Right levels critical to acceptability of GST regime     

The First Discussion Paper (‘Paper’) on the Goods and Services Tax (‘GST’) in India was released on November 10, 2009. As stated therein, the objectives of the dual GST are to broaden the tax base, to remove the present problem of tax cascading, to move to a common tax base and to subsume various Central and State taxes and levies into the Central Goods and Services Tax (CGST) and the State Goods and Services Tax (SGST) respectively.

The overall objective being a moderation in the tax rates. In order to achieve the aforesaid objectives, there needs to be agreement bet-ween the Centre and the States on several aspects of the dual GST. One such aspect relates to the tax free or exemption thresholds under the CGST and SGST respectively. In other words, the question is with regard to determining the level of turnover, below which a business entity would be kept outside of the GST and not be required to collect and pay the tax.

The issue of the appropriate determination of thresholds is central to the debate on the GST for a variety of reasons. In the first instance, setting of an appropriate threshold level is critical to the overall acceptability of the GST itself, since it is politically impossible to impose the GST on small businesses and traders. There is also the question of tax collection efficiency and it would not be worthwhile to collect the GST from small traders on this ground as well. However, too high a threshold would pose challenges to the broadening of the tax base and coverage that is intended in the GST and also, as a corollary to the above, to the moderation of the GST rates themselves. For all these reasons therefore, appropriate exemption thresholds are key to a good GST design.

The Paper recommends differential thresholds of Rs 1 million for the SGST on goods and services and a threshold of Rs 15 million for the CGST on goods respectively. The threshold for the CGST on services is not identified in the Paper but is recommended at a proportionately high level. These recommendations essentially maintain the status quo that obtains presently under the central excise and State VAT laws respectively. It also seems that the relatively high threshold of CGST has been recommended, keeping in mind that the Central government has little or no experience in dealing with small traders.

Now, there are several difficulties that arise as a result of the above recommendations of differential thresholds under the federal and the State laws, on both goods and services. Firstly, they would result in a breakage in the GST chain since dealers above the level of Rs 1 million of turnover would be covered under the SGST but not under the CGST. This would result in partial cascading as the CGST paid on raw materials and inputs will not be eligible as an offset. Further, should such dealers effect inter State supplies, the question of applicability of the Integrated GST (IGST) on such supplies would need to be addressed.

Differing thresholds will also incentivise under reporting of revenues, particularly from dealers who typically supply to final consumers and for whom therefore the benefit of input tax credit offsets, particularly at the central level, is not important from a business standpoint. Finally, the relatively high threshold for the CGST would lead to a challenge in determining a moderate revenue neutral rate for the CGST, besides being inimical to a broadening of the tax base.

The related aspects of the compounding / composition scheme have of course been addressed in the Paper whereby Rs 5 million of gross annual turnover has been proposed for the compounding cut off, with a uniform floor rate of 0.5 per cent under the SGST. The Paper suggests that the composition scheme will protect the interest of small businesses.

While the composition scheme does address some of the challenges highlighted above, several others highlighted above continue to be relevant. On balance, it is clearly preferable to have uniform thresholds for the CGST and SGST across goods and services as against the present recommendations contained in the Paper. Ind-eed, newsreports have it that the Central Government has opposed the recommenda-tion of differential thres-holds. It is hoped that subsequent discussions and agreement will facilitate introdu-ction of common thresholds across the two taxes.

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Source: Business Standard, India, dated 14/12/2009