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GST Panel Likely To Discuss Capital Market Issues In Meeting Today

A presentation will be made by the ‘Capital Markets’ division under the Finance Ministry before the committee.

An employee uses a telephone inside the India International Exchange operated by India International Clearing Corp.
An employee uses a telephone inside the India International Exchange operated by India International Clearing Corp.

The Goods and Services Tax Officers Committee, comprising of central and state government officials, is likely to discuss removal of transactions made in securities from the category of ‘exempt supplies’ or ‘turnover’ in its meeting today.

Currently, income from securities is considered as an exempt turnover, since securities are classified neither as goods nor services in the new indirect tax regime. Businesses which get a part of their income from exempted goods do not get full input tax credit, in turn adding to their costs.

A presentation will be made by the ‘Capital Markets’ division under the Finance Ministry before the committee, likely for removing such income from the exempted turnover category, an official in the know of the development told BloombergQuint requesting anonymity.

What Is Exempt Turnover?

Profits made by companies from trading in securities is categorised as an exempt turnover, while they have a taxable turnover from their regular business activities. The companies or businesses that have an exempted turnover besides a taxable turnover, cannot avail input tax credit proportional to their exempted income under GST.

As per the explanation for reversal of input tax credit under chapter 5 of the central GST rules 2017, “the value of security shall be taken as one percent of the sale value of such security.”

For example, if a businessman trades in securities and earns Rs 40 lakh as 1 percent sales value of such transactions, this amount would be his exempt turnover. If his turnover from primary business is Rs 2 crore, then the ratio of his turnover to the exempted turnover, 20 percent in this case, would be reversed from his common input tax credit balance.

This means that he will not be able to avail 20 percent of his common input tax credit, and will add to his costs, explained Niren Shethia, partner-indirect tax at PwC India.

Companies Crying Foul

Companies, which are earning such exempt turnover, are of the view that as they are not being able to avail the entire input tax credit that they are eligible for leads to increase in their costs.

Globally, transaction in securities is not considered as exempt turnover, and therefore, does not impact the input tax credit balance, said Shethia.

Government can consider eliminating treatment of transactions in securities as exempt turnover since it adds to the tax costs of doing supplies.
Niren Shethia, Partner-Indirect Tax, PwC India

Companies are arguing that their income from securities is just a return on investment, and not business activity, said Abhishek Jain, partner-indirect tax at EY India. Therefore, they are seeking the law should be amended, so that they are not required to reverse input credit from income through securities, he said.

“Like in the case of businesses that deal in exempted items (like loose wheat, rice) as well as taxable items, input credit is reversed proportional to their turnover of exempted goods. In the case of income from securities, it is an investment, and not business activity,” Jain explained.

Widening Composition Scheme

The Officers Committee on GST may also allow certain service providers to avail the Composition Scheme, and simplify return filing process by mulling furnishing of a single return from next financial year, two government officials told BloombergQuint.

Job-works, currently treated as services, may be allowed to be a part of composition scheme, one of the official cited above said.

Also, taxpayers who provide services of about Rs 5 lakh a year additionally may also be allowed to opt for composition scheme, the same official said. This proposal was also discussed in the GST Council’s meeting in Guwahati, and requires a change in the law, he said.

What Does It Offer?
Under the composition scheme, traders and manufacturers pay a flat goods and services tax rate of 1 percent of their turnover.

For example, a small taxpayer who sells washing machines and provides a maintenance service for a fee, would be allowed to avail the composition scheme. His turnover from services provided should not exceed Rs 5 lakh a year, the second official explained.

But, not all service providers will be allowed to opt for the scheme as it is high value addition task, the second official said. Allowing all service providers to avail the scheme would mean significant loss of tax for both states and central government, he added.

The proposal after it is cleared by the Officers Committee will be tabled before the GST Council on Jan. 18.

It will be a relief to the industry if composition scheme is extended for job work, however the rate of GST would be higher than 1 percent, said Pratik Jain, national leader-indirect tax at PwC India.

Simplifying Tax Returns

The panel is going to discuss simplification of the return filing process under GST, and is likely to finalise filing of a single return under the new indirect tax regime from next financial year, officials said.

There are several options being considered which include merging GSTR 1 and GSTR-3B by including additional tables in GSTR-1, the first official quoted above said.

If this happens, then taxpayers will have to file just one return, he added. This will not require much changes in the system, and can will be implemented from the next financial year, the official said.

Matching of invoices to check evasion would be done by the system, and taxpayers will be questioned if their purchase and sale details do not match, he said.

Other option, according to the second official, is to consolidate GSTR-2 and GSTR-3. But he assured that if this proposal goes through, enough time would be given to taxpayers as they will have to change their systems.