to procedural hurdles for over three months.
Why did the GST Council ignore the howls of protests from trade and industry right from the day the GST was rolled out? Or was the government response expedited by a subtle hint from the Rashtriya Swayamsevak Sangh chief Mohan Bhagwat, who in his Dussehra address underlined the need for safeguarding the interests of small industries and small retailers, among others? And did senior BJP leader Yashwant Sinha’s sharp criticism of the GST’s implementation problems play a role in the remedial steps that the government took last week?
Remember that exporters were complaining about the adverse impact of the proposed GST on them even before it was rolled out. It is, of course, a reflection of the commerce ministry’s failure that the exporting community’s plea for corrective steps could not make an impact either on the commerce ministry or the finance ministry. Merchant exporters have now been virtually freed from paying GST on the products and raw materials they procure for undertaking exports. Similarly, duty exemption on items imported for export production will continue and refunds of duties to exporters will be expedited within a time frame.
Even though the GST Council has belatedly responded to exporters’ concerns, the uncertainty is not yet fully over. The relief for exporters announced last Friday is only an interim measure and will remain valid till March 2018. What happens after that is anybody’s guess.
Exports cannot be grown in a situation of policy uncertainty. If exporters do not know what the duty structure or refund mechanism will be just about five months from now, the challenges of giving a leg-up to India’s exports will become even more daunting. GST reforms need not be an impediment for exports growth. On the contrary, the two should help each other.
For small and medium enterprises (SME), the composition scheme can be used by any unit below an annual turnover of Rs 1 crore, compared to Rs 75 lakh earlier. This means relief for over 1.5 million entities which have already registered under the composition scheme. And now that the window for registering under it will remain open for six more months, expect more small enterprises to join the composition scheme that will allow them to file only quarterly returns and pay tax at the following rates: 1 per cent for traders, 2 per cent for manufacturers and 5 per cent for restaurants.
In 2012-13, there were about 1.7 million small units with an annual turnover of between Rs 10 lakh and Rs 1 crore. That number may have increased to about 2 million now. So, the composition scheme may end up having 2 million taxpayers under it. Of course, they will not get the benefit of input tax credit (essentially refunds of taxes paid by them in the process of their buying goods or raw materials for the final sale), but this is hardly a problem compared to the freedom they will get from the hassles of monthly returns and matching of invoices to claim input tax credit.
The government’s ambition to widen the tax net as much as possible is possibly the main reason for it to have ignored the evidence of its own data on small traders and manufacturers. The data for 2012-13 suggest that over 80 per cent of the turnover is accounted for by units with an annual turnover of over Rs 10 crore. This figure may have changed by now, but the trend would not be very dissimilar. This would also suggest that broadly 80 per cent of the GST revenues would be coming from the category of units with an annual turnover of over Rs 10 crore. In terms of the number of units, they account for only about two per cent of the total number of enterprises. Thus, focusing on these units would have made more sense for GST revenue collection purposes.
In contrast, a relatively small proportion of about 3 per cent of turnover was accounted for by enterprises with an annual turnover of between Rs 10 lakh and Rs 1 crore. But they had a share of 18 per cent of the total number of enterprises that paid taxes. Allowing the composition scheme to cover units up to an annual turnover of Rs 1 crore, therefore made sense and should have been done even before the GST rollout.
The question is: Should the threshold for the composition scheme be raised further to Rs 2 crore? The number of units with an annual turnover of between Rs 1 crore and Rs 2 crore accounts for five per cent of the total tax-paying units, but their share in total turnover of such companies is only 3 per cent.
Another question that the GST Council must address now is if enterprises with an annual turnover of up to Rs 1.5 crore can be allowed to file quarterly returns, is there merit in extending this facility to all tax-payers under the GST? It will be important to reassess what the risks and losses will be if taxes continue to be paid every month, but returns are filed every quarter? If the risks are less problematic than the improvement in the ease of doing business and the reduction in the compliance cost, the GST Council should remain open to reviewing such relaxations as well.