Pragmatic changes to gst regime

Pragmatic changes to gst regime

Pragmatism runs risk of undermining principle.

The Goods and Services Tax (GST) Council has, on the whole, made pragmatic changes, to ease the tax and compliance burden on small businesses. The changes include raising the turnover limit for eligibility to enter the composition scheme to ₹1.5 crore from the coming fiscal, easing compliance for traders opting for the composition scheme and doubling the threshold for exemption from registration and payment of GST to ₹40 lakh. This will provide respite to small businesses that were also crippled by demonetisation. Reportedly, a higher exemption threshold would make more than two million businesses eligible, but of them may not avail of it.

Revenues are unlikely to come down. Data shows that a quarter of the firms registered with the GST Network have turnover between ₹20 lakh and ₹1crore, but their share in the GST revenue mop-up is only 5%. A new composition scheme for service providers that allows them to pay a flat levy of 6% and leaves them out of the tax credit chain is fine. Such easing of norms raises administrative convenience but, on the flip side, they are likely to disincentivise formality. The council must work towards bringing large swathes of the informal sector under GST, lowering and converging rates, to help small businesses grow. GST creates audit trails across the income and value chain, creating a builtin incentive to pay tax. Raising the exemption thresholds too high will only undermine the value added chain that is critical for the governance benefits of having the GST. The Arvind Subramanian panel on GST had cautioned against this.

The tax system should not become messy. But the council’s decision to have two threshold limits for exemption — ₹20 lakh and ₹40 lakh — from payment of service tax makes things complicated. Also, muddling the tax system defeats the principle of “one nation, one tax”. The council’s decision to allow Kerala, which faced devastating floods last year, to levy a cess on intra-state supply of goods and services within the state makes sense. It should be withdrawn after two years.