NEW DELHI: A host of small-scale producers could come in the tax net under the proposed goods and services tax (GST) as the draft being examined by states seeks to impose the new levy on units with a minimum annual turnover of Rs 10 lakh.
At present, all taxes and levies have separate threshold levels—Rs 1.5 crore for excise levy, Rs 10 lakh for service tax and individual state limits for value-added tax (VAT), such as Rs 2 lakh in Karnataka and Haryana to Rs 50 lakh in Punjab.
GST will replace all these taxes, with a likely uniform exemption limit of Rs 10 lakh.
The low threshold limit for GST will bring more goods producers and service providers under the tax net and, conversely, a wider base will help keep the rate lower and make it more efficient.
“Threshold value needs to be low for a broader tax base and a lower revenue-neutral rate. However, a lower threshold value needs to be balanced with sector needs and historical perspective,” says Bipin Sapra, partner at Ernst & Young.
The GST is a consumption tax that replaces all indirect taxes including excise duty, service tax, countervailing duty and special additional duty and state taxes including VAT, entertainment tax, luxury tax, purchase tax, entry tax and other local levies.
The new tax will create a seamless pan-India market for both manufacturers and service providers with the right to offset state taxes paid on inputs sourced from another state. GST will also be applicable on imports while exports would be zero-rated.
Small units will be only marginally hurt by a low exemption limit of Rs 10 lakh as they can claim credit for taxes on inputs. Today, a company availing excise exemption cannot claim credit for tax paid on inputs.
North-eastern states that have limited industrial activity and wanted a lower threshold would be compensated for any revenue loss, according to the draft paper circulated to states and the Centre last week for their comments by the empowered committee of state finance ministers. The draft framework would be fine-tuned after the panel’s views are incorporated and made public by early November.
However, tax experts say Rs 10 lakh may be too small a threshold and recommend a higher base of Rs 40-50 lakh. “For small-scale producers, a composition scheme is preferable as they would not be required to maintain detailed records and tax incidence would be lower,” says R Muralidharan, executive director at PriceWaterhouseCoopers. Under a composition scheme, a producer can pay a flat rate of tax without maintaining records but the unit cannot avail the facility of input tax credit.
Small manufacturers may find the proposal difficult to swallow. “While it is in the interest of MSMEs to become part of the VAT chain as it is an efficient way of conducting business, the cost of compliance for very small firms that carry out jobwork for bigger manufacturers could go up substantially,” says Anil Bharadwaj, secretary general of Federation of Indian Micro and Medium Enterprises.
As per the draft paper, GST will have two components on the lines of the Canadian model. This dual GST — a central GST and a state GST — will have two rates: a floor rate, or lower rate, and a standard rate, or the higher rate.
Source : The Economic Times