GST exemption has brought cheers to MSMEs, but not everybody's happy

The latest round of relaxation in the registration threshold and composition scheme is likely to substantially reduce the compliance burden on small businesses. According to government statistics, the increase in the registration threshold could benefit 2 million taxpayers to opt out of the GST net. Increasing the exemption threshold and the ambit of composition scheme to include service providers should go a long way in simplifying GST compliances for small businesses. 

“This is in line with the global policy where the focus is on large taxpayers for tax collection,” says Pratik Jain, partner and leader indirect tax, PwC. 

Experts say the decision whether to be part of the GST net or avail of reduced compliance is something each business has to take depending on their customer profile, where they stand in the supply chain, nature of procurements they make, among other things.

According to Shivam Mehta, partner at law firm, Lakshmikumaran & Sridharan, a common grudge small enterprises have is that even when they do not intend to avoid paying taxes, they find it difficult to ensure compliance with limited finances. “By widening the eligibility limit for composition scheme, especially including more service providers and mixed suppliers, the government seems to ensure tax collection and minimal compliance for small businesses,” he adds.

Small businesses dealing in goods could now deregister if they are below the Rs 40-lakh threshold unless they are supplying to large customers who insist on registration. “This would be advantageous as it permits them to do business without any statutory records,” says MS Mani, partner, Deloitte India. 

Some businesses with up to Rs 1.5 crore of turnover now have the option to avail the composition scheme with a flat GST tax of 6 per cent and less compliance. But its customers will not be able to avail the benefits of input tax credits. 

Small dealers would now have to compute their turnover accurately to see where they stand in terms of registration and the composition threshold, say experts. “Depending upon the nature of business, input expenses, customer and vendor profile, a considered decision should be taken on whether it is efficient to opt for composition scheme with reduced rate and no input tax credit vis-à-vis paying GST under normal scheme with full input tax credit,” says Harpreet Singh, partner, indirect taxes, KPMG in India.

One thing most experts agree on is that the government is likely to step-up the anti-evasion efforts to minimise the loss of tax revenue.“Higher thresholds result in fewer taxpayers, which means that tax officials would now be better placed to do close scrutiny for large taxpayers. This is likely to help curb tax evasion,” says Singh.

Even if businesses opt for the new schemes, previous period compliances have to be completed and closed. Otherwise, businesses could still come under the scanner of the taxman, say experts. Some, like Mehta, feel that if it is easier for people to comply with the law, tax evasion should come down.

Mani is of the view the move to increase the registration threshold and the composition scheme coverage would dent tax collections. “This would put more pressure on tax authorities to increase collections from other taxpayers,” he says.

Not everyone is happy with the sops given to small businesses under the GST regime as it encourages distortions within the tax system. According to Bipin Sapra, tax partner, EY India, the increase in exemption limit is a step that moves away from the ideal GST structure with a large base and low rate. “The exemption is the worst form of benefit, as the credit chains break and cost of production and delivery increase,” he adds.

Jain cautions that the government must ensure that the relief is not misused by taxpayers by splitting their businesses or in any other manner. Further, the GST council should try to align all the states to opt for the same threshold to ensure uniformity in the tax structure, he adds.

Mani feels the single return per year facility could also be extended to medium scale enterprises having a turnover of up to Rs 5 crore.

What the GST Council recommended

• Increase in turnover limit under composition scheme to Rs 1.5 crore

• Taxpayers under composition scheme required to file one annual return

• Payment of tax to remain quarterly along with a simple declaration

• Composition scheme made available to suppliers of services or mixed suppliers for GST rate of 6% (3% CGST + 3% SGST)

• Facility available for those with annual turnover of up to Rs 50 lakh

• Two exemption threshold limits for suppliers of goods, Rs 40 lakh and Rs 20 lakh

What businesses need to do

• Changes are effective from the next financial year onwards, from April 1, 2019

• Small business willing to avail the benefit of revised registration threshold would need to apply for cancellation of their existing GST registration

• Those opting for composition scheme would need to apply for the same 

• Businesses should evaluate their customer profile before deciding to de-register or move to composition scheme

• If they deal with customers eligible for input tax credit, it may be better for them to continue issuing tax invoices

• Those businesses which engage with suppliers, which fall under the revised threshold or have opted for composition scheme, will have to revisit their costs, system configurations, possibility of reverse charge tax in future, etc

• Small dealers should compute their turnover accurately to see where they stand in terms of registration and composition threshold