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GST: Is anyone listening to the needs of the small guys?

Zenobia Aunty and her niece are inundated with emails from readers from across the country on issues relating to GST. While the big players are gearing up to meet the July 1 deadline, even they do admit to challenges – for instance, only a handful of draft rules have been issued, the rates are unknown and this is just the tip of the ice-berg. The biggest challenge is that not only do they have to ensure that their own IT systems are GST compliant, but they also have to ensure that their vendor’s IT systems are in place. This is because if the vendor cannot upload the invoice of the good or service it has sold, hey presto – up in smoke goes the input tax credit for the buyer.

However, it is the smaller players who have genuine difficulties, going way beyond the technology challenges or shortage of time to gear up for GST. Grievances from them are pouring in thick and fast. Of course, we also get that stray mail, accusing us of a conspiracy, even as our endeavor is to educate our readers, who can in turn send in their feedback so that we can have in place final GST rules that are better attuned to the needs of the taxpayers – both large and small. Zenobia Aunty, sometimes, amuses herself by reading these emails, but more often than not, these trolls are fittingly ignored.

We do need GST and the first steps have been taken. It is imperfect as of now, some challenges arising out of the draft rules may probably be addressed shortly by the GST Council. Issues arising out of the Act may not see an immediate correction. But there is hope for a better tomorrow.

Zenobia Aunty thought it best to highlight three key issues, which our readers (falling in the category of small to medium size business owners or individual suppliers of goods or services) are repeatedly pointing out to us.

Challenge 1 – You need to register even if you are otherwise exempt:

Under the GST law, every supplier of goods or services is required to be registered under GST in the state or union territory from where it makes a supply, if the turnover in a financial year is Rs. 20 lakh or more (for special category states – such as NE this threshold is Rs. 10 lakh). Thus, one would think that there is no need for smaller players to register under GST.

However, if small suppliers (be they of goods or services or both) make an inter-state supply, they have to register (their turnover is immaterial)! And an inter-state supply may even denote a supply from Gurgaon to Delhi, the commute of which is only a few hours.

So for instance, a web-designer who is based in Delhi, bags an assignment from a Gurgaon based start up to set up a website. He’s just made an inter-state sale (for supply of a new web design) and has to register under GST, even if his annual turnover is say just Rs. 15 lakh and the fees from this particular assignment is just Rs. 25,000. Registration under GST may sound simple, but comes with its own set of compliance requirements.

Currently, under service tax, exemption is available if the aggregate turnover of taxable services doesn’t exceed Rs. 10 lakh. So while this threshold under GST of Rs. 20 lakh seems generous, with restrictions such as on inter-state supply, Zenobia Aunty wonders if it is truly so.

If this provision wasn’t enough, there is more. In creeps the concept of a ‘casual taxable person.’ It means one who occasionally undertakes transactions involving supply of goods or services or both, in the course or furtherance of business, whether as a principal, agent or in any other capacity, in a state or union territory where he has no fixed place of business.

Besides, registration under the GST Act, the casual taxable person, also has to pay tax at the time of applying for registration on an estimated basis. Since he or she doesn’t have a place of business in that particular state, there would be no output tax in that state, thus the state GST cannot be adjusted as an input tax credit. To that extent, the GST is a sunk cost. Moreover, if there is a refund due as excess tax was paid on estimated basis, it remains to be seen how soon this will be given. TOI has analysed this concept in its news section.

Challenge 2 – Composition levy mechanism is very restrictive:

It is an alternative method of levy of tax designed for small taxpayers whose turnover is up to Rs 50 lakh. Those who opt for this mechanism are not allowed to take input tax credit nor collect any tax from the recipient. To such extent it seems fair. After all, the rate of GST under the composition levy is low.

It is 2.5% of the turnover in case of a manufacturer or 1% for dealers. But there are restrictions attached. For instance, once again no inter-state supply is permissible. Or for that matter, a person opting for a composition scheme, cannot sell via an e-marketplace (GST requires e-marketplaces to collect tax at source).

Zenobia Aunty has a favourite shop keeper in Jaipur – his shop is tucked in a tiny alley and his business earns him around Rs. 20 lakh a year, enough to keep him satisfied. Reluctant to carry parcels of quilts or bits and pieces of pottery back to Mumbai, she always asks him to dispatch them by courier, of course for a fee. When Zenobia Aunty next visits Jaipur, and he agrees to send them to Mumbai, he would be making an inter-state sale. Thus, he would lose the benefit of the composition levy, which is otherwise available to him.

Clearly, inter-state supply will prove to be a hurdle for small business men, as the benefit of composition levy is not available in such cases.

Challenge 3 – The draconian reverse charge mechanism:

If a small businessman (who as per the threshold limits is not required to obtain GST registration) supplies goods or services to a customer who is registered under the GST Act, the customer (buyer) is liable to pay the GST on such purchase. Not only this, but the buyer also has to self- invoice. In other words, the buyer has to issue an invoice for the purchase made by him from the unregistered seller. This invoice is to be uploaded in the GST system.

TOI has analysed this concept in its news section.

No doubt, this provision is going to hurt small business entities and individual suppliers of goods or services. In case of purchase from small business the liability to determine the correct tax and to pay it will be on buyer. It will increase the compliance on buyers so they will prefer to purchase from registered taxpayers only.

The reverse charge mechanism will not apply when the sale is from an unregistered supplier to an unregistered customer (small entity not required to register or B2C transactions).

Conclusion: Yes, introduction of GST will be a historic moment in tax history. However, it should not hamper the interests of the small business or individual suppliers – as of now it seems to be doing so. Surely, this wasn’t the intention?

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