Background : Reverse charge or TDs provisions are not compatible to the system of forward charge Value added taxation. The system is based on input tax credit mechanism. However there are certain dominant sections of society who resist being subjected to tax and to overcome it the reverse charge is used. Though it puts compliance burden on honest tax payers, to some extent provisions of Sec 9(3) are justifiable.
What is the aim of this additional reverse charge provision : We understand that the intention behind this provision is to catch those who avoid paying taxes by remaining unregistered, such as sand suppliers, petty contractors etc.
Difficulties for MSME sector : Reverse Charge provision U/S 9(4) will hit hard the micro, small and medium enterprises (traders, work shops, job workers, processors, small contractors). The small or petty contractors who are not liable for registration because of smallness of turnover (less than 20 lakhs) may loose business or will be forced to take registration. Registered MSME units do not have in house expertise to know the rates of various inputs. They can not afford the services of qualified consultants. Most of them rely on accountants or part time tax consultants, even quacks. Therefore this provision will not only increase compliance cost for them, but they are likely to make mistakes which make them vulnerable to penal provisions. There will be no significant gain to the revenue but lot of pain to MSME tax payers.
Every month tax payer will have additional tax liability. It will also be drain on cash flow. The exercise is futile considering the cost of compliances as compared to revenue gain.
Concession of Rs. 5,000 every day makes no real difference. Auditors as well as assessing officers will have to go through inward supplies of every day and calculate whether it exceeds the limit.
It is causing and will cause lot of difficulties to honest small and medium scale tax payers. In addition artisans who are from weaker section of society will get lesser amount for their work on the pretext that their customers have to pay tax. No system can monitor this.
Exempt supplies will become costly : Hospitals, educational institutes who are exempted from being priority sector. However they invariably have to take services of unregistered persons due to smallness of business. Example : outside faculty, lecturer. For these institutes this reverse charge tax is cost which will ultimately fall on students and patients. Similar will be the fate of housing societies and many other such organizations.
Section 9(4) may be deleted fully
Other alternatives to bring into tax net those who try to avoid.
1) Use provisions of sec 9(3) and TDs more effectively to bring in tax net those who have taxable turnover but avoid paying tax.
2) It may be provided that in case of input supplies from any one person during a month is more than Rs. 20,000 or during a year is more than Rs. 75,000 his name, address and PAN number shall be reported in return.
3) It may be provided that tax will be payable only in case the input goods or services are not eligible for input tax credit and value of such input from that supplier during a month is more than 5,000.
4) Reverse Charge Tax U/S 9(4) will be payable at a uniform rate of 5%.
An illustrative list of URD inputs is given below. It is testimony how difficult it is to calculate the tax on reverse charge basis. It is necessary to reduce the rigors of the provision of Sec 9(4) otherwise it will create ill will for GST among st MSME whose number is large and spread across the country.
List of inward supplies debited to P&L account likely to be from unregistered persons
1) Reimbursement of various expenses while on duty paid to employee by way of allowance.
2) Reimbursement of expenses while on duty paid to employee at actual.
3) Water bottles.
4) Kerosene or other fuels
5) Loading & Unloading expenses
7) Rent Paid for residence of employee.
8) Shop/ Go down Rent
9) News paper, books & magazines
10) Job Work / Labor Charges
11) Food & Beverages Expense during out station work or in office.
12) Stay in a hotel, lodge
13) Truck/ Tempo Hire Charges.
14) Advertisement in magazines
16) Flex designs
17) Printing of cards, envelops etc.
18) AMC Charges
19) Commission to agents,
20) House Keeping Charges. (sweepers)
21) Car /vehicle cleaning charges.
22) Xerox copies/ photo copies.
23) Postage and Courier Charges.
24) Stationery –paper, pen, pencil, clips etc.
25) Hardware –screw/ nut/ bolt
26) Painting charges.
28) Repair and Maintenance – Building
29) Repair and Maintenance –furniture
30) Repair and Maintenance – machinery
31) Repair and Maintenance – Vehicles
33) Electrical goods/ bulbs / wire, switches etc
34) Security Charges
35) Sitting Fees, Commission or any other payment made to director by company.
36) Account Writing ,
37) Professional Fees
38) Cold drinks.
39) Tea, coffee biscuits.
40) Entertainment expenses.
41) Staff Uniform cloths.
42) Laundry expenses
43) Packing material
44) Packing Charges
45) binding charges
46) Banquets, flowers such other welcome articles
47) Gift articles from women self help groups
48) Chakali, ladu, bakery products from small self help group .
49) Driver charges
50) Hire of computers and other peripherals.
51) Furniture hire
52) Hire of Office equipments
53) Festival contribution to sarvajanik mandal.
54) Conveyance Expense – Taxi, Auto, Bus, Train
55) Rent for premises.
56) Petrol, diesel, lubricants.
57) Staff dress (cloths) Footwear, socks, caps etc.
58) Notary charges.
59) RTO/passport agent charges.
60) Parking charges paid
61) Entry fee
The list is illustrative and not exhaustive.
To find out correct rate will be daunting task for not only MSMEs but tax experts also. Practically each one must know the entire rate schedule, exemptions with terms and conditions for goods as well as services. If it is scrapped GST will be much easier.
Hope that the better counsel prevails on Government, more specifically on GST council at the earliest.
(Author can be reached at firstname.lastname@example.org)