The new composition provides a simpler method of calculating tax liability. In a bid to reduce the cost of administering small traders in the proposed Goods and Services Tax (GST) regime, the finance ministry plans to collect taxes from businesses below a turnover of Rs 1 crore at a defined floor rate, which will be much lower than the GST rate.

This composition, which provides a simpler method of calculating tax liability, will be optional for dealers.

For instance, a dealer whose turnover is between Rs 10 lakh and Rs 1 crore can opt for a compounded levy of one per cent on his taxable turnover, instead of paying GST at 16 per cent.

“The compounding scheme may have an upper ceiling of Rs 1 crore on gross annual turnover and a floor tax rate, which could be a fixed amount or a percentage of the annual turnover,” said an official in the finance ministry, on condition of anonymity. “The scheme will be administered by the states for collecting Central GST (CGST) as well as State GST (SGST). Dealers involved in inter-state purchases will not be eligible for it.”

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In the current value-added tax (VAT) regime also, there is a compounding scheme for businesses below a turnover of Rs 50 lakh in many states. It has not been availed by many traders because the difference between the VAT rate (4 per cent) and the floor rate (about 1 per cent) is not huge. Moreover, traders who join the scheme cannot issue tax invoices to customers or claim set-off on VAT paid on purchases. In the GST scheme, too, the input tax credit will not be allowed against the purchases made from exempt dealers.

The empowered committee of state finance ministers had suggested compounding a cut-off at Rs 50 lakh and a floor rate of 0.5 per cent across the states. The task force of the 13th Finance Commission on GST suggested that small dealers with a turnover of Rs 10 lakh to Rs 40 lakh be allowed to opt for a compounded levy of one per cent, each towards CGST and SGST.

The Centre agreed for a cut-off of Rs 50 lakh for CGST, provided the threshold below which businesses would not be taxed by the Union government was kept at Rs 10 lakh, instead of Rs 1.5 crore suggested by the empowered committee. It, however, said the floor rate of 0.5 per cent would be for SGST alone.

Another official said the limit was proposed to be raised to reduce the compliance burden for small traders and small-scale industries and administrative work for the states.

The finance ministry has suggested simplified procedures for dealers under the compounding scheme, such as registration by single agency for both SGST and CGST without manual interface, no physical verification of premises and no pre-deposit of security, simplified return format, longer frequency for return filing, electronic return filing through certified service centres or chartered accountants, audit in 1-2 per cent cases based on risk parameters, and lenient penal provisions.

Under VAT, traders dealing in sugarcane, pan masala, narcotics and rectified spirit are not eligible for the compounding scheme. The Finance Commission task force suggested that dealers of high value goods like gold, silver and platinum ornaments, precious stones and bullions, subject to the threshold exemption but without the ceiling of Rs 40 lakh, be allowed to opt for the scheme in GST. It reasoned such items are prone to smuggling due to high tax incidence resulting in social and economic disorder.

Making the Process less Taxing

  • The finance ministry plans to collect taxes from businesses below a turnover of Rs 1 crore at a defined floor rate, which will be much lower than the GST rate
  • The scheme will be administered by the states for collecting Central GST as well as State GST. Dealers involved in inter-state purchases will not be eligible for it
  • In the current VAT regime, there is a compounding scheme for businesses below a turnover of Rs 50 lakh in many states. But it has not been availed of by many traders because the difference between the VAT rate (4 per cent) and the floor rate (about 1 per cent) is not huge
  • Moreover, traders who join the scheme cannot issue tax invoices to customers or claim set-off on VAT paid on purchases
  • In the GST scheme, too, the input tax credit will not be allowed against the purchases made from exempt dealers
  • The empowered committee of state finance ministers had suggested compounding a cut-off at Rs 50 lakh and a floor rate of 0.5 per cent across states
  • The task force of the 13th Finance Commission on GST suggested that small dealers with a turnover of Rs 10 lakh to Rs 40 lakh be allowed to opt for a compounded levy of one per cent, each towards CGST and SGST

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