Govt plans concessional GST for small business

Written by Gireesh Chandra Prasad | New Delhi | Updated: Nov 26 2013, 10:58am hrs
In order to make the proposed Goods and Service Tax (GST) palatable to small businesses, the Union government is considering a GST rate much lower than the standard revenue neutral rate for businesses in the annual sales bracket of R25-75 lakh. This incentive is in addition to the total GST waiver for businesses below the R25 lakh annual sales threshold. Also under consideration is a 10-year moratorium on subsuming petroleum products in GST.

Sources privy to the development said the Centres proposals would be placed before states shortly.

The idea is to present the new indirect tax regime acceptable to a large number of small businesses and make it politically feasible, even as the Centre makes significant compromises on the design of GST to get states on board.

The compounded GST rate that is lower than the standard rate will be applicable only on sales within a state by manufacturers, service providers and traders, all of whom will all be categorised as dealers. The special rate will not be applicable on inter-state transactions, however small the value may be, said an official. The combined (Centre-state) revenue neutral rate of GST is likely to be around 16-20%.

The move is expected to benefit the services sector greatly. Now, service providers with an annual turnover of R10 lakh or more have to collect 12% service tax from consumers and pay it to the government. A service provider with R10 lakh turnover can expand sales by seven fold and still pay only the compounded (concessional) GST rate if the proposal goes through. There are 17 lakh service tax assessees now and a sizeable chunk are within the R25-75 lakh range. The exact number of assessees by turnover who may benefit from the nominal rate is, however, not immediately available.

Manufacturers, on the other hand, need to pay excise duty at present only if their turnover is above Rs 1.5 crore. As per the earlier proposal of having only a Rs 25 lakh threshold for all businesses to come under GST, more small manufacturers would have come under the tax net under GST. The lower GST rate will also bring relief for manufacturers in the Rs 25-75 lakh sales bracket as they would need to pay only a nominal amount of tax (not the full GST) in the new regime, as against nil now.

That apart, tens of thousands of traders who now pay state VAT on sale of goods would also benefit from the move. Currently, the state VAT exemption threshold is Rs 5 lakh in some states and Rs 10 lakh in others. While traders above this level pay full VAT rates, those up to Rs 75 lakh would require to pay a lower rate of GST if the Centres proposal is implemented. Of course, since excise/service tax and state VAT collapse into GST, the standard GAT rate would slightly higher than the respective state VAT, but the concession would ensure that smaller traders dont face a sudden increase in rate.

Composition schemes such as this help small businesses by exempting them from detailed compliance requirements. The authorities, on the other hand, can then better utilise their resources for administration of bigger assessees, said Muralidharan R, executive director, PwC. Those availing of the nominal GST rates may not be able to claim input tax credit, he added.

Both the central government and the states will stand to lose revenue on account of the proposal, said a government official who asked not to be named. Proceeds from taxes on inter-state trade called IGST which will replace the current central sales tax (CST), on which the concessional rate will not be available, will go to the Uion government under the new regime and shall not be devolved to states, the sources added.

The Empowered Committee (EC) of State Finance Ministers, which met in Shillong last week is now in the process of sending its recommendations to the Centre, mainly urging the finance ministry to revise the Constitution (115th Amendment) Bill to keep petroleum products, liquor and entry of goods out of GST. Union finance minister P Chidambaram will now examine the recommendations of the EC and responses from the revenue department and take a call on the final form of the Bill. According to sources, Chidambaram is likely to offer a 10-year moratorium on subsuming petroleum products in GST. The Centre hopes that the new proposal would prompt the states to drop their demand for constitutionally barring petroleum products and liquor from GST.

The earlier draft of the Bill had specifically excluded petroleum products and liquor from GST, but the finance ministry revised the Bill based on the recommendations of the parliamentary standing committee on finance, allowing for their inclusion. If these products are not barred from GST constitutionally, Union and state governments will have the flexibility to decide in favour of their inclusion in GST in future without another amendment to the Constitution.