Govt needs to simplify GST returns, not remove such a large segment from filing returns. It will hit tax compliance.
With the general elections coming closer, the government is keen to reduce the pain caused to millions of small businesses across the country since, were this not to be done, it could result in negative voter sentiment. Sushil Kumar Modi, one of the ministers in the group of state finance ministers constituted to find solutions to the MSME problem, told FE that one of the suggestions was to raise the GST threshold from Rs 20 lakh right now to Rs 75 lakh. As a result, the argument is, a large number of units will no longer have to file GST returns and so will no longer feel aggrieved. The move may not have any great revenue implications either since the data shows that roughly a fourth of the 1.2 crore firms registered under GST have a turnover of Rs 20 lakh to Rs 1 crore, but these account for just 5% of total GST collections.
The argument of raising thresholds to stop harassment of many, however, is an old one, and applies to all taxes, not just the GST. In the case of personal income taxation, for instance, over 65% of returns filed in FY17 were by those who earned less than Rs 5 lakh a year, but these accounted for just 35% of the income declared; in terms of the tax collections, the share will be much lower since the tax bracket is the lowest in the country. The top 10% of returns, on the other hand, account for around 38% of the total income declared. Yet, tax authorities don’t increase the minimum threshold to Rs 5 lakh or even more, do they? The reason for this is that there are a much larger number of people in the lower-income brackets and larger compliance there still results in large collections. The total income declared by those in the Rs 5-10 lakh income bracket, for instance, was Rs 786,871 crore in FY17, leading to income tax of Rs 157,374 crore at full compliance, given the tax rate of 20% in this bracket; each 10% increase in compliance gives the taxman Rs 15,700 crore, not an amount to be sneezed at.
In the case of small businesses filing GST, rather than asking them not to file at all by raising the threshold to Rs 75 lakh, what is more important is to ensure tax filing is simple for them. There is, even now, a composition scheme for those earning under Rs 1.5 crore—the 20 lakh firms registered under this pay GST of less than Rs 3,000 crore in a year—and all that is required here is a simple form. But this scheme doesn’t apply to service sector firms or those who are operating in more than one state. A simpler solution, then, would be to either extend the composition scheme to services firms and extend it to even firms with inter-state sales. Another option, if this is not possible, is to simply allow firms with a turnover of, say, Rs 50 lakh per year to file a single-page return every six months with just their name, turnover and some details like that. Since most of these firms will be dealing with—buying or selling—large firms, and the latter upload their invoices onto the GST platform anyway, this serves as an evasion-check for even the smaller firms who file just a summary return. If firm A shows a turnover of Rs 33 lakh for the year, but its purchases from large firms—whose invoices are on the GST portal—show purchases of Rs 42 lakh, the GST authorities can, at any point, ask it to explain the discrepancies. This meets the needs for both bringing in as many people into the GST net while, at the same time, avoiding undue harassment.