On daily basis all of us come across shops in our localities which would not issue proper bills or use simple paper to issue bills in case some one asks for it and transact business mostly on cash. They don’t carry any account books or detailed records in respect of their stocks and sale. Does that mean that they are tax exempt? The answer is NO as the threshold limit under VAT laws of the states is around Rs. 5 lacs and they sell for much more than this amount in any year. Majority of them have opted the Composition Schemes, the facility offered to all such dealers having their turnover upto Rs. 50 lakhs in a year. By which they pay a fixed sum in lieu of tax and be tax compliant.
There would always be a segment of taxpayers who would find it difficult to completely fulfill the compliance requirement of tax laws, may be due to their small size or nature of their operations. From the tax collector view point also, the cost of collecting tax from such tax payers is far more in percentage terms than the tax collected from them. But this argument can not be used to exempt them from payment of tax. To meet this dual objective of simplicity for tax collector and tax payer, a scheme called Composition Scheme is offered to taxpayer, by which the taxpayers are given the option to pay an amount calculated on some parameter in lieu of tax calculated based on complex calculations expected by that law. In the proposed GST law also the composition schemes will be offered to certain set of taxpayers. The same is contained in Section 8 of Model GST law. On going through this section, I find that the scheme provided in this section is non workable and does not meet the desired objective. In the following article an attempt has been made to analyse these provisions.
8. Composition Levy
(1) Notwithstanding anything to the contrary contained in the Act but subject to sub section (3) of section 7, on the recommendation of the Council, the proper officer of the Central or a State Government may, subject to such conditions and restrictions as may be prescribed, permit a registered taxable person, whose aggregate turnover in a financial year does not exceed [fifty lakh of rupees], to pay, in lieu of the tax payable by him, an amount calculated at such rate as may be prescribed, but not less than one percent of the turnover during the year:
Provided that no such permission shall be granted to a taxable person who effects any inter-State supplies of goods and/or services.
Provided further that no such permission shall be granted to a taxable person unless all the registered taxable persons, having the same PAN as held by the said taxable person, also opt to pay tax under the provisions of this sub-section.
(2) A taxable person to whom the provisions of sub-section (1) apply shall not collect any tax from the recipient on supplies made by him nor shall he be entitled to any credit of input tax.
(3) If the proper officer has reasons to believe that a taxable person was not eligible to pay tax under sub-section (1), such person shall, in addition to any tax that may be payable by him under other provisions of this Act, be liable to a penalty equivalent to the amount of tax payable as aforesaid:
Provided that no penalty shall be imposed without giving a notice to show cause and without affording a reasonable opportunity of being heard to the person proceeded against.
THE SCHEME AS PER MODEL LAW
ANALYSIS OF FEATURE OF THE SCHEME
♣ The aggregate turnover has been defined in Section 2(6) to mean aggregate value of all taxable and non taxable supplies, exempt supplies and export of goods and/ or services of a person having same PAN.
♣ From the wording it appears that the scheme with same turnover would be available to Supplier of goods or Supplier of Services or Supplier of goods / services. This looks to be very unlikely as margin of value addition in goods and services vary to a great extent. The average margin of value addition in goods is to the tune of 10% to 25% whereas in services it could be between 10% to 75%.
♣ Not less than 1% of the turnover will be payable in lieu of GST.
a. From the wording in section it is not clear that whether amount will be calculated on aggregate turnover or taxable turnover.
b. In case it is calculated on aggregate turnover than it will be a non workable proposal for a taxpayer having exempt and non taxable income.
♣ Taxpayer will not collect any tax on the supplies made by him. Since the supplier has not to collect tax, to imagine him to be issuing sales invoices or maintaining a record of his turnover is a faulty thinking.
♣ Taxpayer will not be eligible to claim input tax credit. Thus the amount paid by him though payable in reference to total value will be effectively percentage of his value addition only.
1. The Composition Schemes are available in Service tax and State Vat laws as on date. They are different for different kind of Suppliers. So the schemes need to be made in reference to nature of business besides the size of business as is proposed in the Model law.
2. The amount of composition levy needs to be fixed up in reference to value of input supplies in case of Supplier of goods as expecting these suppliers to be maintaining records of their turnover is expecting impossibility. The record of his input supplies will already be available in the GSTN from the figures submitted by his suppliers.
3. The amount of levy need to be fixed as percentage of taxable turnover only and not as percentage of aggregate turnover other wise it will be very unfair to suppliers having non taxable and exempt turnover.
CA SANJEEV MALHOTRA
FCA, FCS, AICWA, LL.B
Indirect tax Consultant