1. Press Release issued after the 32nd GST Council meeting reads as follows on the decision of increasing the threshold limit for registration:
“2. Higher exemption threshold limit for supplier of goods: There would be two threshold limits for exemption from registration and payment of GST for the suppliers of goods i.e. Rs 40 lakhs and Rs 20 lakhs. States would have an option to decide about one of the limits within a weeks’ time. The threshold for registration for service providers would continue to be Rs 20 lakhs and in case of Special category States Rs 10 lakhs.”
2. Subsequently Notification No. 10/2019-Central Tax dt. 07.03.2019 came to be issued to provide for the said higher threshold limit. In the present article we seek to understand the nuances of the said notification.
3. The referred notification has been issued by exercising the powers granted u/s 23(2) of the CGST Act, 2017. Said provision grants power to the Government, on the recommendations of the Council, to specify the category of persons who may be exempted from obtaining the registration under the Act. It thus follows that vide the referred notification “category of persons” have been stipulated who are exempted from seeking the registration.
Why does the registration matter ?
4. Perusal of Sec. 9(1) of the CGST Act, 2017 entails that the tax which is levied on the “supply” of goods or services or both shall be collected from the “taxable person” in the manner prescribed. Further the term “taxable person” as defined u/s 2(107) of the said Act encompasses the person who is registered as well as the person who is liable to be registered u/s 22 or 24 of the said Act. Hence the tax levied on the “supply” cannot be collected from the person who is not a “taxable person”. Two conclusions will therefore follow:
a. Once a person is registered (even voluntarily), such person will be liable to pay the tax which has been levied on the supplies made by him irrespective of the turnover and
b. The person who is not liable to be registered and is also not registered voluntarily cannot be held liable to pay the tax.
5. Hence under GST the exemption from the payment of the tax follows the exemption from registration.
Which category of the persons can claim the exemption from the registration under the new notification ?
6. Referred notification provides as under:
“Any person, who is engaged in exclusive supply of goods and whose aggregate turnover in the financial year does not exceed forty lakh rupees”
7. Hence only a person satisfying following two conditions can claim the exemption from the registration (subject to certain exceptions discussed later):
a. Who is engaged in exclusive supply of goods
Reference here is invited to Sec. 9 read with Sec. 7, Sec. 8 as well as Schedule II of the CGST Act, 2017. This is because joint reading of the referred provisions can only tell one whether he is supplying the “goods” or “services” or “both”. As an example a person undertaking works contract or supply of food as a part of any service shall be deemed to have made supply of “services” and not supply of “goods”. Hence such person cannot fulfil the said condition.
What about the person supplying the services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount ? Government at many places (see Notification No. 2/2019-Central Tax (Rate) as an example) have chosen to specify that such interest income shall not be considered while determining the aggregate turnover. However, the present notification is silent on this point. Hence can a person having interest income (from Fixed Deposits) be prohibited from taking the benefit of the higher threshold exemption when all other supplies are exclusively of goods ? We are of the view that such interest income can tantamount to supply only if the test of “business” as enshrined u/s 7(1) is surpassed qua the transaction. If it is derived from an investment activity, we are of the view that the same is not a “supply” and hence it cannot be considered as the “supply of services”. Interpreting it otherwise would also defeat the intent behind the notification.
b. Aggregate turnover in the financial year do not exceed INR 40 lakhs
The term aggregate turnover as defined u/s 2(6) of the CGST Act, 2017 includes all kinds of supplies. Hence the aggregate of the same needs to be seen as to whether it is below INR 40 lakhs or not to claim exemption from registration. Another interesting issue attached here is as to what would happen if such person crosses the limit of INR 40 lakhs during the financial year itself ? Will he be held liable to pay the tax on the first INR 40 lakhs or will he be liable to pay the tax only on the incremental amount ?
It must be noted that the limit of INR 40 lakhs has to be seen for the financial year in which exemption from registration is sought and not of the preceding financial year. Hence a person at the start of the year, fulfilling the other conditions, can seek exemption from the registration. Once the limit of INR 40 lakhs is breached, such person becomes “liable for registration”, for want of any exemption, and hence becomes the “taxable person”. Thus such person will be liable to pay the tax only on the incremental amount.
Can a person claim the exemption only on fulfilling the above referred conditions ?
8. This is because the notification further carves an exception and provides that the following persons cannot claim the exemption even if both the above referred conditions are fulfilled:
(a) persons required to take compulsory registration under section 24 of the said Act;
9. Section 24 of the CGST Act, 2017 provides that the following categories of persons shall be required to obtain the compulsory registration:
(i) persons making any inter-State taxable supply;
(ii) casual taxable persons making taxable supply;
(iii) persons who are required to pay tax under reverse charge;
(iv) person who are required to pay tax under sub-section (5) of section 9;
(v) non-resident taxable persons making taxable supply;
(vi) persons who are required to deduct tax under section 51, whether or not separately registered under this Act;
(vii) persons who make taxable supply of goods or services or both on behalf of other taxable persons whether as an agent or otherwise;
(viii) Input Service Distributor, whether or not separately registered under this Act;
(ix) persons who supply goods or services or both, other than supplies specified under sub-section (5) of section 9, through such electronic commerce operator who is required to collect tax at source under section 52;
(x) every electronic commerce operator [who is required to collect tax at source under section 52];
(xi) 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 person; and
(xii) such other person or class of persons as may be notified by the Government on the recommendations of the Council
10. Hence the above referred persons cannot claim exemption from registration. Interesting issue comes up when Sec. 24(iii) referred above is seen. It provides that the persons “who are required to pay tax under reverse charge” shall be compulsorily registered. Hence let us consider a scenario wherein a trader engages a GTA (who is not under forward charge) to supply transportation services. Said trader otherwise fulfills both the conditions discussed earlier (exclusive supplier of goods and turnover below INR 40 lakhs). Can such trader claim the exemption from registration under the referred notification or he cannot because GTA services procured by him are under reverse charge ? We shall assume that the GTA services in question is taxable. Now Sec. 9(3) of the CGST Act, 2017 grants power to the Government to specify any “recipient” and make him liable to pay the tax on certain categories of supply of goods or services. Notification No. 13/2017 – C.T. (R) issued be exercising powers u/s 9(3) in the context of GTA services makes certain recipients liable to pay the tax under reverse charge. Perusal of lists suggests that the person in question, assuming an individual and being a trader, is not covered and hence it can be safely concluded that such person does not attract compulsorily registration u/s 24(iii). But what if such trader is a partnership firm ? A partnership firm is covered in the list of recipients who have been made liable to pay the tax on the GTA services. Can such trader, being a partnership firm, enjoy the exemption from the registration in the given facts ? To answer the question let us see the opening words of Sec. 24. Same are reproduced below:
“SECTION 24. Compulsory registration in certain cases. — Notwithstanding anything contained in sub-section (1) of section 22, the following categories of persons shall be required to be registered under this Act, —“
11. Now Sec. 24 only provides for overriding Sec. 22(1) and not Sec. 23. Hence it appears that Sec. 23 under which presently discussed notification has been issued would override Sec. 24. Said conclusion would have been valid provided the notification under discussion would have remained silent with respect to the application of Sec. 24. As the said notification expressly excludes from its purview the persons who are required to take compulsory registration u/s 24 in our case the partnership firm may not be able to enjoy the exemption from registration.
12. Now one could say that the above conclusion looks illogical as the intent behind the notification will be defeated. It must be seen that the intent behind the notification is not to grant exemption from the payment of tax under reverse charge, wherever applicable. However, the flip side is that once the registration is sought, outward tax cannot be avoided. Hence prudent shall demand that the person opting for the exemption from registration under the referred notification should exercise due caution and avoid triggering any of the clauses u/s 24.
13. It may also be noted that the person making inter-state supply (in the present case of goods) shall also trigger compulsory registration and hence cannot claim the exemption from registration by applying the higher threshold.
(b) persons engaged in making supplies of the goods, the description of which is specified in column (3) of the Table below and falling under the tariff item, sub-heading, heading or Chapter, as the case may be, as specified in the corresponding entry in column (2) of the said Table.
14. Person making supply of the following goods cannot claim exemption even if both the earlier referred conditions are fulfilled:
|Sl. No.||Tariff item, subheading, heading or Chapter||Description|
|1||2105 00 00||Ice cream and other edible ice, whether or not containing cocoa|
|2||2106 90 20||Pan masala|
|3||24||All goods, i.e. Tobacco and manufactured tobacco substitutes|
(c) persons engaged in making intra-State supplies in the States of Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Puducherry, Sikkim, Telangana, Tripura, Uttarakhand; and
15. These States have chosen not to apply the higher threshold and hence shall be continued to be governed by the earlier threshold limits.
(d) persons exercising option under the provisions of sub-section (3) of section 25, or such registered persons who intend to continue with their registration under the said Act.
16. Persons who have taken voluntary registration or those who intend to continue with the existing mandatory registrations can obviously choose not to avail the higher threshold exemption. This is suggested for those suppliers who intend to avail the credit and pass the same to their customers who in turn can avail the credit of the tax charged. It must however be noted that the mandatorily registered persons can also choose to claim the exemption at a later date, subject to fulfilment of above discussed conditions, and need not claim the same from the 1st day of the financial year. Such persons shall however be liable to pay the tax on the supplies made during the period when they were registered.
17. Above discussions would thus lead to an inescapable conclusion that the exemption from the registration upto INR 40 lakhs is only for pure traders. However, care must be taken to avoid breaching any of the conditions discussed in detail above as the consequences thereof could be the demand of the tax at the normal rates on the outward supplies without the grant of the corresponding input tax credit (as it may get time barred).
(Views are strictly personal)