The Government’s brazen attempt to increase the profits of MSMEs by letting them retain a good portion of tax collected from consumers is illogical
The Goods and Services Tax (GST) Council has adopted a liberal stance towards small businesses, keeping in mind their potential to generate employment and increase workers’ income. The bearing is particularly reflected in its decision to (i) exempt businesses having a turnover below a certain threshold of Rs 4 million from registering under GST and paying tax; (ii) allowing a manufacturer having a turnover less than Rs 15 million opt for ‘composition scheme’ under which he will pay tax @1 per cent and face minimal compliance viz returns to be filed quarterly against monthly for regular assesees; (iii) allowing service providers with turnover less than Rs 5 million under composition scheme and pay tax @6 per cent.
The decision to bring service providers under the composition scheme was taken in the 32nd meeting of the Council (January 10), which also raised the threshold under (i) and (ii) from the earlier Rs 2 million and Rs 10 million respectively. The special dispensation carved out for small businesses may give them reason to cheer but there’s a flip side. A cardinal principle behind indirect taxation is that all consumers pay tax at the same rate, irrespective of who offers the services. Further, unlike direct tax, which is levied on the income of an entity, by nature, an indirect tax is payable by the consumer, which the supplier collects and gives to the Government.
In this case, however, the entity opting for composition scheme pays tax at a lower rate than for normal assesees. Thus, a service provider under the composition scheme pays tax @ 6 per cent as against normal 18 per cent (slab rate applicable to most services). The rules also bar it from raising a tax invoice and charging tax from the user. Both stipulations are in contravention to the guiding principles. Where do we go from here? What is the situation on ground? An illustration will help unravel the intricacies.
Take for example, the value of a service is Rs 100,000. For a normal service provider, with GST @18 per cent, the tax included value will amount to Rs 118,000. He will raise a ‘tax invoice’ which includes Rs 100,000 and Rs 18,000. On the other hand, a service provider under composition scheme will raise a simple sales invoice for Rs 118,000 without separately mentioning the tax component of Rs 18,000. He/she may not appear to be collecting tax from the customer (in sync with the rule) but receives Rs 18,000 as part of the price. After depositing tax @6 per cent (on Rs 118,000) or Rs 7,080, he is left with Rs 10,920.
The entity under composition scheme does not get offset for the tax paid on purchased inputs. However, for a service provider not purchasing inputs, this is not relevant; so he retains the entire surplus. Even in case he buys inputs say worth Rs 40,000, paying GST @18 per cent or Rs 7200 (for which he does not get offset) then also, he will make net gain of Rs 3720 (Rs 10,920-Rs 7,200). In case of a trader/manufacturer, an entity under composition scheme is even more favourably placed as he gets away by paying a mere 1 per cent even as his collection from consumer is higher. Even with denial of input tax credit, he will end up with net gain. For dealers not paying tax at all (having turnover more than Rs 4 million), the gain will be even higher. In short, even as all dealers/service providers collect GST at the same rate (this fundamental point can’t be camouflaged by sheer innovation in documentation technique viz tax invoice versus simple sale invoice), those under composition scheme give to the Government a lesser tax amount, thereby pocketing the differential. Correspondingly, the tax department incurs revenue loss. No wonder, small businesses contribute very little to the overall tax kitty. Thus, businesses having a turnover between Rs 2 million and Rs 10 million constitute about 25 per cent of those registered under GSTN but their contribution to revenue is only 5 per cent. Further, more than 50 per cent of the registered firms having turnover of more than Rs 2 million, contribute a meagre 1.5 per cent of the total. In other words, 75 per cent of the registered entities contribute a miniscule 6.5 per cent to the total revenue.
The Government’s intent to help small businesses/enterprises is indeed laudable. But a brazen attempt to increase their profits by letting them retain a good portion of the tax collected from the consumers is illogical and unacceptable. All tax collections 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 the exchequer. Prior to GST, traders were evading tax payment by not billing sales. Under GST, this is being legitimised. The exemption or concessional tax on small businesses, which essentially means their giving to the Government less than what they collect from consumers, 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 filing of returns, minimal documentation and ease of doing business.
(The writer is a policy analyst)
