GST-hit small units need more help

In India, tax administrations have faced the perennial problem of defining the ‘small’ and providing tax concessions to them.

The central excise department in the past defined small units as those having an annual turnover of less than ₹1.5 crore.

The income-tax department defined small units as those with an annual turnover below ₹1 crore and who were not required to submit income-tax returns in Form 3CD under section 44 AB of the Income Tax Act.

For the levy of service tax in the past, small units were defined as those with an annual turnover of less than ₹10 lakh.

Finally, different States, especially in the North-East and hilly regions, prescribed varying turnover limits for providing VAT benefits to the small.

The goods and services tax, therefore, faced the challenge of integrating all these definitions.

After great deliberation in the sub-committee meetings, the GST Council decided that duty exemption would be provided to all units with less than ₹20 lakh annual turnover, and for this purpose the turnover of all business entities with the same PAN number was aggregated together to compute the turnover.

Units below ₹20 lakh turnover would constitute the ‘small-small’, and ‘small-medium’ categories was meant to cover units with annual turnover between ₹25 lakh and ₹1 crore; these were brought under the composition scheme.

Under this scheme the units would pay a flat tax on turnover and file simple quarterly return but would be ineligible to take or provide input tax credit.

These segments largely cover the mom-and- pop stores who cater to small local areas in the B2C segment.

The GST conclave at Guwahati provided further concessions to this segment.

The turnover threshold for eligibility was raised from ₹1 crore to ₹1.5 crore. A uniform rate of 1 per cent on the taxable turnover was prescribed against the earlier provision of 1 per cent (for traders) and 2 per cent (for manufacturers).

In addition, it was decided that even if units under the composition scheme had a services turnover of up to ₹5 lakh, they would be eligible to remain under this scheme.

In a move to further boost small and medium units, the GST Council brought down the rates on a large number of items such as wet grinders, bamboo furniture and various handmade products which are mainly produced by small units.

To reduce the compliance burden of returns filing for composition units and non-composition small units with annual turnover of less than of ₹1.5 crore, these units were allowed to pay quarterly and file quarterly returns.

In order to bring more units under the GST net the units filing nil rate of returns have been provided with the option of filing a simpler version of the GSTR 3B returns. These changes will certainly help small units. However, a recent insightful article by an eminent economist made the point that the GST scheme still hurts small businesses supplying to large businesses in a B2B transaction.

While deferment of the reverse charge mechanism scheme has helped, there is still a danger that large units may move away from purchasing from the unorganised sector if duty credit is not available.

The way out of this is to reduce the compliance burden on the unorganised small and thereby encourage them to come under the duty-paying regime.

A large part of the complexity of the returns filing procedure can be traced to invoice matching requirements which involve the uploading of invoices with their numbers.

A possible solution could be that invoice matching for intra-State transactions could be done on a summary basis with less granularity by matching GSTR 1 with GSTR 3. The elaborate invoice matching through GSTR 1, GSTR 2 and GSTR 3 which is now sought to be redesigned can be restricted to inter-State transactions.

Finally, there is also a need to specially address the problem of job workers who are a distinct category of their own.

First of all it is important to unify the duty rate for all job workers at 5 per cent. These job workers, unlike units under the composition scheme, work closely for large and medium businesses.

Therefore, the duty paid by them must be allowed as input tax credit to large and medium businesses.

There is, therefore, perhaps a case for a simplified scheme like the composition scheme for job workers with a simple returns filing mechanism but allowing for credits and, therefore, also allowing inter-State sales.

This sector has enormous employment potential and is an integral part of the economic scenario. Hurting them would destroy many livelihoods. To sum up, the success of GST will also have to be judged on the touchstone of how smoothly it integrates small and medium businesses with the mainstream.

Formalisation of the informal is an often stated principle. To achieve this, a number of procedural changes need to be made.

Happily, some have been done at the Guwahati meeting but some still remain. This is a great challenge before the GST administrators but one can be hopeful in the context of the great sensitivity shown by the GST Council in its past deliberations.

The writer is National Leader, Tax & Economic Policy Group, EY India. The views are personal

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