Small-scale units dwindling in the wake of GST isn’t a good omen, feather touch taxation will assuage them

That the small-scale industry (SSI) have been the mainstay of the Indian industrial economy is almost trite. It provided employment to some six crore people  is significant in itself. Its contribution to exports and providing employment in rural areas is also well-documented. In the event, the recent report that SSI units have been feeling like the proverbial deer before the full glare of headlights and hence attenuating if not self-destructing is disconcerting. The Goods and Services Tax (GST) while doing the commendable job of mainstreaming (formalising) the economy by pushing to the surface what was hitherto happening underneath or in the subterranean channels seems to have unwittingly left the SSI on the wrong side—they have been for the first time made to feel the heat of taxation. In the earlier cash-and-carry economy, they were operating in they were by and large untrammeled by any legal niceties including taxes. [caption id=“attachment_4336443” align=“alignleft” width=“380”]  Representational image. Reuters.[/caption] At present, there are some 16 lakh small dealers registered under the GST compounding scheme. Only those with a turnover of not more than Rs 1.5 crore are eligible to avail themselves of the compounding scheme. The gravitas for opting for the compounding scheme is being let off with just a slap on the wrist, as it were—1 percent GST, period. But they cannot claim input tax credit (ITC) the main feature nay the hallmark of GST. In fact, denial of ITC has kept a large number of small-scale units away from the temptations of the compounding scheme because they supply to larger firms which insist on them being registered under the GST and paying full tax so that ITC isn’t denied to the large-scale firms. Yet the truth remains that the compounding scheme is a godsend for small and tiny enterprises especially those doing the last mile delivery to the ultimate customers. In a recent visit to Vijayawada, the author was pleasantly surprised to find several shopkeepers proclaiming proudly their GST status—We are registered under the GST compounding scheme. This is almost wearing tax compliance on sleeves. What the government must do is to do everything in its power to hard-sell the scheme to more and more small dealers, if necessary by heightening the scheme’s threshold from Rs 1.5 crore to a generous limit of Rs 5 crore given the fact that a small trader operating in Delhi’s Chandni Chowk or Bara Bazaar in Kolkata is likely to sell a lot more than Rs 1.5 crore per annum. At the same time, the presumptive taxation scheme for small traders under the Income Tax law also needs to be tweaked so that it is in harmony with the GST. As it is, the Income Tax law lets small traders with a turnover not exceeding Rs 2 crore with a slap on the wrist—presumed profit just 8 percent (6 percent on revenue received through banking channels) of the turnover which is indeed a generous presumption in favor of the small traders given the eye-popping retail margin of 25 percent to 30 percent on the average. The government must align the two schemes—GST compounding scheme and the income tax presumptive taxation scheme. The turnover limit ought to be the same under both, say Rs 5 crore. The tax rate, however, cannot be the same given the fact that while one is an indirect tax, the other is direct which cannot be passed onto the ultimate consumer.

While the government can and should bring about a thaw in these two schemes, it cannot be business as usual for the subterranean business in India which prior to GST has been thriving through cash payments and kachcha (unofficial) invoices.

Indeed, GST has smoked them out and exposed them not only to the GST authorities but also to the Income Tax authorities. If you cannot beat them join them is an old adage. The wise ones have joined the mainstream by either enlisting themselves under the compounding scheme of GST or registering themselves as full-fledged taxpayers with GSTN. But it is the ones who have started downsizing, unable to face the heat of the twin pincer of indirect and direct tax, that must worry the government. Heightening the entry barrier to compounding schemes as suggested herein should go some way in this regard. India cannot rely only on large scale industries. Small ones must have their place under the sun but they cannot hark back regressively into the past and pine for shady business deals. The government must educate them suitably.

(The author is a senior columnist and tweets @smurlidharan)