GST relief for MSMEs: State finance ministers may recommend raising of threshold to Rs 75 lakh

GST relief for MSMEs: State finance ministers may recommend raising of threshold to Rs 75 lakh
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New Delhi, Dec 26: A group of state finance ministers might recommend raising the turnover threshold for the goods and services tax (GST) from the current Rs 20 lakh to Rs 75 lakh, in a move that would give lakhs of micro and small enterprises the option to be outside the ambit of GST. Sushil Kumar Modi, deputy chief minister of Bihar, who is a member of the group, said that a proposal to raise the exemption threshold was found to be more practical than tax refunds in providing relief to MSMEs. Modi, who holds the finance portfolio in the state and has been a key member of many GST-related panels over the last two-three years, also said a composition scheme similar to existing ones for traders and manufacturers could be made available for small services providers. The annual revenue limit for the scheme could be between Rs 50 lakh and Rs 1 crore.
However, the higher overall GST threshold might not dramatically reduce the number of GST registrants, 1.2 crore at last count. Nor would it impact the government’s revenue in any significant manner. While a quarter of the firms registered with the GST Network (GSTN) have turnover between Rs 20 lakh and Rs 1 crore, their share in the government’s GST revenue mop-up is just 5%. Even as the mandatory lower limit for a firm to register for GST is Rs 20 lakh, more than half of the firms registered are those with turnover below that level. Though these sub-Rs 10 lakh firms contribute just 1.5% of the GST revenue, they prefer to be in the tax chain for the benefit of input tax credit and to keep large businesses (which are in the GST chain) as their buyers.
The panel headed by minister of state for finance Shiv Pratap Shukla was formed in August to suggest ways to make GST less burdensome for small firms. Although some states had proposed that MSMEs be refunded a portion of taxes paid by them, the group, Modi said, found the approach impractical. A better solution was to restore exemptions enjoyed by some of these companies in the pre-GST regime. GoM for raising GST threshold to Rs 75 lakh The excise duty threshold was Rs 1.5 crore turnover, while units with annual turnover of up to Rs 10 lakh were in the service tax net. As for the state VAT, the entry threshold varied among states in the Rs 5 lakh-20 lakh range.
According to Modi, the composition scheme for small services providers could have revenue threshold between Rs 50 lakh and Rs 1 crore. The scheme, which provides for nominal tax rate without input tax credit is currently operational for traders and manufacturers with annual turnover of below Rs 1.5 crore. The GST Council had previously disagreed on bringing the scheme for the services sector because the value addition in the industry could be large in some cases compared with manufacturing or trading. Taxing the services providers at nominal rate, it was feared, would result in foregoing significant amount of revenue.
“We need a better system for, say, a beauty parlour operator who runs a small business but finds 18% GST and related compliance cost prohibitive,” Modi said. Union finance minister Arun Jaitley last week had said the reluctance of small services providers in joining GST was one of the reasons for lower-than-expected growth in GST collections. Modi, who heads the group of ministers that examined the option of raising revenue for flood relief in Kerala via a cess, said the group reached a consensus that the affected state should be allowed to levy a higher SGST to generate the extra revenue for relief and reconstruction.
However, a pan-India cess might not be favoured by the group as it could face dissent from some states, he said. The larger issue of generating funds under National Disaster Relief Fund, after the National Calamity Contingent Duty (NCCD) was subsumed under GST, would be left for the 15th Finance Commission which would submit its report late next year, Modi said. He added that the Finance Commission, rather than the GST Council, would be best placed to decide if the compensation for states for GST revenue shortfall could be extended by three years to 2025.
“I personally believe that shortfall currently experienced by states would disappear in 3-4 years as was the case when states introduced VAT. However, to assuage states’ fears, it could be best left to the Finance Commission to make that recommendation (on extending the compensation period),” Modi said.