Arun Jaitley addresses a press conference after GST Council meeting in New Delhi. (Source: PTI)

GST Council Raises Exemption Threshold, Expands Composition Scheme

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GST Council Eases Small Businesses’ Woes

The GST Council today gave relief to small businesses by increasing the Goods and Services Tax exemption limit from Rs 20 lakh to Rs 40 lakh and extending the composition scheme to service providers.

The new exemption threshold—the minimum annual turnover for businesses supplying goods to register under the GST—will be effective from Apr. 1, 2019, Finance Minister Arun Jaitley told reporters. For hilly states and those in the North East, the threshold has been doubled to Rs 20 lakh.

States can decide if they want to maintain the exemption limit at Rs 20 lakh or Rs 40 lakh in a week. However, the threshold for mandatory registration of service providers would remain at Rs 20 lakh and Rs 10 lakh in special category states, according to a statement by Ministry of Finance. The higher exemption threshold will allow around 20 lakh taxpayers to opt out of GST if they choose to.

Revenue Secretary Ajay Bhushan Pandey told BloombergQuint that states opting for different registration thresholds will not lead to any distortions as the exemption limits are only for those taxpayers doing business within a state. He said it’s difficult to estimate how much revenue the government will forgo from the threshold limit hikes.

“We have only estimated the outer limit, say if 50 percent of dealers go out of the system, then the revenue implication could be Rs 2,000-Rs 3,000 crore,” he told BloombergQuint. “But that’s only an estimation and the actual amount could be much lower.”

Also read: Public Credit Registry Better For SMEs Than Special Norms, Says RBI Deputy Governor Viral Acharya

Sachin Menon, head-indirect tax at KPMG, hailed the move to raise the threshold as a “bold step”.

“I think it’s a bold step… that would take away almost 50-60 percent of the total registered filers from the tax bracket,” Menon told BloombergQuint. “That makes sense because the total tax they are collecting from this bracket is equal to the cost they are incurring to collect it. I think it is just about 2-3 percent of the total revenue.”

In Sync With Former CEA’s View

The move finds resonance with the former Chief Economic Adviser Arvind Subramanian, who in his report on the indirect tax in 2015 had suggested that the registration threshold should be kept at Rs 40 lakh.

Setting exemptions to the threshold must balance three considerations, Subramanian had said. They are:

  • Minimising the burden on small taxpayers would call for higher thresholds.
  • A high threshold achieves social objectives because poorer households are more likely to buy from smaller shops.
  • A high threshold not only risks foregoing revenues but also undermines the value-added chain that is so critical for the governance benefits of having a GST.

Also read: Does Arvind Subramanian Believe India’s GDP And Fiscal Deficit Data?

The GST Council has also extended the composition scheme—that allows small businesses to pay taxes at a lower rate without receiving input tax credit—to service providers with annual turnover of Rs 50 lakh.

Taxpayers providing only services, as well as goods and services, can now avail composition scheme. The GST rate for services under composition scheme has been fixed at 6 percent—comprising 3 percent central GST and 3 percent state GST. The council has also raised the existing composition scheme turnover threshold to Rs 1.5 crore and special category states have been given a week to decide their respective limits.

Taxpayers availing the composition scheme from April 1, 2019 will have to file one annual return but pay the tax on a quarterly basis.

The increase in the threshold and reduction in the return filing requirements to once per year for composition dealers would reduce the number of returns to be filed on the GST portal and reduce the overall load, said MS Mani, a partner at Deloitte India.

A traders’ body concurred that the move will be a fillip to small businesses. The decision by the GST Council to give relaxation to small traders will certainly take the taxation burden out from large number of small traders in the country, the Confederation Of All India Traders said in a statement.

Free accounting and billing software will be made available to small taxpayers with annual turnover of Rs 1.5 crore, Jaitley told reporters.

Kerala Can Levy Disaster Cess

The GST Council also approved the proposal of a ministerial panel to allow Kerala to impose natural calamity cess of 1 percent on intra-state supply of goods and services. The cess will be levied for two years.

Introduction of a cess distorts the GST structure to some extent and the simplicity it seeks to achieve, said Abhishek Jain, an indirect tax partner at EY India. “While this additional levy should help Kerala victims, companies as well as GSTN would need to modify their IT systems for incorporating this change.”

Also read: Government Says It’s Taking Steps To Trace Missing GST Filers

Other Decisions

  • A seven-member group of ministers will be constituted to examine whether a composition scheme can be introduced to boost the residential segment of the real estate sector.
  • A proposal before the council was to reduce tax on under-construction properties by denying them input tax credit. Delhi Deputy Chief Minister Manish Sisodia said he suggested that reducing GST on such properties will make affordable housing expensive.
  • A group of ministers shall be constituted to examine the tax rates for lotteries.

Also read: Government Wants To Lower GST On Under-Construction And Finished Houses: Modi

'Bold Step'

Tax expert Sachin Menon has called raising the threshold a bold step because it takes away more than half of the taxpayers in the bracket.

I think it a bold step for the government to raise the threshold limit to Rs 40 lakh for the taxpayers and that would take away almost 50-60 percent of the total registered filers from the tax bracket and that makes sense because the total tax they are collecting from this tax bracket is equal to the cost they are incurring to collect it. I think it is just about 2-3 percent of the total revenue.
Sachin Menon, Head-Indirect Tax, KPMG

Different Thresholds Won't Make A Difference, Says AB Pandey

Revenue Secretary Ajay Bhushan Pandey does not see any impact even if different threshold are adopted by the few states, he told BloombergQuint.

"Today also we have different thresholds for special category states."

  • More than 20 lakh dealers will be eligible to avail the benefits of today's decisions.
  • Will have to see how many actually take advantage of the exemption limit hike or the Composition Scheme.
  • Exemptions don't apply to inter-state sales; they will have pass on the input credit to the other states, and for that they'll have to get registered.

He added that it is difficult to estimate how much revenue will be foregone from the various threshold limit hikes.

We have only estimated the outer limit, say if 50 percent of dealers go out of the system; then the revenue implication could be Rs 2,000 crore-Rs 3,000 crore. But that’s only an estimation & the actual amount could be much lower
Ajay Bhushan Pandey, Revenue Secretary 

Attempt To Match Pre-GST Regime, Says Ritesh Kanodia

The moment a taxpayer opts for Composition Scheme, he will have to pay tax on the entire value, said Ritesh Kanodia, partner at law firm Dhruva Advisors.

  • By expanding Composition Scheme, the Government is trying to help small tax payers who are not in a position to file returns in time.
  • It's an attempt to match the pre-GST regime.
  • Downside is that they pay tax at the composition rate and don't get to claim credit.

Tune in for detailed analysis on the key decisions of the 32nd GST Council meeting.