As the country rushes towards the July 1 roll-out of the new indirect tax regime, the smaller businesses and enterprises are going to get hit in more ways than one. To give some relief to the really small traders, manufacturers and restaurant owners, the GST Act proposes a composition scheme.
What is the composition scheme?
The composition scheme allows traders, manufacturers and restaurants with an aggregate turnover in the previous financial year of ₹20 lakh to ₹75 lakh to pay, instead of the tax payable, an amount calculated as a percentage of their turnover.
This works out to 1 per cent of the turnover in the State or Union Territory for small manufacturers, 2.5 per cent of the turnover in case of restaurants, and 0.5 per cent of turnover for traders.
Earlier, the turnover threshold for qualifying for this scheme was ₹50 lakh. But with many industries making a representation to the Centre to increase the limit, it was revised to ₹75 lakh in the GST council meeting held on June 11, 2017.
However, many are of the opinion that the limit could have been raised all the way to ₹1 crore, the upper limit indicated by the GST regulation.
What does it do?
The scheme will provide relief to smaller enterprises that are grappling with the changeover to the new regime. The threshold for those falling within the ambit of the Goods and Services Tax (GST) has been lowered to ₹20 lakh, making a new set of enterprises, thus far out of the tax-net, subject to GST.
Awareness about the GST rules and ability to cope with the changes is quite low in this segment. Lower compliance levels and easier tax paying process under the composition scheme will come quite handy for these businesses.
Many of these enterprises have fallen into the net due to new rules under GST, such as service tax charge on job-workers. The literacy level in this segment could be quite low, making the transition to the GST network that is entirely IT driven, quite difficult.
How helpful is it?
While the intention is good, the scope of the composition scheme is limited and not all small enterprises can opt for it. The scheme is open to all small manufacturers and traders, but service providers are mostly outside the purview of this scheme, with the exception of small restaurants.
With service providers forming a large part of the micro-enterprises segment, a large swathe of the enterprises are thus excluded.
Also, the scheme is open only to enterprises that do business within a particular State. Those selling goods to another State (inter-State transaction) cannot opt for this composition scheme. So if a business chooses to pay the composition levy, it will have to restrict its area of operations to one State. Similarly, if a company supplies through e-commerce operators who are required to collect tax at source, it can not enrol for this scheme.
Are customers affected?
The deepest cut, however, is that the tax payer opting for this scheme cannot collect any tax from the customers. Since small companies cannot collect tax from customers, input tax credit is not available to them.
If the supplier has paid GST, then the tax will have to be borne by the small company. Similarly, larger companies registered for paying GST might not want to buy from these small companies opting for composition scheme, since they will not have any tax credit to set-off.
Enrolling for this scheme could, therefore, be restrictive and hamper operations and growth.
Many SMEs currently misreport their turnover in order to claim the benefits currently available to smaller enterprises. Similar practices are likely to continue with companies opting for the composition scheme as well. The GST regulations have also laid down stringent penalties for those misreporting their turnover in order to qualify.
Businesses will therefore have to do regular checks to see if they have exceeded the turnover threshold.