GST council to tighten norms for composition 

GST council to tighten norms for composition 

Context

• The twenty-third meeting of the Goods and Services Tax (GST) Council in Guwahati is all set to tighten the noose on players who have started splitting their business operations into smaller entities to avoid higher tax liabilities.

What are the new steps?

• The Council is also set to cut tax rates on a large number of product lines.
• The Council is expected to further liberalize the Composition Scheme for small businesses and traders to pay a flat and low tax on their turnover.
• The annual turnover eligibility threshold is likely to be raised to ₹1.5 crore from the ₹1 crore limit.
• A proposal to permit firms making inter-State good supplies to participate in the Composition Scheme is in consideration.

The emergence of parallel economy

• The government is anxious about the emergence of a parallel economy despite the restrictions on the Composition Scheme, whose original threshold limit was just ₹75 lakh a year.
• A Group of Ministers were asked to simplifying the Composition Scheme and they have recommended a new regulation that would bar all associated enterprises from participating in the scheme, if their combined turnover crosses the specified threshold limit.

What is happening?

• Businesses are getting fragmented to take advantage of the Composition Scheme. Existing firms are creating multiple entities so that the turnover of each entity remains below the threshold.
  This will not only result into a loss of revenue for the exchequer but also dents the ease of doing business in the country.
• The Central and State GST laws already define associated enterprises in line with the Income Tax Act, which lays down, among other parameters, common management, control and shareholding patterns among different firms to determine if they are linked.
• The restriction on inter-State supplies by businesses under the Composition Scheme could also fuel the prospects for more informal trade outside the tax net.

Restaurant rates

• The group of ministers have also recommended harmonizing the tax rates on all restaurants to 12% instead of differential rates for those that have air-conditioners or a liquor licence.
• The revenue department is worried about a potential revenue loss of ₹4,000 crore from the move as well as the implications of offering such businesses input tax credits for their raw materials and rent.

No resolution yet

• The Group of Ministers has still not been able to arrive at a consensus on the question of whether supplies from small firms that are part of the Composition Scheme should translate into input tax credits for larger firms who buy from them.

What is Goods and Services Tax (GST)?

• GST is an indirect tax reform which aims to remove the tax barriers between states and create a single market.
• It is a single tax on the supply of goods and services, right from the manufacturer to the consumer.
• The Government had introduced the 122nd Amendment Bill, 2014, in the Parliament to facilitate the introduction of GST in the country.
• The Bill was finally passed by both the Houses in 2016
• It is a consumption based tax/levy. It is based on the “Destination principle.”
• GST is applied on goods and services at the place where final/actual consumption happens.
• It came into force from 1 July, 2017.
• It is levied at multiple rates ranging from 0% to 28%.

There are three components of GST:-
1. Central GST (CGST) – it will be Levied by Centre
2. State GST (SGST) – It will be levied by State
3. Integrated GST (IGST) – It will be levied and collected by Central Government on supply of goods and services

Detailed provisions of GST Act:

• The Central GST and the State GST would be levied simultaneously on every transaction of supply of goods and services except on exempted goods and services.
• In case of inter-State transactions, the Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all inter-State supplies of goods and services.
• Under current laws only the Centre can impose a tax on services. GST will empower states to collect service taxes

What was the need for GST?

• The exclusive division of fiscal powers between the states and centre government has led to a multiplicity of indirect taxes in the country.
• Multiplicity of taxes at the State and Central levels has resulted in a complex indirect tax structure in the country that is ridden with hidden costs for the trade and industry.
• In the prevailing tax systems, there were several cases where the government has not been able to detect evasion and loss of tax revenues.
• VAT rates and regulations differ from state to state. And it has been observed that states often resort to slashing these rates for attracting investors. This results in loss of revenue for both the Central as well as State government.
• Before implementation of GST, taxes used to ‘cascade’, with the levied on several inputs (good or service) that have already been taxed, along with inputs to those inputs.
• Cascading of tax leads to inefficient tax collection and evasion of taxes.

What are the objectives of GST?

• To eliminate the cascading effects of taxes: for example tax on tax, on production and distribution of goods and services across the country.
• One Nation, One Tax: Uniformity of tax rates across the India by subsuming all indirect taxes at the centre and state levels.
• To reduce tax evasion and corruption.
• Increasing tax to GDP ratio and revenue surplus.

What are the benefits of GST?
Benefits from GST:

1. It will help to get rid of the current patchwork of indirect taxes by simplifying them.
2. It will enlarge the tax base for larger resource generation.
3. Due to simplification of tax structure, large scale sectors will benefit as there will be one general rate to be paid by all companies.
4. The cascading effect of taxes will reduce in the supply chain thereby reducing production costs making exports more competitive
5. It can facilitate seamless movement of goods across states
6. It will reduce the transaction costs of businesses.
7. The GST is expected to reduce manufacturing costs as logistics cost will decline. It will boost productivity through efficient resource allocation and greater tax compliance.
8. GST will accelerate the growth and economy of the nation as it will make the industry more competitive and efficient.
9. positive credit profile of India at rating agencies because this shows government’s will to improve ease of doing business
10. Will facilitate MAKE IN INDIA by making one India oppose to current regime which fragment India along state lines which levied different states tax.

What are the criticisms of GST?

• The new tax system does away with the barriers to free trade within and between States, effectively turning India into a single free market for goods and services.
• GST being a Consumption tax decreases the income in some states where consumption is low and every state will see some revenue loss as many other local body taxes are also merged with GST.
• Some kept out of Basket: Alcohol, real estate, electricity are kept out of GST which defeats the very own purpose of having one tax.
• Though anti-profiteering provisions are given the act, chances are high that due to high rates the seller may keep the profit to himself, putting the load on consumers.