From an industry standpoint, five years provide a good timeframe to assess what more needs to be done for GST to fully achieve its objectives of rationalisation of taxes, simplification in compliances, seamless flow of credit and yielding the benefits of ‘One Nation, One Market’ to businesses at all levels. India has more than 93 lakh registered medium, small and micro enterprises (MSMEs). As per the government data, during the period 2015-16, there were about 634 lakh unincorporated non-agriculture MSMEs in the country engaged in different economic activities.
Conscious of the immense contribution of the sector, the government has been taking many measures to provide a more facilitative environment for MSMEs’ growth. The GST regime, too, has endeavoured the same. Under GST, the government has liberalised some norms for MSMEs. For instance, the initial exemption threshold of Rs 20 lakh has been increased to Rs 40 lakh for goods. The threshold for the composition scheme was increased to Rs 1.5 crore a year for goods and Rs 50 lakh for services. Composition dealers have been allowed to supply services. Goods predominantly manufactured and/or used in the MSME sector have been given a preferential rate treatment.
The GST Council recently agreed to waive the mandatory registration of small online vendors if their turnover is lower than Rs 40 lakh and Rs 20 lakh for goods and services, respectively. The decision will bring parity between online and offline sellers and encourage many small e-commerce players into the market.
Additionally, composition dealers with a turnover of up to Rs 1.5 crore will be allowed to make intrastate supplies through e-commerce companies. Despite these measures, while bigger businesses have experienced the benefits of GST such as a common market, minimisation of tax cascading, reduced cost of tax compliance, and technology-enabled transparent tax structure, the MSMEs have been grappling with several compliances and financial constraints. Address invoice matching woes One of the challenges for MSMEs is invoice-matching for claiming the input tax credit. GST law allows credit where the supplier has furnished the GST return, paid taxes, and fulfilled other conditions. The recipient of the supply of goods or services often faces mismatches in the invoice numbers and dates.
The discrepancies and the required reconciliation of outward and inward supplies by the prescribed due dates create an immense compliance burden for the small taxpayers, who have limited resources. To provide relief, small businesses with a turnover of up to Rs 5 crore should be allowed to avail credit based on the invoices received. At a minimum, this relief may be provided for intra-state supply of goods and services. Make composition scheme more attractive The composition scheme for small businesses can be made more attractive by further relaxing the conditions. For instance, currently, the scheme is not available for a person making inter-state supply.
The person also cannot claim any input tax credit in respect of his procurements or charge GST from the recipient of the supply. Extending the scheme to small dealers who have both intra-state and inter-state supplies will enable more persons, including exporters, to opt for the composition scheme. Input tax credit to the extent of output tax payable should be allowed to the composition dealer. Further, the rates of composition scheme should be rationalized to have a single rate of 1% as against three GST rates of 1% for traders, 2% for manufacturers, and 5% for restaurant service providers. The threshold turnover for opting composition scheme should be increased to Rs 5 crore from Rs 1.5 crore currently, to benefit many small businesses.
Facilitate availment of credit Another measure that can make compliance easier for MSMEs is the relaxation of the time limit for claiming the input tax credit. Currently, a taxpayer must claim credit in respect of an invoice, before the due date of furnishing a monthly return for September following the end of the financial year to which such invoice pertains, or, before furnishing the relevant annual return, whichever is earlier. Imposing such a time limit may hamper the claim of credit in some genuine cases (e.g., delay in receipt of invoices). Relaxing the time limit to three years from the date of filing the annual return for the given financial year will allow the claim of credit in such cases.
The law allows small taxpayers to file quarterly returns. While the relaxed timeline provides relief to small taxpayers, it also means that taxpayers making zero-rated supplies such as exporters or suppliers to SEZ, need to wait till the quarter-end to claim a refund of input tax credit accumulated due to zero-rated supplies. The delay results in the blockage of working capital for small taxpayers. To help such taxpayers, small suppliers filing quarterly returns should be allowed to claim provisional refunds monthly. Have RCM for unregistered MSMEs A significant issue has been disruptions in the supply chain due to the reluctance of unregistered MSME suppliers to register under GST, fearing compliance pressures. This has disincentivised larger units from buying from the unregistered suppliers as they will not be able to claim the credit.
Going forward, supplies from unregistered dealers can be taxed under the reverse charge mechanism (RCM), enabled by technology advancement support. Make e-way bill procedures less onerous Currently, the e-way bill related rules require online pre-registration of goods with a consignment value of above Rs 50,000 before they are transported. The requirement puts an immense compliance burden on small businesses transporting goods. The e-way bill procedure should be dispensed with for small taxpayers with a turnover of up to Rs 1.5 crore. Alternatively, it should be restricted only to the inter-state supply of goods and services.
Amend GST provisions on advance paid for the supply of services Generally, the time of supply of services is the date of issuance of invoice or receipt of payment, whichever is earlier. For the supply of services, tax is payable even on advances. The provisions for time of supply of service for small service providers should be amended so that GST in respect of advance money received by the service provider is taxed only at the time of invoice raised or service received, whichever is earlier. This will benefit the small service providers and improve their working capital. GST is a monumental and positive reform for all stakeholders. Addressing the above compliance and working capital-related aspects will help smoothen the on-ground challenges and go a long way in making GST a Good and Simple Tax for the smaller entities too.
(The writer is Director, Tax and Economic Policy Group, EY India)