Excise duty alignment with GST likely to impact SMEs

Budget 2011-12 could widen the excise duty net to include more small & medium enterprises (SMEs), as the finance ministry wants to reduce the threshold for exemption from the current Rs 1.5 crore. This would be a step towards aligning the duty structure with the proposed goods & services tax (GST), wherein the government has suggested a uniform threshold of Rs 10 lakh for both Centre and states.

However, a finance ministry official said while the Budget would reduce the exemption limit, it would not be brought down to Rs 10 lakh. While the source did not reveal the actual figure being considered, he said the Rs 10-lakh limit would be reached in stages. A new threshold would have major tax implications for SMEs, as all businesses with an annual turnover above the limit would be required to pay excise duty.

An empowered committee of state finance ministers has suggested a threshold of Rs 10 lakh for state GST and Rs 1.5 crore for Central GST. The Centre, on the other hand, has repeatedly insisted on a common threshold to ensure harmony in the new indirect tax regime.

At present, the excise duty threshold varies from state to state. Most of the large ones have prescribed a limit of Rs 5 lakh in their state VAT Acts. The empowered committee had suggested a dual GST threshold, it said, to protect the “interests of small traders and small-scale industries”.

States feel a uniform threshold of Rs 10 lakh would pinch small industries, which would pass the burden on to consumers, making items of daily use dearer. Furthermore, while a lower threshold would boost the Centre’s revenue collections, states say it would hurt the competitiveness of SMEs, forcing some to close and render their workers unemployed.

The Union government — which feels a dual structure would encourage under-reporting of turnover by SMEs — has said that instead of excluding them from central GST, businesses with a turnover below Rs 1.5 crore could be compensated with simplified and reduced paperwork. These businesses may not be required to file returns frequently, their registration process could be made easier, and a minimum audit based on risk parameters could be prescribed.

GST is now likely to be introduced only after April 2012. The government had set a revised deadline of April 2011 for the new indirect tax regime after it missed the original target of April 2010. The finance ministry had then hoped for an October 2011 rollout, but even that appears unrealistic now. There is still no consensus on several areas of the GST’s structure or constitutional amendments.

 

TAXING TIMES

# FinMin wants lower threshold for exemption than Rs 1.5 cr

# Objective is to bring duty in line with Rs 10-lakh GST threshold

# State duty limit varies; many have prescribed Rs 5 lakh

# States feel uniform limit will hurt SME competitiveness