AUGUST 25, 2017

By BSV Somanath

SECTION 10 (1) of CGST Act, 2017 governing the "Composition Levy" lays down that - "a Registered Person, whose aggregate turnover in the preceding financial year did not exceed 75 lakh rupees, may opt to pay, in lieu of the tax payable by him, an amount calculated at such rate as may be prescribed, but not exceeding,-

(a) 1% of the turnover in the case of a manufacturer

(b) 2.5% of the turnover in the case of restaurant/Hotel services

(c) 0.5% of the turnover in the case of other suppliers"

Further, Section 10(4) of the CGST Act, 2017 reads -

"A taxable person to whom the provisions of sub-section (1) apply shall not collect any tax from the recipient on supplies made by him nor shall he be entitled to any credit of input tax".

The general principle of Indirect taxation is that the tax is paid by someone and ultimately the same is borne by someone.

Then, how to describe this Composition levy which has been paid and not collected. Is this levy not akin to the Income Tax under Direct Taxes, which is paid and borne by the individual?

Naturally, this provision begs for a comparison with the situation prevailing earlier.

Under the Central Excise Act, there existed a Notification No. 01/2011-CE dt 01.03.2011 as amended providing exemption to certain goods from payment of excise duty in excess of 1% /2% adv without the benefit of Cenvat Credit on inputs. There was no facility to avail the duty paid @ 1% or 2% as Cenvat credit to the buyers. But the important aspect is that of there being no provision to deny the collection of tax paid @ 1% or 2% by the sellers from the buyers. The reason is simple. The Central Excise duty is an indirect tax.

The denial of Cenvat credit to the manufacturers and the buyers of the said products was there under the Central Excise Act and is similarly retained under the GST Act too. Then, is there any rationale for having such a restriction of making suppliers under the "Composition Levy" under the GST Act to not collect the tax from the recipients on the supplies made by them?

The impact of such restriction is illustrated here:

The cost of goods supplied in a restaurant : Rs. 1000

The Tax of GST Paid @5% : Rs. 50

The total cost of provision of service to be collected from the customer/recipient : Rs. 1050

If the supplier of service is not allowed to collect the tax of Rs. 50 from the recipient, then it will severely dent the profit margin of the suppler in a transaction where ITC is denied to the supplier and the recipient. If the profit margin of the above mentioned supplier is only 5%, then the composition scheme instead of being of any help to him, will push him into losses. The scheme if allowed to continue in its present form may not remain lucrative and may not serve the coveted aim of the government to provide succor to the MSME sector.

The woes of the composition taxpayer do not end here. The prospect of having to pay GST @ 1%/2%/5% on the turnover without collecting the same from the recipients and to pay Income-Tax on the profit, if any, again makes it double whammy and certainly forces the assessee to entertain a second thought for opting the scheme.

Such a restriction of not having to collect the component of tax from the recipientsmay not necessarily be pushing the composition dealer to the mainstream GST of full taxation with ITC.

In terms of Section 2 (C ) of THE CENTRAL BOARDS OF REVENUE ACT, 1963 ACT NO. 54 OF 1963, the "direct tax" means

(1) any duty leviable or tax chargeable under

(i) the Estate Duty Act, 1953 (34 of 1953);

(ii) the Wealth-tax Act, 1957 (27 of 1957);

(iii) the Expenditure-tax Act, 1957 (29 of 1957);

(iv) the Gift-tax Act, 1958 (18 of 1958);

(v) the Income-tax Act, 1961 (43 of 1961);

(vi) the Super Profits Tax Act, 1963 (14 of 1963);

(vii) the Interest-tax Act, 1974 (45 of 1974);

(viii) the Hotel-Receipts Tax Act, 1980 (54 of 1980);

(ix) the Expenditure-tax Act, 1987 (35 of 1987);

(x) the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (22 of 2015);

and

(2) any other duty or tax which, having regard to its nature or incidence, may be declared by the Central Government, by notification in the Official Gazette, to be a direct tax.

The Composition Scheme under GST in its present form has all the ingredients to be declared a "Direct Tax". Therefore, for the Composition Scheme to remain outside purview of "Direct Tax" and be a part of what is not a direct tax i.e. GST, it is vital that the restriction of not having to collect the component of GST by the supplier from the recipients is given a go by.

It is true that the composition scheme is not new to VAT. But, that was limited to SALE only. Even the scheme under VAT was not a runaway hit. What is significant today is the extension of composition scheme under GST to manufacturing sector and a burgeoning Service sector i.e. Restaurant / Hotel Service also.

Therefore, the composition scheme which is touted to be a simplified one aimed at small and medium level of tax payers will lose its sheen if this small change is not brought out.

(The author is Superintendent of Central Tax, GST Commissionerate, Hyderabad and the views expressed are strictly personal.)