By Parnika Jhunjhunwala
The composition scheme under the GST law is an optional scheme for small suppliers, traders and manufacturers to pay a fixed amount in a prescribed percentage in lieu of tax payable in the normal levy. Thus, the main objective behind the introduction of this scheme is to reduce the compliance burden for small traders. Any taxpayer whose aggregate turnover in a financial year is less than 75 lakhs can avail this scheme, thus choosing not to register as a normal taxpayer.
All businesses dealing in the goods sector can opt for this scheme. In the service sector, however, only the restaurant sector can register under this scheme. Manufacturing units within the specified threshold can also avail the scheme other than manufacturers of tobacco, tobacco substitutes, pan-masala, ice-cream and other edible ice. The rate of tax for the composition levy is very minimal. The traders are subject to 1 percent tax, manufacturers to 2 percent and restaurants 5 percent (all inclusive of CGST and SGST).
A mixed bag of ills and benefits?
As mentioned, under this scheme, the tax rate ranges from 1 to 5 percent. Thus, the limited tax liability will allow small suppliers to make better profits. Traders registered under this scheme will also have lesser compliance since they have to file only a quarterly return. These two advantages also allow them to level the playing field since small traders will have greater profit margins as compared to normal taxpayers. Hence, suppliers under this scheme may outplay the economies of scale of large enterprises by offering competitive prices.
One can argue that the benefits get somewhat nullified by the drawbacks. Taxpayers under this scheme cannot carry inter-state transactions and import-export of goods and services. This restriction of practising only intra-state business only might hinder the expansion and growth of small businesses, thus ensuring that small businesses remain small, hence defeating the very purpose of the scheme.
Another major drawback is that traders cannot avail input tax credit on inward supplies and neither can they raise a tax invoice on sales. This implies that a buyer from a composition dealer will not be able to avail input tax credit on his purchases either. This might discourage buyers to buy from composition dealers, especially in the case of B2B businesses. The very fact that they cannot raise a tax invoice means that the burden of tax lies on the taxpayer only as he cannot recover the tax from his buyer.
Strict legalities and narrow scope
The Penal Provision under this scheme is very stringent. If the dealer is not eligible for the scheme or the government has incorrectly granted permission, then the dealer will be liable to pay the differential tax along with the penalty which can extend up to a liability of the total tax. This provision is unjust because GST compliance and return filing and payments, all have to be done online. Given the fact that small businesses are not tech savvy and do not have the resources to entirely computerise accounting, the possibility of making errors due to lack of awareness about the laws and the procedure of filing returns increases. Thus, such a high penalty of up to 100% is uncalled for.
The other implementation issue with the GST, in general, is the reliability of its integrated technology network, the GSTN (Goods and Services Tax Network). The network aims to hold up to 70 million accounts, recording numerous debit and credit transactions and other documentation. Ensuring that the network is robust and does not collapse like the Obamacare Health Insurance plan is a must.
While at the national level, the reliability of the network is worrisome; at the level of composition dealers, the availability of the software is more troublesome.
The electronic commerce operators are outside the scope of this scheme since they indulge in inter-state supplies. However, this decision is in stark contrast with the government’s vision of ‘Digital India’ wherein they aim to boost the start-ups. Given the fact that there are still many e-commerce businesses in their nascent stage and lacking adequate resources, the government should have made some provision to accommodate them under the new tax regime.
Can it help the informal sector?
Despite the seemingly attractive tax rates and lowered compliances, there have been fewer registrations than expected. So far, 5.12 lakh businesses have registered—a six-fold surge in the last 15 days from the initial figure of 90,000 till July 16—following which the government has extended the deadline for registering under this scheme to August 16. Although the number of registrations has spiked in the last 15 days, a taxpayer has to act very consciously if he decides to register under this scheme.
It is possible that this scheme might encourage small traders earlier unaccounted for, to register themselves. Given that businesses generally avoid registration due to high taxes, such minimal tax rates might attract some traders from the informal sector. However, the possibility of that happening is bleak due to a lack of awareness about the scheme. The scheme should be promulgated to encourage more registrations.
Featured Image Source: Visual Hunt
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