AUGUST 09, 2022

By Shailesh Sheth, Advocate, M/s SPS Legal

COMPOSITION Scheme - 'Is it time to phase it out?'

As was discussed earlier, typically, a small number of taxpayers account for a large proportion of the revenue from GST. This universal feature of GST/VAT is strongly visible in case of Indian GST as well. The following statistics pertaining to ' Contribution to GST Revenue from Different Constitutions of Business' recently released by GSTN provide ample proof of this fact.

[Note : Status as on 30th June, 2022. Source: GSTIN]

It is, therefore, imperative that the collection costs of the government and the compliance cost of the taxpayers, particularly small taxpayers, are kept under check. The government, with its scarce resources, can ill-afford concentrating on the large number of small taxpayers whose contribution to the revenue in absolute terms is quite negligible. Deploying scarce administrative resources so as to raise revenue most effectively thus calls, it is argued, for a concentration of those resources on the largest taxpayers,the revenue to be raised from the small firms is seen as insufficient to warrant the resources required for its collection. [Ebrill, Keen, Bodin & Summers (2001)]

On the other hand, GST, operating through 'invoice credit method' is a highly compliance-driven tax system and puts heavy compliance burden on the small taxpayers.

Thus, keeping in view the twin aspects of the administrative feasibility for the government and the compliance costs of the small taxpayers, every VAT-compliant country has devised some ways and means to address this complex issue as effectively as possible. India's attempt to deal with this persistent problem lies in providing the reliefs to the small taxpayers and in the process, relieving the government of massive administrative burden, in the following ways, viz:

- Threshold exemption; and

- Composition scheme.

In Part-III, various aspects of the 'threshold exemption limit' have already been discussed. In this Part, certain aspects of the 'Composition Scheme' and its desirability or otherwise are briefly discussed.

The statutory provisions governing the 'Composition Scheme' or 'Presumptive tax Scheme' are contained in S.10 of the CGST Act, 2017 ('the Act') read with Rule 7 of the CGST Rules, 2017 ('the Rules'). Essentially, there are two alternate schemes in vogue at present. Sub-sections (1) and (2) of S.10 of the Act contain the provisions governing the basic scheme. However, without going into the details, suffice it to mention here the eligibility criteria and the rates prescribed for the specified taxpayers under the scheme which are as under:

a. Eligibility limit :

(i) Aggregate turnover not exceeding Rs. 1.50 crore in the preceding financial year (other than in the case of the specified States);

(ii) Aggregate turnover not exceeding Rs. 75 lakhs in case of the States of Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand.

b. Eligible taxpayers and rate of tax (CGST+SGST) prescribed :

(i) Manufacturers - 1%

(ii) Restaurant Services - 5%

(iii) Traders - 1%

It may be noted that the benefit of the Scheme is also extended to those eligible suppliers of goods whose value of services (other than restaurant services) is less than 10% of the turnover in the preceding financial year or Rs. 5 lakhs, whichever is higher.

[Refer to S.10(1) of the Act read with R.7 of the Rules read with notification no. 14/2019-CT dated 07.03.2019 as amended] .

For those small taxpayers who are otherwise not eligible for the benefit of the scheme under S.10(1) of the Act, an alternate scheme was notified w.e.f. April 01, 2019 by notification no. 02/2019-CT (Rate) dated March 07, 2019. Though the scheme is basically an exemption scheme, considering its features,it reads and operates like a composition scheme only. This alternate scheme applies to the suppliers of both goods and services, and the turnover limit prescribed is Rs. 50 lakhsin a financial year and the rate of tax (CGST+SGST) prescribed is 6%.

While both the schemes have their own sets of conditions, a significant condition prescribed in the case of both the schemes relates to Input tax credit (ITC) and the collection/recovery of output tax from the recipient of the supplies. It is provided under both the schemes that a taxable person opting for the scheme shall not collect any tax from the recipient of the supplies made by him nor shall he be entitled to any credit of input tax, i.e. ITC. It is this condition that merits serious consideration when one examines the issue of the desirability of the continuation of the composition scheme.

First, there is no gainsaying that the composition scheme is highly distortive insofar as the maintenance of a seamless ITC chain and the principle of levying tax only on the 'value addition' is concerned. The taxpayer opting for the scheme is restricted from availing ITC, though the nominal rates of tax on the supplies as prescribed under the scheme may be tempting. However, the ITC of the tax paid on the inward supplies of the goods or services to which the taxpayer would have been otherwise entitled simply go waste. Consequently, not only is the desirable seamless ITC chain broken, but also the tax paid on the inward supplies enters into the cost of the final supplies being made by the taxpayer. At the same time, the restriction on the taxpayer from collecting any tax from the recipient/buyer of the supplies further aggravates the situation. The scheme thus not only flies in the face of the avowed objective of GST, i.e.,to mitigate the cascading of tax, but also prevents the availability of the supplies at a reasonable price to the end consumers. Both these restrictions in fact, act as a 'double whammy' for the taxpayers who might have opted for the scheme lured by the nominal rate of tax. The end consumer also becomes the ultimate victim bearing the tax burden though he may be blissfully unaware of it.

Aside from the above, the composition scheme, contrary to the claim or common understanding, casts a huge administrative and compliance burden on the government and the taxpayers. What is also a matter of concern is the fact that the revenue earned from this class of registered persons does not justify either the increased administrative and compliance burden,or the attendant costs or the cost of collection of tax.

On the administrative front, the plight of the composition taxpayers can be understood from the following:

- Number of relevant Rules to be complied with - 6 (Six)

- Number of Forms/returns prescribed - 13 (Thirteen)

- Number of notifications including amending/

superseding notifications issued till date on

various issues - 34(Thirty-four)

- Number of Circulars/RoD Orders relating to composition taxpayers - 5 (Five)

Not surprisingly, the provisions relating to the composition scheme constitute a law by itself. Coming to the revenue collection from this class, the latest figures make for shocking reading:

- Total number of active Composition Taxpayers as on 30th June, 2022 - 15,86,906

- Total tax paid [From 01.07.2022 to 31.03.2022] - Rs.11,824.15 Crores

- Average tax per GSTIN/per quarter - Rs.4,518.44 (Minimum) and Rs.8,511.71 (Maximum)

Notes:

- The total and average tax paid in cash is based on non-nil returns.

- The status of 'total and average tax paid' is as on quarter ending March 31, 2022.

[Source: GSTIN]

The above figures certainly tell their own story! It is indeed quite shocking that the average revenue collection per quarter (based on the number of returns filed excluding nil returns)ranges between Rs. 390 Crores and Rs. 782 Crores and the government has earned a meager revenue of Rs. 11,824.15 Crores from this class of registered persons since July, 2017 till March, 2022, i.e. in 57 months!

That effectively works out to a little over Rs. 200 crores per month! A simple question then arises: ' Does this negligible revenue justify the administrative and compliance burden and the compliance and collection costs imposed on or incurred by the government and the taxpayers? ' The author is of the view that even if the revenue is earned in cash, the gross collection is so meagre that it hardly justifies the continuation of the scheme.

The Council, therefore, may have to seriously consider the desirability of the continuation of the composition scheme. No doubt, it may not be possible to discontinue/withdraw the scheme overnight. However, as the scheme is a drag on the administration, a burden for the taxpayers, and hardly adds significantly to the Revenue's kitty, it is now time to seriously consider the gradual phasing out of the scheme. The Council, instead, may do well to raise the threshold exemption limit to a level that is prudent, pragmatic and practical. As for the north-eastern States, the Council, instead of prescribing a separate threshold limit, may consider other ways and means to secure the financial interests of these States and make them significant partners/contributors in the overall economic growth. The author feels that this will substantially ease the administrative and compliance burden of the government and the taxpayers and also reduce the tremendous strain under which the GSTN Portal is presently operating. While there could be some revenue loss in the process, the same would be outweighed by the visible and invisible advantages of the discontinuation of the scheme and the increased threshold exemption limit.

[Continued…]

Please See Part I , Part II & Part III

[The views expressed are strictly personal.]