Concerns of SME Sector

1.  Lower threshold to expand SME Coverage under GST

a)  The threshold limits under GST regime, is fixed at Rs.20 lacs (Rs. 10 lacs in case of specified states except J& K), above, is likely to bring a large chunk of SME Sector under GST because:

• ·Present exemption limit of 150 lakh under central excise is reduced to 20 lakhs under GST (however there is relief as well because in service tax exemption limit was 10 lacs in most of states the VAT registration threshold was between Rs. 5-10 lacs):
• Presently, a tax payer having business across different states in India, is entitled to the benefit of threshold limit in each State. Under GST, in such cases, the threshold limit would be available on an all India basis; and
• Compulsory Registration irrespective of threshold limit for large number of specified tax payers in following circumstances, would result in substantially higher registrations.

b) Compared to the threshold exemption scheme presently prevalent which is applicable to taxable turnover (Central Excise & Service tax,) effective threshold limits under GST would be very low inasmuch as:

• For computing, aggregate turnover, taxable and exempt suppliers of goods & services & export turnover is to be considered
• In the following cases the person need to take registration irrespective of threshold. These cases would make the effective threshold limit for Registration under GST irrelevant for registrations in SME Sector.

(1)   Persons making any inter-State taxable supply (after amendment in case of services only);

(2)   Persons who are required to deduct tax under section 51 (Tax Deduction at Source);

(3)   Persons who are required to pay tax under sub-section (5) of section 9 (electronic commerce operator)

(4)   Casual taxable persons making taxable supply;

(5)   Persons who are required to pay tax under reverse charge;

(6)   Non-resident taxable persons making taxable supply;

(7)   Persons who supply goods or services or both on behalf of other registered taxable persons whether as          an agent or otherwise;

(8)   Input service distributor;

(9)   Every electronic commerce operator;

(10) Every person supplying online information and database access or retrieval services from a place outside India to a person in India, other than a registered taxable person;

It has been provided in section 23(1)(a) of CGST that a person engaged exclusively in the business of supplying not taxable/exempt goods & services shall not be required to be registered. However, even with a nominal taxable supply of goods/services, registration may become necessary if the aggregate turnover exceeds Rs.20 lakhs (Rs. 10 lacs in case of specified states except J& K).

A significant fall out of the above, is that such persons would be hit by provisions of section 9(4) of CGST discussed in para 1.2 hereafter.

Even in cases covered by section 23(1)(a) of CGST, Registration would become necessary, in regard to cases covered under Reverse Charge Provisions [viz section 9(3) of CGST.

1.2  Tax on purchases by registered persons from unregistered persons under Reverse charge mechanism

The relevant tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

It is very likely that a large number of SME businesses (trades, service providers etc.) could be within threshold limit of Rs.20 lakh and hence strictly not required to be registered under GST. However, as stated above, a most unprecedented provision has been made under GST law, to the effect that if the registered person purchases goods/services from an unregistered person, the registered persons are required to discharge tax liability under reverse charge basis on such purchases without any threshold limit. Though these provisions have been suspended till 31.03.2018 by GST council considering the practical facility faced by the registered person.

This provision is most hard hitting and defies any rationale as the Govt. on the one hand has given threshold exemption and at the same time, has indirectly taken it away on the other hand. It would not only increase compliances for the registered SME but would also increase costs of doing business. But the major fallout of this provision would be, due to increased compliances, registered persons may avoid dealing with unregistered SME. This could drive away lakhs of SMEs out of business & affect their basic survival & livelihood.

1.3  Hardship Provisions relating to Input Tax Credit (ITC)

a)  No ITC in cases where tax payment defaulted by supplier

Section 16(2)(c) of CGST provides that no ITC can be claimed, by a taxable person who receives the goods/services and making valid payment, if the person who is supplying the services is not depositing the GST. Practically for such default, the supplier should face stiff penal actions instead the buyer should be penalized. This provision would create undue hardships to Trade & Industry particularly in the SME Sector which is always short of working capital. These provisions are also against the spirit of “ease of doing business” in India.

It is also a regressive step taken by the Government as under CENVAT Credit Mechanism which is currently in practice under Central Excise/Service Tax. Under the current regime of CENVAT if the manufacturer/service provider availing credit has properly and validly received goods/services supported by duty/tax paid document and has taken reasonable steps to ensure that there is no malafide evidence from the duty/tax paid document issued by the supplier, such manufacturer/Service provider is entitled to Credit and Credits cannot be reversed even in cases where it is subsequently found that the supplier has not paid the duty/tax to the Govt.

b) Invoice-wise matching, Reversal & Reclaim of ITC

 Under the GST regime, all GST registered businesses are required to uplift all supply information through the GSTN portal by the 15th day following the close of a month. In order to claim an ITC, the purchaser must upload all purchase information by the 15th day following the close of that month. A credit will only be available where the purchaser’s invoice matches the sales invoice uploaded by the supplier and the GST has been paid.

 Under this approach, it will be almost impossible for a business to claim its credit entitlement on a timely basis. The delay in claiming credits and the costs associated with managing this system alone will unnecessarily increase the working capital of SME businesses, eroding one of the benefits of moving to the GST system.

c) Reversal or ITC in case of non – payment to supplier

In cases where a registered person avails ITC but fails to make payment to supplier within 180 days from the date of issue of invoice, such registered person is not only required to reverse such ITC but would also be liable to pay interest from the date of availment of ITC till the date of payment. Though it is provided that, such registered person shall be entitled to claim ITC upon payment of invoice. This would adversely impact the SME Sector that is usually operate with low margins and under severe working capital constraints.

d) Denial of ITC in case of non – compliances

The harsh provisions like non-availability of ITC for the non-registration period, non-availability of ITC on cancellation of registration on simple instances like non-filing of GST returns for a consecutive period of six months (3 Returns in case of Composition Scheme), or non-furnishing of return u/s. 39.

The above instances are too harsh in as much non-compliances could happen due to variety of reasonable and would adversely impact SME Sector who operate with limited infrastructure.

1.4 Working Capital Blockages & Constraints

In addition to the hardship provisions relating to ITC stated above, the following provisions under GST, would also result in working capital blockages & impact cash flows of SME Sector:

a) Unlike the practice prevalent under current indirect tax regime, under GST regime, stock transfers to own branches would be taxable. With GST being paid on the date of transfer but Credit becoming available only when stocks are liquidated by the receiving branch, cash flows would be severely impacted.

b) Merchant Exporters’ Business model is widely prevalent in the SME Sector, Under the existing indirect tax regime, Merchant Exporters procure goods from exempted SSI units without excise duty and without payment of State VAT in terms of declaration filed for export. However, under the GST regime, suppliers would charge GST/SGST/IGST to the Merchant Exporters. Upon payment, Merchant Exporters would have to claim refund. Though it has been provided that 90% of the refund claims would be granted provisionally within 7 days, however the practical experience in case of refund has remained a nightmare. This has created a huge cash flow constraint for SME Merchant Exporters’ and cause hardships.

1.5 Complex & Voluminous Compliances

It is widely known that the SME Sector operates with a very limited skilled infrastructure. The level of statutory compliances, prescribed in the law, is very high. Under GST, for a registered person (other than composition scheme) 3 Returns would be required to be filed every month and 1 Annual Return. Recently lot of relaxation has been given and filing of form no. 2 & form no. 3 has been temporarily suspended and the next decision in this respect would be taken by a special committee.

Presently every registered user other than composition scheme) required to file a Form GSTR 3B on monthly basis and for small entrepreneurs having turnover upto 1.5 crores are required to file quarterly return.

In case TDS provisions are applicable, there would be additional compliance. The costs are likely to increase substantially for the SME Sector (including non-profit bodies, Cooperative Societies etc.)

1.6 Recommendation

Considering the peculiar business scenario in the country and the circumstances under which SME Sector operates, their significance in the Indian Economy and practices prevalent worldwide, it is recommended that they should be distinctly treated and a relaxed sort of rule should be prescribed for them in terms of compliance, refund policy, ITC claims etc.

The Government has over the past few months has cut down various impediments and compliance burdens. The SME sector is hopeful that the Government should come out with some more relaxations and changes that would address their specific needs.

However, it is for sure that with the GST the now the SME sector has to change the practices, the way they are handling their business and also the way they are keeping their accounts. They have to adopt some good accounting software with GST enabled features to keep their regular accounts to meet out the requirement of GST regime and moreover they have to focus on their business process to increase efficiency and economy in their business so that they could take the competitive challenges that are bound to come after the implementation of GST (one nation one tax that has removed the trade barriers).