GST threshold level to bring more small cos under tax net

The goods and services tax (GST), proposed to come into effect sometime next fiscal, will bring in far reaching changes in the country?s indirect tax administration regime, including a uniform threshold at both Centre and state levels of an annual turnover of Rs 10 lakh for goods and services. This will mean many small-scale units and manufactures will be brought into the tax net at the central GST level. At present, the threshold for central excise below which small scale firms do not have to register and are fully exempted is Rs 1.5 crore. For service tax, it is Rs 10 lakh.

Other key proposals in the draft discussion paper on GST, accessed by FE, include cash refund to replace the current scheme of area-based exemptions and a PAN-based identification number for taxpayers. State finance ministers in their meeting last Friday approved the 15-page draft discussion paper.

The proposed uniform threshold could however end up excluding many taxpayers from the GST net at the state level. At present, the threshold for value added tax (VAT) payment varies in different states but is in the range of Rs 2 lakh to Rs 10 lakh. While for most states, it has been kept at Rs 5 lakh, for the northeastern states it is Rs 2 lakh only. Tax experts say the move would exclude most tax payers from the state GST net, as about 60% to 70% of those paying VAT have an annual turnover of Rs 3 lakh to 5 lakh. In fact, the proposed GST model could keep about 90% of the taxpayers in the northeast out of its ambit.

The draft paper also indicates that services too could be taxed at multiple rates. The draft paper includes services in its definition of goods. Goods, it has proposed, will be taxed at multiple rates?a lower rate, a standard rate and a special rate for precious metals. It is however, silent on tax rates.

It also does not throw any light on how and where services like transmission, distribution and telecom will be taxed. It has not said whether such services would be taxed on an originating or end-use principle.

?We still have to look into the issue. But there are certain international principles on this, which we plan to examine and follow,? a senior government official said.

The model for GST, as outlined in the discussion paper, is expected to be finalised on November 10 when the empowered committee of state finance ministers meet Union finance minister Pranab Mukherjee.

As announced earlier, the draft paper has said GST would have three components ? a central GST (CGST), a state GST (SGST), and an inter-state GST (iGST). While the central GST would include central excise duty, additional excise duty, service tax, counter veiling duty, special additional duty and all central-level surcharges and cesses, the SGST would subsume VAT, sales tax, entertainment tax, luxury tax, taxes on lottery, octroi and state cesses and surcharges. But there still needs to be consensus on including purchase tax and octroi in the GST regime, with Punjab and Maharashtra opposed to such a move.

Meanwhile, iGST, to be levied on inter-state trade would be administered and collected by the Centre and the proceeds would be transferred accordingly.

The draft discussion paper has also mooted stringent norms for utilisation of input tax credit. As GST will have a dual structure, where states and the Centre will administer the tax separately, the draft has said there would be no cross utilisation of input tax credit between the centre and the state levels.

States have also agreed to do away with the contentious issue of tax subsidies. The area-based tax exemption in the northeast and states of Himachal Pradesh and Uttarakhand will be replaced with cash refunds. ?The idea is to do away with all exemptions and subsidies and instead give refunds on the actual amount pad as taxes. But how far this will be executed is still to be seen,? the official said.

Like in the case of VAT, GST too will have a compounding scheme, where businesses work contractors, dealers and hotels with a gross turnover of Rs 50 lakh annually can opt to pay GST at the compounded rate. While the floor rate has been proposed at 0.5%, the upper rate will be at 1%.

States have also suggested a comprehensive IT infrastructure for administering GST. In this regard, they have also called for an identification system for taxpayers under GST based on the permanent account number for income tax payers.

The draft paper has also categorically said compensation mechanism to states for loss of revenue for switching over to GST should be fixed by an autonomous body like the 13th Finance Commission and not Government of India.