For small assesses compliance with Indian tax laws has always been a challenge. Forcing such assesses for compliance may not yield much revenue to exchequer. It may in fact alienate them from the mainstream and they maybe get into the parallel economy. Therefore, most of the indirect tax laws in past provided for composition scheme for assesses with benefits such as provision of filing of quarterly return instead of regularly monthly return, payment on quarterly basis, collection and payment of tax at much lower rate than regular rates. The new GST law while providing for the scheme has made it unworkable and unfair. Provisions have been made in GST law without considering the ground realities of small time assesses. There are many challenges which are being faced under the new GST composition scheme which we would discuss in this article.
Section 10 of CGST /SGST Act 2017 provides the option of composition scheme for registered persons with aggregate turnover not exceeding Rs.50 lakh in preceding financial year. This limit of Rs.50 lakh has been enhanced to Rs.75 lakh now with exception of north-eastern states. As a relief, in 22nd GST council meeting, it has been proposed to increase the limit of Rs.75 lakh to Rs.1 crore and for north-eastern states, the limit could be increased to Rs.75 lakh. The key features of the scheme are as follows:
- Option to be claimed for all locations in different states with same PAN;
- Service providers cannot claim the benefit except restaurants;
- Manufacturers of specified goods such as ice-creams, pan masala and tobacco products not allowed to opt for this;
- Interstate outward suppliers not allowed;
- Sale through e-commerce operator not allowed;
- Aggregate turnover includes turnover of all locations in the country with same PAN;
- Option of filing quarterly GST return / quarterly payment of tax provided with no need of invoice wise entries while filing GST return;
- GST of 2% for manufacturers, 5% for restaurants and 1% for traders fixed;
- No input tax credit allowed on procurement of goods / services.
After understanding few key features, we would try and understand few challenges in the provisions made for this scheme. As per the estimates around 16 lakh assesses have opted for composition in GST. If few challenges are removed, then the numbers could increase significantly. The SME need to be gently got into the net. The present law is draconian and unreasonable at present. However, the listen ability of the GSTN is still high. The main challenges are discussed below:
Input tax credit not allowed
Assessee who opted for composition would not be eligible for claiming input tax credit. Though tax at lower rate is payable by such assessee, the tax cannot be collected from the customers. As a result, the customer procuring goods would not be eligible for any input tax credit. This would increase the procurement cost to such customers and also lead to cascading effect of taxes. It is relevant to note that though tax cannot be collected by composition dealer, such tax amount would have been included in costing of goods or services. Allowing the composition assessee to collect tax from customers and allowing such customers to take credit of such tax would avoid the cascading effect which is one of the prime objective of replacing the older indirect taxes laws with GST.
Credit of tax paid to customer
No credit available at present to the customer. The composition tax charged by the opting dealer should be available to the receiver/ customer as it was there in earlier service tax law. Adopting the archaic VAT provisions for this was not correct.
Compliance with RCM
Main purpose of composition scheme is to reduce compliance and tax burden on small assesses. However, in GST law, such assesses are not spared from complying with tax payment under reverse charge mechanisms under Section 9(3) or Section 9(4). Relaxation from these provisions would help such assesses from rigorous compliance needs such as issue of self tax invoice for payment of tax under reverse charge, issue of payment vouchers to suppliers, identifying classification and rate of taxes for procurements under Section 9(3) and Section9 (4). In 22nd GST council meeting, it has been proposed to postpone the compliance of Section 9(4) till 31st March 2018.
Tax payment on exempted income as well
Though very low rates of GST are prescribed for composition dealers, the tough condition is need of payment of tax on turnover in the state. Turnover in state includes aggregate value of all taxable supplies, exempt supplies and export supply as well. If supplies are made for export, the same would be treated as interstate supply and dealer would immediately become ineligible for the scheme. However, need of tax payment on exempted supply income without tax credits is bit harsh for assesses. Inclusion of such exempted supplies would also have effect on Rs.75 lakh / Rs.1 crore limit. Change in definition of turnover definition for composition scheme would help the small assesses.
Option to be made available for service providers
Composition scheme is not provided for service providers except restaurants serving food. The scheme should be expanded to all service providers allowing them to concentrate on their business growth rather on compliance with GST in spite of low turnover. This is very important for the smaller manufacturers, job workers and the works contractors (movable) to whom composition scheme needs to be extended.
Conclusion: The challenges discussed above are only indicative. Professionals should make effort to bring these open issues to assesses who have opted or willing to opt for composition scheme. Representation from professionals, industry bodies to government could remove few of these challenges. The ICAI has made a number of suggestions in regard to the Government which would be available in public domain in a few days. If not addressed this could also be one of the reasons for the failure of GST acceptance by SMEs in this year.