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Hasty Implementation of GST may end up 'eating up' Small & Tiny Businesses!

TIOL - COB( WEB) - 516
SEPTEMBER 01, 2016

By Shailendra Kumar, Editor

AFTER a protracted gap the Empowered Committee of State Finance Ministers on GST met the industry and trade associations' representatives in the capital last Tuesday. It was indeed a welcome step in the direction of implementing the historic Goods & Services Tax (GST). For an interesting change, the State Finance Ministers also pointedly asked the industry the most fundamental question or call it the much talked about benefit of the GST system - Whether, if the GST rate is kept low, the businesses in India would pass on the benefits to consumers. Though it is the most pertinent question to ask but its answer is certainly not as simplistic as any member of the EC may have believed it to be. Secondly, no answer to such a question at this stage would have any elements of promisory estoppel. Thirdly, if one goes by the pages of history, it would perhaps not happen. So, it is certainly not the commitment but competition alone which may ensure a market-driven reduction in the prices of goods and services in the years to come. Thirdly, such a question is truly ill-timed. The Empowered Committee should have discussed the major components of the proposed system such as registration, number of returns, tax payments, availment of input tax credit, refund, audit and many others.

Ideally, the Empowered Committee should have discussed the cost of compliance under the proposed system. In fact, it would have been desirable if the economy would have been split into three major heads in the goods category and also under services category. One head could have been that of large taxpayers which account for major chunk of the revenue kitty. Since they would have a different set of technical, procedural and software issues, they deserve to be met separately for their views. There would be uniformity in the character of feedback received from such a group. Their problems would be consisting of issues like stock transfer, free items along with the paid ones, provision for returned goods, branch to branch transactions, related party transactions, classification, valuation of goods and services, transition-related issues, availment of credit, input-output matching of invoices etc.

The second category would have included medium-scale industries. They would also have their own set of problems if the GST laws are implemented in the present form. And the third head would have been that of small and tiny units which are highly vulnerable to not only the vagaries of the business climate but also any extra ounce of burden put by an amended tax provision. Here, we are talking about a completely new system which is going to send ripples across all the 'bricks' of a small business. The taxonomy would have been the same for the businesses from the services sector.

Since compliance for industries from all these pluralistic categories is a complex issue, I intend to focus on the most vulnerable category of small and tiny businesses in this column today. Undoubtedly, small businesses contribute marginally to the tax kitty but they account for more than 40% of the GDP and also the job sector. Their contribution cannot be undermined merely because they chip in paltry amounts to the Consolidated Fund of India (CFI). Secondly, even a cursory glance at the VAT horizon across the globe tends to reveal that every VAT Regime takes extra pain to provide an easy and friendly compliance matrix to small businesses. How does one define small and tiny businesses? One simple threshold could be the exemption limit which is Rs 10 lakh for the services and Rs 1.5 Crore for goods manufacturers. Let's presume that the threshold of Rs 10 lakh is not enhanced in the final Model GST, in such a case it would be asphyxiating framework for tiny businesses. As per the Draft Model Law, if one crosses Rs nine lakh limit, one would be required to take registration which would mark the beginning of another harrowing journey for them. Ideally, every good VAT system allows ONE TIME crossing of the threshold limit in a year. Whether it is going to be Rs 10 lakhs or Rs 25 lakhs as proposed by the Centre, one time crossing of the Circuit should be made permissible.

Let's now move to those who are above the exemption limit but fall in the range of Composition Scheme or call it flat rate scheme. As a first step, they would be required to take is to go for registration. If they happen to do business in several States, they would be required to take multiple registrations. As per the proposed scheme, if one prefers to do business with Six States, one would be taking more than a dozen registrations. First, the focus should be to make it one or two registrations only. Or, there can be a centralised registration for such small units. Then comes the return filing which would be many dozen if one adds up the monthly and yearly returns. First, this number should be reduced, and secondly, a special and simple return should be designed for better compliance. For instance, UK provides 10 boxes in its return form for small businesses. If we visit Singapore there are only seven boxes. Even if India goes for even 12 boxes, it would be a great step forward in the direction of facilitating small businesses for better compliance behaviour. What is further required to be done is to launch a simple APP for small businesses. But why only for small businesses?

Let's first visit small towns in India. A good number of townships will either have no internet or will have poor connectivity. Secondly, power is a scarce commodity. Since a good number of small units may not be IT-savvy and may also not have internet and computer, it would be more pragmatic to connect with them through their mobile handsets. Since mobile penetration is more prominent, an App-based return-filing can be a simpler system if manual interface is to be completely erased. In fact, such an App should also allow one to send SMS in parts and such SMSes should be integrated by the APP into a formatted return which can be automatically transferred to the GSTN Server. Such a compliance facilitation platform would go a long way in widening the tax base which happens to be one of the primary goals of the GST system.

What about the cost of compliance? Let me presume that going by the number of returns to be filed and the registration, even if a consultant or a CA or any other facilitator charges only Rs 8,000/- a month it would be about Rs one lakh a year. If the profit margin of a small business is only about 12 lakhs a year, the compliance costs would account for above eight per cent. And, if the profit is in the range of 25 lakhs it would be about four per cent - it is still too steep, and would dissuade a taxpayer from complying with the tax laws. Ideally, the compliance costs for one particular tax should not cross 1% to 1.5% of the profit margin. Secondly, it must be remembered that there is no business which promises only profits, loss is a part of every business. So, if one records losses in a particular year, it further dilutes the willingness to comply with the tax laws.

In this background, the two objectives which must not be lost sight of are - 1) The exemption threshold should be high enough to encourage small businesses to grow and join the tax net on their own. Since growth is the uncompromising goal of every business, all small businesses if they offer values and can survive competition in today's world, would become bigger, employing more unskilled, semi-skilled and skilled hands, and would finally join the credit chain; 2) if the threshold is kept low to widen the tax net, it must be kept in mind that a very simple compliance regime should be carved out so that tax evasion does not come to their mind as the only option. After all, lesser compliance burden automatically leads to widening of tax base.

Let's hope in the haste to implement the proposed reform, our policy makers do not lose sight of small businesses and forfeit the historic opportunity to put in place a simple indirect tax system and widen the tax net as much as possible. Secondly, they also need to ensure that in their excitement to widen the tax base, they should not end up killing the small and tiny businesses - many of them generally end up becoming big and large, creating more jobs and contributing more to the overall tax kitty, not only through indirect taxes. Yet another point which must be kept in mind is that dual administration should be avoided at least for small businesses. More than one tax administration would create confusion and may lead to extortion which is a dominant feature of the present day VAT regime in the States. Since States are going to tax services for the first time, such a precaution is the need of the hour as there is bound to be mess for the initial few years. And, since small businesses do not have generally comforting capital base, they cannot survive through implementational mess running into several years. So, this calls for a special hand-holding tax regime for them. I am sure our political masters would take due care before the final roll-out of GST!