SMALL BUSINESSES UNDER GST (PART-I)

[Dr. Sanjiv Agarwal]

There are more than sixty million business enterprises in India with about just one million incorporated and few thousand listed companies. The majority of business are covered under SME or MSME segment including traders & retailers. This sector is mainly specialized in the production, trading and retailing of consumer commodities and providing services to consumers.  The implementation of GST is certainly going to affect this sector and the employees associated with it.

Under the present excise laws, no duty is required to be paid by a manufacturer having a turnover of less than ₹ 150 lakh. Under Service Tax laws threshold exemption scheme is available for small service providers having aggregate value of ₹ 10 lakh in the preceding financial year. Under Vat laws such exemption varies from State to State. Therefore currently small scale providers enjoy a basic exemption from Central Excise, Service Tax and VAT levy, if they fall under the threshold limit.

On the other hand, the fixation of the threshold limit for tax exemption under the proposed GST regime would affect the businesses of small-scale traders and retailers in terms of its impact on tax cost, working capital requirements and compliance requirements.

The proposed regime places the small businesses and industries on the same footing as of large-scale industries by removing such tax differentiation by levying a tax on stock transfers and by neutralizing the cascading impact of input taxes through the input credit mechanism available under the GST regime.

Presently, small businesses subject to threshold exemption are subject to levy of various taxes, mainly comprising of VAT, Service Tax and Excise Duties. The multiple taxes are further subject to multiple rates of taxes and cascading effect adding to the complexity of present taxation regime. GST regime, in overall perspective, is going to be beneficial to the small business as in GST many taxes will be subsumed leading to lesser taxes, lower compliance cost and above all, there will be no tax cascading.

Taxable Territory

Unlike the present Service Tax law, GST law shall extend to whole of India including the State of J & K. Therefore, if small traders/retailers supply goods/services in state of J&K, then it will subject to levy of GST. Likewise supply of goods/services to SEZ and exports shall be considered as zero rated supply. However, it is proposed that import of goods / services shall be subject to Integrated GST (IGST).

Therefore, supply of goods and services by traders and retailers like electronic equipments, apparels, event management related services etc. in state of Jammu & Kashmir shall also be subject to levy of GST.

Taxable Person

For GST, ‘taxable person’ means a person who is registered or liable to be registered under Schedule-V of the model law. A person, who has obtained or is required to obtain more than one registration in one State or more than one State, shall be treated as distinct persons in respect of each such registration. An establishment of a person who has obtained or is required to obtain registration in a State, and any of his other establishments in another State, shall be treated as establishments of distinct persons for the purposes of GST.

For example, if small traders & retailers have shops, warehouses or godowns, offices etc in same State/different State(s) from where they make supply of goods or services, then in case of separate registration, such office, godown etc shall be treated as distinct person. Accordingly, transactions between distinct persons will be subject to levy of GST with input credit mechanism.

Threshold Exemption Limit

However, under GST regime, the threshold limit of ₹ 10 lakh or 20 lakh (Rs. 10 lakh for specified States) is provided for payment of GST. Presently in Service Tax, there is a threshold exemption of ₹ 10 lakhs based on the aggregate threshold limit of ₹ 10 lakh and no Service Tax is payable in such cases. In the GST regime, the limit of threshold exemption will be enhanced to ₹ 20 lakh on all India basis except in case of north-eastern and hilly States (total 11 States) where it will be ₹ 10 lakhs. These States are Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Tripura, Sikkim, Himachal Pradesh, Jammu & Kashmir and Uttarakhand. For this purpose, definition of 'aggregate turnover' has been provided in section 2(6) of the GST law which is different from the existing one. Since under GST regime, the limit of threshold exemption gets reduced from ₹ 1.50 crore to ₹ 10 lakh or 20 lakh, it may adversely affect the small scale traders & retailers in case of goods. However, for services, it is beneficial.

Small business may not be directly impacted by GST as there is a threshold exemption to businesses up to an annual turnover of ₹ 2 million and ₹ 1 million for north eastern and hill States. (Arunachal Pradesh, Assam, J & K, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himchal Pradesh, Uttarakhand). Further, businesses between ₹ 2 to 5 million will have an option to pay a composition amount under section 9 of GST law at a flat rate without claiming input tax credits and without having the requirements to maintain detailed books of account or compliances. This will also be incentivized for undertaking transactions digitally.

Registration

According to Schedule-V to model GST law (version-II), every supplier shall be liable to be registered under the Act in the State from where he makes a taxable supply of goods and/or services if his aggregate turnover in a financial year exceeds rupees 10 lakh in the North-East States including Sikkim and hilly area and rupees 20 lakh for India except North-East States including Sikkim and hilly area. Therefore, threshold limits of rupees 20 or 10 lakh is available for registration under GST. A taxable person can also opt for composition scheme if his aggregate turnover is more than rupees 20 or 10 lakh and less than rupees 50 lakh.

Further, importer, exporter, and any person who make inter-state supplies shall also be considered as a taxable person and is required to be registered under GST irrespective of threshold limits.

Under GST regime every person who is liable to be registered under the Act, shall have to apply for State-wise registration for supply of goods / services from different States. There is no concept of single centralized registration under GST regime as is presently done. Small traders & retailers may opt for different registrations state wise in case of multiple branches or business verticals if they are engaged in supply of goods or services from such place or have different verticals.

Business vertical means a distinguishable component of an enterprise that is engaged in supplying an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business verticals.

Factors that should be considered in determining whether products or services are related include:

1. the nature of the products or services;
2. the nature of the production processes;
3. the type or class of customers for the products or services;
4. the methods used to distribute the products or provide the services; and
5. if applicable, the nature of the regulatory environment, for example, banking, insurance, or public utilities.

Businesses will have to identify the business verticals, if any and decide whether to have separate registration or not. However, for small businesses, verticals may be few and that too in some of the cases only.

(To be continued .......)