JANUARY 04, 2019

By Shailesh Sheth, Advocate

IV. RECOMMENDATIONS relating to the restructuring of the Composition Scheme, etc. (Economic initiatives):

Council's recommendations:

The Council has decided to refer the following issues to the Committees/GoM indicated against them:

i. Extension of the Composition Scheme to the small service providers and the proposed rate of tax and threshold limit - Law Committee and Fitment Committee.

ii. Tax rate on lotteries - Committee of States

iii. Taxation of residential property in real estate sector - Law Committee and Fitment Committee.

iv. Threshold limit of exemption under GST regime - GoM on MSMEs.

The Council, in its next meeting, would take a view on the above issues.

Comments:

This is one initiative taken by the Council which no one really anticipated and has come as a pleasant surprise for the taxpayers, particularly the small and medium taxpayers!

i. Extension of Composition Scheme to the small service providers - Small is beautiful…!

Netizens may recall that the Council, at its 28 th Meeting held on July 21, 2018, had made the following recommendations concerning the composition scheme viz:

a) to raise the upper limit of turnover for composition scheme from Rs. 1.00 crore to Rs. 1.50 crore;

b) to allow the composition dealers to supply services (other than restaurant services) for upto a value not exceeding 10% of turnover in the preceding financial year or Rs. 5.00 lakhs, whichever is higher.

Since both the above recommendations necessitated the amendments in Section 10 of the CGST Act, 2017, the same could not be implemented immediately. Later, these amendments have been carried out in Section 10 by the CGST (Amendment) Act, 2018, though yet to be operationalized.

Now, in a major step to liberalize the entire composition scheme further, the Council, it appears, is seriously looking at extending the composition scheme to all small service providers. The scheme is perceived and claimed to be restricted, at present, only to the restaurant services. Aside from this, the Council is also looking at the revision of the threshold limit and the rate of tax for the purpose of composition scheme. The Council has decided to refer these issues to the Law Committee and Fitment Committee.

This is, indeed, a significant and heartening development for the small service providers who were vying for the inclusion within the scope of the composition scheme without any exception. The service sector is a major contributor to the GDP and still, is largely dominated by the small and medium sized players. Nevertheless, these players provide meaningful employment to the large number of people across the country. The exclusion of such small service providers from the composition scheme has certainly cast an onerous compliance and financial burden on them. It also puts tremendous stress on the system and keeps the revenue officers on tenterhooks since the tendency to remain outside the tax net is quite strong amongst such players.

Under these circumstances, the Council must be commended for taking a bold and pragmatic view of the entire scenario and for contemplating the inclusion of all small service providers within the ambit of the composition scheme. Considering the ground realities of the Indian economy, the proposed increased limit of Rs.1.50 crore may either be raised to Rs. 2.00 crore or at least, be left untouched. At the same time, the Council may look at the possibility of a much-reduced rate of 3% for the composition taxpayers.

Since the benefit of the composition scheme is subject to the non-availment of ITC, it does result into the cascade of tax and may warrant a hard look in the future. However, in this initial stage, what is of prime importance is to ensure that the small service providers are not put under any distress and are encouraged to adopt the' invoice-culture'! The objective shall be to bring this class of service providers in the main stream and make them voluntary tax-compliant. It is sincerely hoped that the Committee will take into account these aspects while finalizing its recommendations to the Council.

ii. Threshold limit of exemption under GST regime - An inevitable task!

The Council in yet another significant step has decided to refer the issue of the threshold limit of exemption under GST regime to the GoM on MSMEs. The netizens may recall that at its 29 th Meeting held on August 4, 2018, the Council had decided to frame a new panel/sub-committee with the objective of tackling issues connected with the MSMEs and small taxpayers, considering the stellar role being played by this sector in the growth of the economy.

It is interesting to note that an'ideal threshold - one of the thorniest issues confronting the Council - is being referred by the Council to the GoM on MSMEs. I may here reproduce the following sage words of the internationally acclaimed VAT experts Keen and Mintz which I had quoted in Part-III of my 4-part series of Article "Model GST Law -'A Horror Show'" published on Taxindiaonline.com.

" One of the most important decisions to be taken in designing a value-added tax (VAT) is the threshold level of turnover above which firms are required to charge VAT on their outputs (and entitled to reclaim tax on their inputs). Too high a threshold compromises the basic objective of raising revenue; too low a threshold may leave the authorities overwhelmed by the difficulties of implementation and impose excessive compliance costs on taxpayers. The design problem is further complicated, moreover, by the distortion of competition associated with the differential tax treatment of firms above and below the threshold."["The optimal threshold for a value-added tax"- Keen and Mintz (2004)]

It is obvious that in adopting avery low threshold, neither wiser counsel nor international experience has prevailed upon our policymakers. The adverse effects of the over-eagerness in expanding the tax base are already visible. Administrative nightmares, rising collection costs, burdensome compliance costs and increasing resentment from the small businesses are the aftermath of such low threshold. I recall here the following words of Netherland-based and another globally acclaimed VAT expert Sijbren Cnossen:

" A common rule of thumb is that 80 per cent of the tax is collected from 20 per cent of the taxable firms. In other words, it is not worth the cost to dealing with hundreds of thousands small businesses that contribute very little to revenue. In any case, over time, inflation would erode the size of the threshold."

The Council's decision to have a re-look at the threshold limit of exemption is, therefore, quite timely and welcome. In the same article, I had stated:

"Considering the socio-political-economic and ground realities of the Indian economy, it is desirable - well-nigh, inevitable - that a reasonably high threshold of'Rs. 75 lakh to Rs. 100 lakh' is prescribed. Even for the'composition scheme', the proposed limit of Rs.50 lakh is very low and the same ought to be at least Rs.150 lakh, if not more."

It is hoped that the GoM will take a very practical view of the matter and will suggest a threshold which may ultimately expand the number of' willing taxpayers' rather than' unwilling tax avoiders'!

"The issues at stake in setting the threshold for a value added tax are important - experience shows indeed, that they can be critical to the success or failure of the tax - and their neglect has been unfortunate."

[Keen and Mintz]

iii. Taxation of residential property in real estate sector - At last, a little hope !

The Council has also decided to refer the issue of taxation of residential property in real estate sector to the Law and Fitment Committee. This bodes well for beleaguered real estate sector and the'buyers -of-home-in-waiting'!

The real estate sector, which is presently facing numerous challenges, has been looking forward to some major reliefs to be announced by the Council. However, with practically no such announcement forthcoming, the sector justifiably felt they have been' left in out in the cold' ! Amidst this gloomy scenario, the decision of the Council to refer the issue of taxation of residential property in real estate sector to the Law Committee and Fitment Committee is certainly being seen as' a silver lining in the dark clouds!'.

There is a strong and justifiable expectation that the rate of tax for the under construction residential property will be pegged at 5%. While this is a reasonable expectation considering the present circumstances, such concessional rate shall also be accompanied with the benefit of ITC. If the low rate of tax is made subject to the condition of non-availment of ITC, the whole exercise, in the end, may turn out to be counter-productive and futile. On the other hand, the rate of 5% coupled with ITC entitlement will certainly provide a major fillip to the sector as it will revive the demand in the residential construction segment and in turn, will also have positive impact on the other sectors like cement, steel, etc. and on employment generation.

"You cannot help the poor by destroying the rich. You cannot lift the wage earner by pulling down the wage payer."

(Abraham Lincoln)  

v. Recommendations relating to the revenue trends under GST and the bottlenecks therein (Revenue initiatives)

The Council has approved the proposal to form a 7-Member Group of Ministers to study:

a. the revenue trend, including analyzing the reasons for structural patterns affecting the revenue collection in some of the States;

b. the underlying reasons for deviation from the revenue collection targets vis-à-vis original assumptions discussed during the design of GST system;

c. its implementation and relate structural issues.

The GoM will be assisted by the committee of experts drawn from Central Government, State Governments and the NIPFP who would study and share the findings with GoM who, in turn, would give its recommendations to the Council.

Comments:

Disturbing revenue trends - Reality bites…!

The final set of decisions of the Council revolve around the revenue trends so far seen in the GST regime. On the advent of the GST regime, a target of Rs.1.12 trillion per month average had been set for the revenue collection under the regime. While the critics and skeptics considered the target too 'ambitious' and 'impractical', the Government claimed it to be 'reasonable' and' achievable' !

However, the regime is in its 18th month and reality has started to sink in! It is only twice that the revenue collections have surpassed the Rs. 1 trillion-mark (April, 2018 and October, 2018) though, remaining much below the budgeted target of Rs.1.12 trillion per month average. This disappointing revenue collections under the GST regime would certainly mean that it will be difficult to meet the budgeted fiscal deficit target. The Government will, therefore, have to explore other options to adhere to the fiscal deficit target and as it appears, it is seriously deliberating upon the same.

It is, therefore, not surprising that the Council has decided to take this situation as a 'wake-up call' and go to the very root of the whole issue of revenue targets and revenue collections under the GST regime. The decision to set up a GoM to study and analyse the above crucial issues concerning the revenue trends witnessed so far, the reasons for the deviations from the original targets and other related implementation and structural issues has to be seen in this context.

Needless to say, the over-ambitious revenue targets put tremendous pressure on the system as a whole, especially the manner in which it was put into operation. Past experiences have shown that a target-driven tax regime easily slips into a terror-driven tax regime! One can, therefore, only fervently hope that the GoM, assisted by the chosen experts, will come out with some concrete, practical and serious recommendations which would help the Council - and even the Government of the day - in setting up the revenue targets which are neither ambitious nor unrealistic and also in continuously monitoring the revenue trends, enabling it to undertake the corrective action swiftly.

"To tax and to please, no more than to love and be wise, is not given to men."

(Edmund Burke)

Conclusion:

The 31st Meeting of the Council can easily be regarded as one of the most important meetings held so far, going by the radical, reformative, responsive and reassuring nature of the recommendations and decisions announced by the Council!

It will be unfair to brand these recommendations/decisions'politically motivated'. One should bear in mind that the recommendations/decisions reflect the 'collective wisdom' of the Council representing all the States/UTs irrespective of which political partyis ruling the State or UT.

The wide sweep of the recommendations and the decisions is also a pointer to the fact that the Council is in'combat mode' and intends to address multiple issues confronting the GST regime at present without wasting much time. In its previously held 30 meetings, the Council has reportedly taken 918 decisions related to GST laws, rules, rates, compensation and taxation threshold, 96% of which have been implemented through more than 300 Notifications so far. This clearly reflects the'co-operative federalism' working at its best and the'responsiveness' of the Council to the various challenges arising under the GST regime. No doubt, even after 18 months, GST still remains a'work in progress' but this can't really be helped! The seeds of'instability' and'uncertainty' were already sown at the time of the implementation of GST and therefore, it is futile to expect that the law will become'stable' and'certain' any time soon! The only consoling factor is that the Council has vigorously adopted course corrections, if one goes by the latest recommendations and decisions of the Council, and to put the fast derailing GST train back on track…! There is, therefore, lot to look forward to with hope in the New Year, 2019 for the taxpayers!

"It usually takes a hundred years to make a law, and then, after it has done it's work, it usually takes another hundred years to get rid of it"

(Henry Ward Beecher)

(The author is founder of M/s SPS Legal, Mumbai and the views expressed are strictly personal.)

Editor: The four-part series stands concluded.

See Part I, II & III