The Modi administration continues its courtship of small businesses with a GST breather — but it seems unlikely that state governments will opt in

• At its 32nd meeting, the GST Council decided to double the minimum revenue threshold for compliance with the tax to ₹4 million for producers of goods.
  
• It also raised the limit for the composition scheme, which allows businesses to pay taxes at a fixed rate of turnover (usually 1% for traders and manufacturers), to ₹150 million from ₹100 million.
  
• Government officials said that annual tax revenues would decline by ₹52.3 billion as a result of all the changes, after assuming that the scheme would lose over half its registrants.
  
• Given that the ultimate decision with respect to thresholds lies with state governments, they will likely opt for the status quo rather than relinquishing an important source of revenue.
  

At its 32nd meeting recently, the GST Council, a committee comprising Finance Minister Arun Jaitley along with a number of state finance ministers, unveiled a series of changes in the Goods and Services Tax (GST) regime.

The council decided to double the minimum revenue threshold for compliance with the tax to ₹4 million for producers of goods while retaining the ₹2 million threshold for service providers.

It also raised the limit for the composition scheme, which allows businesses to pay taxes at a fixed rate of turnover (usually 1% for traders and manufacturers), to ₹150 million from ₹100 million. Registrants of the scheme will now be required to only file one annual return and make a tax payment every quarter as opposed to a normal taxpayer, which makes payments on a monthly basis.

In a move that contradicts the idea of “one nation, one tax”, the thresholds have been left to the discretion of state governments, which will have to decide in a week’s time. For example, the existing revenue threshold of ₹2 million will probably continue to apply for states in Northeast India where businesses are smaller and earn less than their counterparts in larger states.

Finally, service providers and producers of goods with a turnover of ₹5 million or less will be allowed to opt for the composition scheme. However, instead of 1% they will have to pay fixed rate of 6%.

The changes, which will be effective from 1 April, are largely directed at reducing the tax and compliance burden on small businesses, and hence, can be seen as a continuation of the government’s plan to revive the prospects of the micro, small and medium-enterprise (MSME) sector. This, in turn, will keep the economy chugging along as the government heads towards national elections.

Last week, the Reserve Bank of India (RBI) gave in to pressure from the central government and announced a restructuring scheme for the stressed accounts of small businesses. This followed the introduction of a revised pricing policy for small business loans in December wherein loans with floating rates would be aligned with an external benchmark for the sake of transparency.

The government measures will keep small business owners happy - an important ploy in an election year. However, the recent revisions to the GST will prove to be a drain on the Centre and state governments, which rely heavily on tax revenue.

With the hike in the minimum revision threshold to ₹4 million, an estimated figure of over two million small businesses will no longer have to pay taxes. Government officials told the Indian Express that annual tax revenues would decline by ₹52.3 billion as a result of all the changes, after assuming that the scheme would lose over half its registrants.

Since the ultimate decision lies with state governments, they will likely opt for the status quo rather than relinquishing an important source of revenue. Given that their polls don’t coincide with national elections, state governments aren’t subject to the same electoral pressures as that of the central government. Besides, most of them are already dealing with a shortfall in GST revenues.

The state of Puducherry has already opted to retain the revenue threshold at ₹2 million, along with Kerala and Chhattisgarh. More states are likely to follow suit next week.


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