Goods and services tax (GST) tax returns filed for the July to September 2017 period by firms under the ‘composition’ scheme suggest there is massive tax theft by smaller taxpayers. The composition scheme is a special one to make GST filing easier for small firms; apart from simpler tax procedures, the returns have to be filed once a quarter. To that extent, the government’s plan to bring in the e-way bill and other ways to plug tax theft are quite justified. While there are roughly 15 lakh small firms registered under the composition scheme today, the number was around 10-11 lakh in September. Of these firms, around six lakh filed their returns for July-September by December 24. The total tax they paid was around `250 crore. Assuming a 2% tax incidence on their turnover — it is 1% for traders, 2% for manufacturers and 5% for restaurants — this means these firms had an average turnover of Rs 2 lakh in that period, or Rs 8 lakh for the full year if you annualise the data. The problem, however, is that firms that have a turnover of less than Rs 20 lakh a year, don’t even need to pay GST or file returns. In other words, these firms are understating their returns in a big way. “The government would need to audit some of these companies to find out why firms with small turnover even registered for the composition scheme, given that buyers don’t even get any credit for purchases made from ‘composition’ dealers,” says Abhishek Jain, a partner at EY.
In an attempt to make GST filing easier, most politicians/analysts want the limit for the composition scheme to be hiked. While the turnover limit was Rs 75 lakh earlier, it was raised to Rs 1 crore in October and to Rs 1.5 crore in November. The tax rate for manufacturers was even lowered to 1%. However, these provisions are applicable only from the January to March 2018 quarter. And firms that have a turnover of below Rs 20 lakh a year don’t have to pay any tax at all. This data, however, suggest there is no need to hike the composition scheme limit at all. Indeed, the limit may even need to be reduced to prevent such rampant abuse. Tax officials suspect large-scale evasion in the form of under-reporting of sales and overstatement of credit claims. But since the GST Council has suspended the invoice-matching mechanism till March, the department is deprived of any meaningful tool to identify revenue leakages. GST revenue in November declined for the second straight month to just over Rs 80,000 crore, lower than the October collection of Rs 83,000 crore. The average mop-up in the first three months of GST was around ~92,000 crore.