Low limits for service tax exemption

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: Several of our members are concerned about the changes in indirect ta-xes proposed in Budget ‘05-’06, such as the SSI exemption scheme. What are the key proposals and their likely impact on SMEs?

— Indian Industries Association, Lucknow

The Budget proposals contain many relevant changes: SSIs had three options with respect to excise. First, SSIs could opt for complete exemption from excise up to production of dutiable goods worth Rs 1 crore, but credit for excise paid on input was denied to the unit. Second, the unit could opt for paying 60% of duty applicable on the final product and could also avail of credit on the duty paid on inputs. The third option was the general route: paying duty from zero production and availing credit on inputs.

The Budget proposes to withdraw the second option, initially meant to help progressive SSIs intending to graduate from complete exemption to integration with the Cenvat chain. The move was widely criticised, and may be reversed.

It is also proposed that SSIs opting for excise exemption, file a declaration to the concerned authorities once they cross the turnover of Rs 40 lakh. Earlier, this applied for turnover over limit of Rs 90 lakh. SSIs fear increase in excise inspector visits due to this.

Though the limit for excisable goods for exemptions remains pegged at Rs 1 crore, the Budget proposes to increase the total turnover criteria for eligibility for excise exemption from Rs 3 crore to Rs 4 crore. This move is not seen as a concession of any consequence.

Service providers, whose aggregate value of taxable services provided during the preceding financial year was up to Rs 4 lakh, have been exempted from service tax up to an aggregate value of taxable service of 4 lakh in a financial year. A very large number of small and tiny units doing job work have come under the purview of service tax. The affected group feels the threshold limit is unrealistically low and should have been at least Rs 25 lakh. It is substantially low even going by the criteria of definition of Small Scale Service and Business Enterprises (SSBEs), where the investment limit is currently Rs 10 lakh. The affected units compare the SSI investment limit of Rs 1 crore and the excise exemption limit of the same value.

The Budget has proposed to put the liability of registration, collection and remittance of service tax, on any firm that avails services of transporters. The threshold limit proposed is of freight value of Rs 750 per consignment, and therefore, impacts almost all firms. The small businesses term it as unjustified.

Does the issue of delayed payments covered under the proposed Small Enterprises Development Bill? What is the status of the Bill and is there any change from the draft circulated in 2000?

— Gupta Cables Pvt Ltd., Bhubaneswar

The issue of delayed payment does not figure in the Bill. Experts, however, feel that in view of the all-encompassing nature of Bill, it should have addressed the issue of delayed payments. Perhaps, the government does not intend to subsume under the new Bill, the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 (further amended in 1998).

Currently, the Bill is in Parliament for consideration. From the draft that was in circulation in 2000, several changes could be expected when the Act gets finally notified. The title itself is expected to be changed from ‘Small Enterprises Development’ to ‘SME Development’.

The Bill is a legislative initiative to bring in policy and development measures under a statutory body: National Small Enterprises Development Board. It attempts to provide some kind of a ‘legal legitimacy’ to the guidelines that the Board would issue on subjects such as registration, finance, public procurement and marketing support. The Bill focuses on reduction of the regulatory burden of labour laws by reducing the statutory reporting and inspections.

There is a fair amount of scepticism with regards to the Bill. First, it is observed that reduction of ‘inspector raj’ is a challenging task through a single Act, as there are powerful central line ministries such as labour and finance, which have their own priorities. Second, it is felt that the reforms have streamlined the processes at the central government level and much of the harassment now is not due to central laws but due to rigidities encountered by SMEs at the level of states. Third, experts express doubts on the efficacy of the Board keeping in view of its large membership at 93, of which 53 are likely to be from the bureaucracy.

It is still seen as a welcome step, no matter how incomplete it is, at this moment.