GST Council Raises Exemption Threshold, Expands Composition Scheme

The GST Council today gave relief to small businesses by increasing the Goods and Services Tax exemption limit from Rs 20 lakh to Rs 40 lakh and extending the composition scheme to service providers.

The new exemption threshold—the minimum annual turnover for businesses supplying goods to register under the GST—will be effective from Apr. 1, 2019, Finance Minister Arun Jaitley told reporters. For hilly states and those in the North East, the threshold has been doubled to Rs 20 lakh.

States can decide if they want to maintain the exemption limit at Rs 20 lakh or Rs 40 lakh in a week. However, the threshold for mandatory registration of service providers would remain at Rs 20 lakh and Rs 10 lakh in special category states, according to a statement by Ministry of Finance. The higher exemption threshold will allow around 20 lakh taxpayers to opt out of GST if they choose to.

Revenue Secretary Ajay Bhushan Pandey told BloombergQuint that states opting for different registration thresholds will not lead to any distortions as the exemption limits are only for those taxpayers doing business within a state. He said it’s difficult to estimate how much revenue the government will forgo from the threshold limit hikes.

“We have only estimated the outer limit, say if 50 percent of dealers go out of the system, then the revenue implication could be Rs 2,000-Rs 3,000 crore,” he told BloombergQuint. “But that’s only an estimation and the actual amount could be much lower.”

Sachin Menon, head-indirect tax at KPMG, hailed the move to raise the threshold as a “bold step”.

“I think it’s a bold step… that would take away almost 50-60 percent of the total registered filers from the tax bracket,” Menon told BloombergQuint. “That makes sense because the total tax they are collecting from this bracket is equal to the cost they are incurring to collect it. I think it is just about 2-3 percent of the total revenue.”

In Sync With Former CEA’s View

The move finds resonance with the former Chief Economic Adviser Arvind Subramanian, who in his report on the indirect tax in 2015 had suggested that the registration threshold should be kept at Rs 40 lakh.

Setting exemptions to the threshold must balance three considerations, Subramanian had said. They are:

• Minimising the burden on small taxpayers would call for higher thresholds.
• A high threshold achieves social objectives because poorer households are more likely to buy from smaller shops.
• A high threshold not only risks foregoing revenues but also undermines the value-added chain that is so critical for the governance benefits of having a GST.

The GST Council has also extended the composition scheme—that allows small businesses to pay taxes at a lower rate without receiving input tax credit—to service providers with annual turnover of Rs 50 lakh.

Taxpayers providing only services, as well as goods and services, can now avail composition scheme. The GST rate for services under composition scheme has been fixed at 6 percent—comprising 3 percent central GST and 3 percent state GST. The council has also raised the existing composition scheme turnover threshold to Rs 1.5 crore and special category states have been given a week to decide their respective limits.

Taxpayers availing the composition scheme from April 1, 2019 will have to file one annual return but pay the tax on a quarterly basis.

The increase in the threshold and reduction in the return filing requirements to once per year for composition dealers would reduce the number of returns to be filed on the GST portal and reduce the overall load, said MS Mani, a partner at Deloitte India.

A traders’ body concurred that the move will be a fillip to small businesses. The decision by the GST Council to give relaxation to small traders will certainly take the taxation burden out from large number of small traders in the country, the Confederation Of All India Traders said in a statement.

Free accounting and billing software will be made available to small taxpayers with annual turnover of Rs 1.5 crore, Jaitley told reporters.

Kerala Can Levy Disaster Cess

The GST Council also approved the proposal of a ministerial panel to allow Kerala to impose natural calamity cess of 1 percent on intra-state supply of goods and services. The cess will be levied for two years.

Introduction of a cess distorts the GST structure to some extent and the simplicity it seeks to achieve, said Abhishek Jain, an indirect tax partner at EY India. “While this additional levy should help Kerala victims, companies as well as GSTN would need to modify their IT systems for incorporating this change.”

Other Decisions

• A seven-member group of ministers will be constituted to examine whether a composition scheme can be introduced to boost the residential segment of the real estate sector.
• A proposal before the council was to reduce tax on under-construction properties by denying them input tax credit. Delhi Deputy Chief Minister Manish Sisodia said he suggested that reducing GST on such properties will make affordable housing expensive.
• A group of ministers shall be constituted to examine the tax rates for lotteries.

Tax expert Sachin Menon has called raising the threshold a bold step because it takes away more than half of the taxpayers in the bracket.

Revenue Secretary Ajay Bhushan Pandey does not see any impact even if different threshold are adopted by the few states, he told BloombergQuint.

"Today also we have different thresholds for special category states."

• More than 20 lakh dealers will be eligible to avail the benefits of today's decisions.
• Will have to see how many actually take advantage of the exemption limit hike or the Composition Scheme.
• Exemptions don't apply to inter-state sales; they will have pass on the input credit to the other states, and for that they'll have to get registered.

He added that it is difficult to estimate how much revenue will be foregone from the various threshold limit hikes.

The moment a taxpayer opts for Composition Scheme, he will have to pay tax on the entire value, said Ritesh Kanodia, partner at law firm Dhruva Advisors.

• By expanding Composition Scheme, the Government is trying to help small tax payers who are not in a position to file returns in time.
• It's an attempt to match the pre-GST regime.
• Downside is that they pay tax at the composition rate and don't get to claim credit.

Tune in for detailed analysis on the key decisions of the 32nd GST Council meeting.

The GST Council took two important decisions in 32nd meeting on Jan 10.

GST Threshold Raised

Effective April 1, the GST exemption threshold has been raised from Rs 20 lakh to Rs 40 lakh. For hilly states and those in the North East, the threshold has been doubled to Rs 20 lakh.

These states will now be able to choose if they want to keep the GST exemption limit at Rs 20 lakh or Rs 40 lakh, Jaitley said.

"Rs 40 lakh will be the exemption limit for all states, and Rs 20 lakhs for NE and hill states with a caveat that they can opt for higher threshold," he added.

The raised exemption threshold will allow around 20 lakh taxpayers to opt out of GST if they chose to.

The GST Council has raised the existing Composition Scheme turnover threshold to Rs 1.5 crore and expanded the scheme to include services as well, starting April 1, 2019.

Here are the key highlights:

• The existing Composition Scheme turnover threshold raised to Rs 1.5 crore.
• Those who use the scheme from April 1 will pay tax quarterly, but file returns annually.
• Those providing services or mixed supplies (goods and services) with a turnover up to Rs 50 lakhs will now be entitled to avail composition scheme.
• Compounding rate for services under composition scheme is fixed at 6 percent.

A group of ministers - set up in early October - was tasked with revisiting the tax structure of different categories of restaurants with the aim of rationalising or reducing the rates, apart from making composition scheme more attractive for businesses.

Headed by Assam Finance Minister Himanta Biswa Sarma, the GoM had recommended that the threshold limit of the composition scheme, that allows small businesses to pay taxes at a lower rate without getting any input tax credits, be raised to Rs 1.5 crore from Rs 1 crore currently.

Finance Minister Arun Jaitley is now addressing the press.

Deputy Chief Minister of Bihar, Sushil Kumar Modi, said that the GST threshold has been increased to Rs 40 lakh from Rs 20 lakh. However, since Kerala and Chhattisgarh insisted on a Rs 20 lakh threshold, states will now have an option to chose either, according to his tweet.

The registration threshold for GST has been increased to Rs 50 lakh, Andhra Pradesh’s Finance Minister Y Krishnudu said on the sidelines of the meeting. As of now, entities fall under the gambit of GST if their turnover is Rs 20 lakh or above.

The finance minister-led council is now discussing the GST rate on properties which are under construction, he added.

The council is expected to discuss lowering GST on under-construction flats and houses to 5 percent, as well as hiking exemption threshold for small and medium enterprises.

Finance Minister Arun Jaitley had said that the next meeting would consider rationalisation of tax rates on residential properties and raising the threshold limit for micro, small and medium enterprises from the current Rs 20 lakh.

Also, the council would consider a “composition scheme” for small suppliers, apart from discussing a calamity cess as well as GST rates on lottery.

Currently, the GST is levied at 12 percent on payments made for under-construction houses or ready-to-move-in flats where the completion certificate has not been issued at the time of sale.

An official had told news agency PTI that this 12 percent GST rate ideally would have been partially offset by way of taxes paid on inputs by builders and hence the actual incidence of GST on under-construction home buyers would have been around 5-6 percent. The builders, however, are not passing on the input tax credit benefit to consumers, the official said.

Read more.

The GST Council is scheduled to meet today for the 32nd meeting. Jaitley, along with his state counterparts, is likely to announce tweaks to India’s 18-month-old indirect tax system after the meeting concludes.