The twenty-third meeting of the Goods and Services Tax (GST) Council in Guwahati on Friday is set to tighten the noose on players who, authorities believe, have started splitting their business operations into smaller entities to avoid higher tax liabilities.
The Council is also set to cut tax rates on a large number of product lines.
The Council is expected to further liberalise 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, imposed at the Council’s October meeting.
Parallel economy
However, the government is concerned 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 tasked with simplifying the Composition Scheme is learnt to 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.
“We understand that 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,” said an official.
He stressed that this not only meant 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,” said a tax expert who didn’t want to come on record till a formal decision was taken in this regard.
While the Prime Minister assured last Saturday that the GST Council could resolve almost all woes faced by businesses under the fledgling indirect tax regime, he attached a caveat that some States could thwart some of the proposed simplification measures.
Officials said the Council is likely to consider a proposal to permit firms making inter-State good supplies to participate in the Composition Scheme, but smaller States that are largely consumers, have reservations on the idea as it could impact their revenues.
At the same time, businesses in Delhi, for instance, become ineligible for the Composition Scheme, even if a minor part of their sales are to customers in Gurugram and Noida.
“Small States may have legitimate concerns, but 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,” an official said, adding that States have in any case been assured of compensation for revenue losses for the first five years of the GST regime.
Restaurant rates
Separately, while the group of ministers has 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.
The GoM has also 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. The GST Council, where States and the Centre have so far resolved issues by consensus, will have several knotty questions on its plate.
