Impact of GST on Small & Medium Businesses (Including Composition Scheme)

1.  Small & Medium Business Enterprises / Tax
Payers including Non – Profit bodies, Co-operative Societies etc [SME]

SME Sector comprises a
significant component of the Indian Economy. Under the prevailing business
scenario in the country, there are small & tiny business units scattered
across the country in large numbers extensively in the Unorganised Sector. Though,
SME Sector contributes very small portion in terms of taxes, it is very
important to our Economy inasmuch as, it significantly contributes to India’s
GDP, provides employment (directly/indirectly) to a large number of people
& also contributes substantially to the Exports of our Country. Accurate
statistics in this regard are not formally available. However, the following be
noted:

–   According to Annual Report (2015-16) of the
Ministry of Micro, Small & Medium Enterprises, there are estimated to be
about 51 Million MSME businesses, employing more than 117 Million people and
have a combined Fixed Asset value of 15 lakh crore (app).

–   According to other press reports, if the
entire unorganised sector is considered comprehensively on a pan India basis,
the SME businesses in India estimated to be around 51 Million, could be
contributing to 45% of India’s GDP and employing 450 million people (app).

–   It is also estimated that SME Sector could be
contributing around 30% to 40% of India’s Total Exports. 

SME Sector is likely to be severely impacted by the GST
Regime. Hence, the implications on this Sector are discussed hereafter, for the
awareness & understanding of SME tax payers. All references in the write up
to Central GST would cover corresponding provisions under State GST as
well. 

2   Threshold Limits

Threshold Limits are usually provided for imposition of any
tax, so that SME are kept out of the tax net. This is also administratively
expedient as it is difficult to exercise control over large number of SME,
where revenue generated is less compared to administrative costs involved.

2.1 Existing
Position

The present threshold limits for SME under different indirect
tax laws are as under:

a)  Central Excise Act, 1944 (CEA)

•    SSI Exemption Scheme upto Value of Taxable
Clearances of 150 lakh in a year subject to terms & conditions.

•    Concessional Excise Duty (2%) without CENVAT
Credit on Specified Products of mass consumption.

b)  Finance Act, 1994 (Act)

     (Service Tax)

•    SSI Exemption Scheme upto Value of Taxable
Services of 10 lakh in a year subject to terms & conditions.

c)  Maharashtra VAT, 2002

•    Turnover upto 5 lakh in a year subject to
conditions.

•    Composition Scheme for specific businesses
subject to terms & conditions.

2.2  Threshold Limits under GST

a)  The threshold limits under Central Goods &
Services Tax Act, 2017 (CGST) & State Goods & Services Tax Act 2017
(SGST) are as under :

•    turnover upto 10 lakh in a year
(Registration Limit 9 lakh)

•    turnover upto 5 lakh in a year (Registration
Limit 4 lakh) for Specified States.

b)  There is no threshold limit under the
Integrated Goods & Services Tax Act, 2017 (“IGST”) in regard to inter–state
transactions of goods & services

c)  For computing the threshold limit, “aggregate
turnover” is defined u/s. 2(6) of CGST as under:

“aggregate turnover” means the aggregate value of all taxable
supplies (excluding the value of inward supplies on which tax is payable by a
person on reverse charge basis), exempt supplies, exports of goods or services
or both and inter–State supplies of persons having the same Permanent Account
Number, to be computed on all India basis but excludes Central tax, State tax,
Union territory tax, integrated tax and cess;

d)  Under Section 2 (47) of CGST, “exempt supply”
is defined as under :

“exempt supply” means supply of any goods or services or both
which attracts nil rate of tax or which may be wholly exempt from tax u/s. 11,
or u/s. 6 of the Integrated Goods and Services Tax Act, and includes
non–taxable supply;

e)  Notwithstanding the threshold limits stated in
Para (a) above, the following category of persons shall be required to be
compulsorily registered in terms of ection 24 of CGST:

i)   Persons making any inter–State taxable supply

ii)  Casual taxable persons

iii)  Persons who are required to pay tax under
Reverse Charge

iv) Persons who are required to pay tax under
section 9(5) of CGST

v)  Non – Resident taxable persons

vi) Persons who are required to deduct tax u/s. 51
of CGST whether or not separately registered

vii) Persons who supply goods and/or services on
behalf of other registered taxable persons whether as an agent or otherwise

viii)Input
Service Distributor, whether or not separately registered

ix) Persons who supply goods and/or services, other
than supplies specified in Section 9(5) of CGST, through electronic commerce
operator who is required to collect tax at source u/s. 52 of CGST

x)  Every electronic commerce operator

xi) Every person supplying online services from a
place outside India to a person in India, other than a registered person.

xii) Such other person or class of persons as may be
notified by the Central Government or a State Government on the recommendations
of the Council.

3   Composition Scheme – Section 10 of CGST
(Scheme)

a)  The Salient Features of the Scheme are as
under:

i)   Scheme is available to those SMEs whose
aggregate turnover in a financial year does not exceed Rs. 75 lakh (increased
from earlier limit of 50 lakh as per press reports) on an optional basis if the
registered person :

•    is not engaged in supply of services other
than supply of food & services for human consumption [as referred in clause
(b) of para 6 of Schedule II – CGST]

•    is not engaged in making any supply of goods
which are not leviable to tax under CGST

•    is not engaged in making an interstate
outward supplies of goods

•    is not engaged in supply of goods through
electronic commerce Operator (covered by section 52 of CGST)

•    is not a manufacturer of such goods as may
be notified by the govt. 

ii)  All registered taxable persons having the same
PAN number can opt for the Scheme if all such persons also opt for the Scheme:

iii)  The taxable persons opting for the Scheme will
have to pay a fixed percentage of gross turnover as tax. The rates of tax for
Composition Scheme are as under :

iv) SME opting for Scheme would not be entitled to
any ITC.

v)  Taxable persons who opt for the Scheme will
not be allowed to charge GST in their invoice and cannot recover tax from
customer

vi) Scheme is subject to reverse charge provisions
contained in section 9(3) & (4) of CGST

vii) The option availed of by a registered person
under the Scheme shall lapse from the day on which his aggregate turnover
during a financial year exceeds the specified limit of 75 lakh (increased from
50 lakh as per press reports)

viii)Registered
Person opting for the Scheme shall have to comply with conditions &
restrictions stipulated under the Composition Rules notified under CGST / SGST. 

4       Concerns of SME Sector

4.1    Fixation to Effective lower threshold would
expand SME Coverage under GST

a)  The threshold limits under GST regime, as
stated in para 2, above, is likely
to bring a large chunk of SME Sector under GST inasmuch as :

•    Present exemption limit of 150 lakh under
central excise is reduced to 20 lakh under GST;

•    Presently, a tax payer having business
across different states in India, is entitled to the benefit of threshold limit
in each State. Under GST, in such cases, the threshold limit would be available
on an all India
basis; and

•    Compulsory Registration irrespective of
threshold limit for large number of specified tax payers as stated in para 2.2(e)
above, would result in substantially higher registrations.

b)  Compared to the threshold exemption scheme
presently prevalent which is applicable to taxable turnover (Central Excise
& Service tax,) effective threshold limits under GST would be very low
inasmuch as :

•    for computing, aggregate turnover, taxable
and exempt supplies of goods & services & export turnover is to be
considered

•    “exempt supply” would cover non taxable
supplies.

     These factors would make the effective
threshold limit for Registration under GST very low & increase
registrations in SME Sector substantially:

     It has been provided in section 23(1)(a) of
CGST that a person engaged exclusively in the business of supplying not taxable
/exempt goods & services shall not be required to be registered. However,
even with a nominal taxable supply of goods /services, registration may become
necessary if the aggregate turnover exceeds Rs. 20 lakh.

     A significant fall out of the above, is
that such persons would be hit by provisions of section 9(4) of CGST discussed
in para 4.2 hereafter.

c)  Even in cases covered by section 23(1)(a) of
CGST, Registration would become necessary, in regard to cases covered under
Reverse Charge Provisions [viz section 9(3) of CGST.]

d)  Since the threshold limit of 75 lakh
(increased from 50 lakh as per press reports) for Composition Scheme would
cover exempt / non–taxable Supplies, the effective exemption limit would be
very low. In this regard, it is pertinent to note that, in the Union Budget for
2016-17 the turnover limit for presumptive taxation (for Specified Business)
has been increased from 1 crore to 2 crore.

4.2    Tax on purchases by registered persons from
unregistered persons 

The relevant
extract of section 9(4) of CGST is reproduced hereafter :

The Central tax in respect of the supply of taxable goods or
services or both by a supplier, who is not registered, to a registered person
shall be paid by such person on reverse charge basis as the recipient and all
the provisions of this Act shall apply to such recipient as if he is the person
liable for paying the tax in relation to the supply of such goods or services
or both.

It is very likely that a large number of SME businesses
(traders, service providers etc.) could be within threshold limit of Rs.
20 lakh and hence strictly not required to be registered under GST. However, as
stated above, a most unprecedented provision has been made under GST law, to
the effect that if a registered person purchases goods/services from an
unregistered person, he is  required to
discharge tax liability under reverse charge basis on such purchases without
any threshold limit.

This provision is most
absurd and defies any rationale inasmuch as the govt. on the one hand has given
threshold exemption and at the same time, has indirectly taken it away on the
other hand. It would increase compliances (preparation of invoices for each
procurement) for the registered SME and also increase costs of doing business.
Another implication is, due to increased compliances, registered persons may
avoid dealing with unregistered SME. This could drive away lakhs of SMEs out of
business & affect their basic survival & livelihood.

4.3    Hardship Provisions relating to Input Tax
Credit (ITC)

a)  No ITC in cases where tax is not paid by the
supplier

     Section 16(2)(c) of CGST provides that no
ITC can be claimed, by a taxable person who receives the goods/services, in
cases where the GST is not paid by the supplier of goods & services.

     This is a highly draconian provision in GST
without any sound justification & rationale inasmuch as a taxpayer
receiving goods / services and making valid payment (with tax) to the supplier
would be penalised for default committed by the supplier (non – payment of
tax). Instead, in such cases, the supplier should face stiff penal actions.
Instead, a compliant tax payer is being penalised, for no fault of his. 

     It has
been a very well settled practice, under MODVAT (CENVAT) Credit Mechanism which
is prevalent under Central Excise / Service Tax for the past 30 years, to the
effect that, if the manufacturer / service provider availing credit has
properly and validly received goods / services supported by duty / tax paid
document and has taken reasonable steps to ensure that there is no malafide
evidence from the duty / tax paid document issued by the supplier, such
manufacturer / Service provider is entitled to Credit and Credits cannot be
reversed even in cases where it is subsequently found that the supplier has not
paid the duty / tax to the govt. There is no convincing reasoning / justification
provided as to why this settled practice is being done away with under GST.

    This provision would create unprecedented
hardships to Trade & Industry particularly in the SME Sector which is
always short of working capital and is contrary to the cause of “ease of doing
business” in India. 

b)  Matching, Reversal & Reclaim of ITC

     Under the GST regime, all GST registered
businesses are required to uplift all supply information through the GSTN
portal by the 15^th day following the close of a month. In order to
claim an ITC, the purchaser must upload all purchase information by the 15^th
day following the close of that month. A credit will only be available where
the purchaser’s invoice matches the sales invoice uploaded by the supplier and
the GST has been paid.

     Under this approach, it will be almost
impossible for a business to claim its credit entitlement on a timely basis.
The delay in claiming credits and the costs associated with managing this
system alone will unnecessarily increase the working capital of SME businesses,
eroding one of the benefits of moving to a GST system.

c)  Reversal of ITC in case of non – payment to
supplier

     In cases where a registered person avails
ITC but payment is not made to supplier within 180 days from the date of issue
of invoice, such registered person is required to reverse such ITC and also
liable to pay interest from the date of availment of ITC till the date of
payment. It is further provided that, such registered person shall be entitled
to claim ITC upon payment.

     This would adversely impact the SME Sector
who usually operate with low margins and under severe working capital
constraints.

d)  Denial of ITC in case of non –
compliances 

Some
examples are as under :

i)   No ITC would be available during the period
for which a tax payer is not registered.

ii)  Non – filing of GST returns for a consecutive
period of six months (3 Returns in case of Composition Scheme), would result in
cancellation of the GST registration. The fallout of this provision is onerous,
inasmuch as a cancellation of registration under GST shall be deemed to be a
cancellation of registration under GST. Further, once registration is
cancelled, ITC would be denied to the customers of such taxpayer.

iii)  Section 16(2)(d) of CGST provides that
registered taxable person shall not be entitled to ITC unless he has furnished
Return u/s. 39.

     The above provisions are too harsh inasmuch
non – compliances could happen due to variety of reasons and would adversely
impact SME Sector who operate with limited infrastructure.

4.4   Working Capital Blockages & Constraints 

     In addition to the hardship provisions
relating to ITC stated in Para 4.3 above,
the following provisions under GST, would also result in working capital
blockages & impact cash flows of SME Sector :

a)  Unlike the practice prevalent under current
indirect tax regime, under GST regime, stock transfers to own branches would be
taxable. With GST being paid on the date of transfer but Credit becoming
available only when stocks are liquidated by the receiving branch, cash flows
would be severely impacted.

b)  Merchant Exporters’ Business Model is widely
prevalent in the SME Sector. Under the existing indirect tax regime, Merchant
Exporters procure goods from exempted SSI units without excise duty and without
payment of State VAT in terms of declaration filed for export. However, under
the GST regime, suppliers’ would charge GST/SGST/IGST to the Merchant
Exporters. Upon payment, Merchant Exporters would have to claim refund. Though
it has been provided that 90% of the refund claims would be granted
provisionally within 7 days, delays are very much likely. This is likely to
create huge cash flow constraints for SME Merchant Exporters’ and cause
hardships.

4.5    Substantial Increase in Compliances 

It is widely known that the SME Sector operates with a very
limited skilled infrastructure. The level of statutory compliances, at the present
itself, is very high. Since GST would work on total automation, compliance
level is likely to increase substantially. Under GST, 3 Returns would be
required to be filed every month and 1 Annual Return. In case TDS provisions
are applicable, there would be additional compliance. The compliance costs are
likely to increase substantially for the SME Sector (including non–profit
bodies, Co-operative Societies etc.).

4.6    Recommendation

Considering the peculiar business scenario in the country and
the circumstances under which SME Sector operates, their significance in the
Indian Economy and practices prevalent worldwide, the following is recommended: 

–   Threshold
limits (including composition) should be rationalised. In this regard,
Threshold for presumptive taxation under income tax, be considered.

–   Scope of
Composition Scheme should be enlarged to cover specific businesses (as
successfully prevalent under present State VAT regime).