GST stocktaking-IV: Small businesses are in a state of confusion; by resolving it India can improve its ease of business ranking

(Editor’s note: A month after the launch of the biggest indirect tax reform undertaken in the country, Firstpost takes a look at how businesses are faring under the new regime. There have been confusion and concerns, much of which have not yet been addressed. This is the last of a four-part series taking stock of the GST’s impact.)

One month has elapsed since Goods and Services Tax (GST) has become a law. Law-making and implementing is a continuous learning and improvement process. Government is learning many things as it goes ahead in implementing GST. Traders agitation in Surat was one such incident. Surat traders agitated in order to make GST compliance manageable. The government understood the issue and came out with a solution and agitation came to an end.

While government is focusing on eliminating tax leakages, it has created a bigger challenge for tax payers. Increased compliance has created problems for many small businesses. This was partially discussed, especially in context of textiles industry, in a previous column by this author. However, this problem is not just restricted to textiles industry. Now even small retailers have been brought within tax compliance net. This is because every business with a turnover above Rs. 20 lakhs has to get registered and pay GST.

 GST stocktaking-IV: Small businesses are in a state of confusion; by resolving it India can improve its ease of business ranking

Representational image. Reuters

This will increase difficulties for small businesses. India anyway ranks very low in ease of doing business ranking and paying taxes ranking. This is largely due to every business required to file 37 returns every year. Add to that multiple rates within a chapter heading with various chapter sub headings with different GST rates. This creates more confusion and complications for a small business owner. With GST things may get difficult.

Here is a table of how India fares vis-à-vis other G20 countries in ease of doing business ranking and paying taxes and GST, VAT, Sales Tax rates. More the number of tax rates and more compliance requirements will make doing business more difficult. Here the author would like to state a caveat that these rankings are before GST was enforced and rankings could possibly change next year to give us the real picture of how GST has affected business.

GST / VAT rates and ease of doing business ranking in G20 countries
Country Overall rank Paying taxes Number of payments Standard rate Other rates
Argentina 116 178 9 21% 27%, 10.5%, 0%
Australia 15 25 11 10%
Brazil 123 181 9.6 IPI: 0%–365%
ICMS: 0%–35%
ISS: 0%–5%
PIS-PASEP: 0.65%, 1.65%
COFINS: 3%, 7.6%
Canada 22 17 8 5% 9.975%–15%
China 78 131 9 17% 13%, 11%, 6%, 5%, 3%
France 29 63 8 20% 10%, 5.5%, 2.1%
Germany 17 48 9 19% 7%
India 130 172 25 18% 0%, 5%, 12%, 28%
Indonesia 91 104 43 10%
Italy 50 126 14 22% 10%, 5%, 4%
Japan 34 70 14 8%
Republic of Korea 5 23 12 10%
Mexico 47 114 6 16%
Russia 40 45 7 18% 10%, 0%
Saudi Arabia 94 69 3 5%
South Africa 74 51 7 14%
Turkey 69 128 11 18% 8%, 1%
United Kingdom 7 10 8 20% 5%, 0%
United States 8 36 10.6 0%–7.5%
Source: Doing Business 2017, E&Y Worldwide VAT, GST and Sales Tax Guide 2017

As is evident from the table, lesser number of rates and lesser number of times a person has to file returns and pay taxes improves ease of doing business ranking.

GST could make things more difficult for small businesses if the government is not receptive and sensitive to concerns and proactive in resolving those issues.

For local businesses like retail shops, small restaurants, etc, the government has announced a composition scheme. In this composition scheme, retailers will have to pay 1 percent CGST and 1 percent SGST on their total turnover. This scheme will be available for retailers with a turnover upto Rs. 75 lakhs. For restaurants, tax rates under composition scheme are 2.5 percent CGST and 2.5 percent SGST.

In composition scheme, tax payer has to pay a flat tax on its turnover and is not allowed to collect tax from its customers and avail input tax credit on GST paid to on purchases. This means small business owner will not have to get into tedious accounting process of maintaining detailed records of tax paid on purchases and tax collected on sales and do all calculation.

Here, the government can be more innovative in reducing compliance and improving ease of doing business. Take a classic case of a retailer. Every retailer either sells branded packaged goods with a MRP or household grocery items. Household grocery items don’t attract GST.

A retailer with a turnover exceeding Rs. 75 lakhs will have to collect tax and file returns. And if the retailer has a turnover below Rs. 75 lakhs and has opted for composition scheme then he will have to shell out 2 percent GST. Here it is important to note that margins on many products sold by retailers are 2 percent or less. So in such a situation, a retailer would end up making no money or even incur losses after paying taxes.

To make things easy for retailers and all intermediaries in the whole supply chain from factory to retailer – be it distributor, stockiest, wholesaler, etc, the government needs to take cognizance of the fact that it is easy to tax packaged branded goods with MRP (maximum retail price) right at the stage of removal from factory. Single point levy of tax on MRP at the point of production and supply, can address all compliance issues of small businesses and traders.

This is not an alien concept. We had that in Excise in Sec 4A wherein excise duty was levied on a product valued at MRP less abatement. Government can do away with abatement and directly charge GST on MRP and collect it from manufacturer / packing unit. This way, government can easily collect tax at the point of production and supply, eliminate tax leakages, reduce cost of tax collection, and reduce compliance and related issues. It will also simplify GST and its implementation and reduce hassles faced by government in implementing GST.

Government can delve upon many such easily resolvable issues and improve ease of doing business to ensure GST doesn’t become “Grossly Stifling Tax” and becomes – what PM Modi said – “Good Simple Tax”.

This is the concluding part of a four-part series on GST stocktaking. Read Part 1 here, Part 2 here and Part 3 here.

(The writer is a Chartered Accountant by qualification and a finance and media professional. You can follow him on Twitter on @sumeetnmehta)

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Updated Date: Aug 05, 2017 14:04:40 IST