Whether Section 24 of CGST Act Hits Article 19(1) (g) of the Constitution
Except persons mentioned in or notified under section 23 of the Central Goods and Services Tax Act, 2017 (CGST Act), section 24 of said CGST Act makes it mandatory to obtain Goods and Service Tax registration, for all persons mentioned, or referred to, in the said section 24, irrespective of their turnover.
Article 19(1) (g) of the Indian Constitution provides that all citizens shall have right to practise any profession or to carry on any occupation, trade or business. However, article 19(6) of the Constitution provides that state can, by law, impose reasonable restrictions on the right provided by article 19(1) (g) of the Constitution.
Clause (107) of section 2 of the CGST Act defines expression ‘taxable person’ to mean a person who is registered or liable to be registered under section 22 or section 24 of the said Act. Section 9 of the CGST Act is charging section of the said Act. Said section 9 makes a taxable person liable for payment of tax. Such definition of expression ‘taxable person’ also applies to all other GST Laws. All GST Laws make a taxable person liable for making various compliances under the provisions of the GST Laws.
Tax compliance costs are understood as costs incurred to obey a tax law. These costs are incurred by taxpayers, or third parties, or both, in meeting the requirements of the tax system, over and above the liability of tax imposed by the tax law. In the Goods and Services Tax (GST), tax compliance costs may be divided mainly in two categories, viz. (I) Fiscal costs, and (ii) Time costs. There may also be some other costs which may be classified as GST compliance cost.
In making compliance of GST Laws, fiscal compliance costs may include sums spent in obtaining assistance of tax professional in obtaining registration, in procuring and maintaining computer, software, and mobile phone, employee costs of running day to day GST accounting, cost of expertise to understand and keep up with changes in policies and rates, cost of submitting GST returns, cost of external accountants for operational and advisory services, sums spent on tax professionals (i.e. tax agents and accountants), cost of stationary, printing charges, etc., and expenses relating to taxation guides, books, communication and other incidental costs.
In relation to GST, time compliance costs are the costs which are incurred by a taxpayer himself, mainly on record keeping for tax purposes, completing the tax return and/or in preparing tax details for the tax professionals as well as time spent on dealing with the tax professionals and tax authorities.
Conditions created by the method of book-keeping in GST Laws become the major problem to businessmen. Maintenance of accounts for GST payment demands a series of necessary duties closely related to the rules imposed by the principal tax laws, rules and regulations. There are a number of detailed rules concerning the ‘book-keeping’ arrangements to enable GST assessment to be carried out. Since adequate records and accounts of all transactions are to be maintained to support tax claims, businessmen must provide invoices, tax returns, book-keeping and accounts in agreement with the GST legislation. Such records are part of the expenses, which the GST registered business has to incur to comply and to fulfill its role in collecting GST revenue.
Parliament has enacted the Central Goods and Services Tax Act, 2017 (CGST Act) for the purpose of levy and collection of central goods and services tax leviable on intra-State supply of goods, or services, or both in the States and the Union Territories. Similar to the CGST Act, with identical provisions, Legislature of each State has enacted State Goods and Services Tax Act (the SGST Act) for such State for the purpose of levy and collection of central goods and services tax leviable on intra-State supply of goods, or services, or both in the State.
Section 9 of the CGST Act / SGST Act which is charging section of the Act makes every taxable person liable for payment of tax. Section 2(107) of the said CGST Act / SGST Act defines expression “taxable person” to mean a person who is registered or liable to be registered under section 22 or section 24 of the said Act. Apart from the functions which are required to be discharged by a taxpayer under the CGST Act and the rules framed thereunder, a registered person is also required to discharge following functions, namely:-
1. Section 25 of the CGST Act provides that every person who is liable to be registered under section 22 or section 24 shall apply for registration in every such State or Union territory in which he is so liable within thirty days from the date on which he becomes liable to registration.
2. Sub-section (8) of section 25 of the CGST Act provides as follows:–
“(8) Where a person who is liable to be registered under this Act fails to obtain registration, the proper officer may, without prejudice to any action which may be taken under this Act or under any other law for the time being in force, proceed to register such person in such manner as may be prescribed.”
3. Sub-section (1) of section 31 of the CGST Act provides that a registered person supplying taxable goods shall issue a tax invoice showing the description, quantity and value of goods, the tax charged thereon and such other particulars as may be prescribed.
4. Sub-section (2) of section 31 of the CGST Act provides that a registered person supplying taxable services shall issue a tax invoice, showing the description, value, tax charged thereon and such other particulars as may be prescribed.
5. Sub-section (1) of section 34 of the CGST Act provides that where a tax invoice has been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, shall issue to the recipient a credit note containing such particulars as may be prescribed.
6. Sub-section (2) of section 34 of the CGST Act provides that where a tax invoice has been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to be less than the taxable value or tax payable in respect of such supply, the registered person, who has supplied such goods or services or both, shall issue to the recipient a debit note containing such particulars as may be prescribed.
7. Sub-section (1) of section 35 of the CGST Act provides that every registered person shall keep and maintain, at his principal place of business, as mentioned in the certificate of registration, a true and correct account of—
(a) production or manufacture of goods;
(b) inward and outward supply of goods or services or both;
(c) stock of goods;
(d) input tax credit availed;
(e) output tax payable and paid; and
(f) such other particulars as may be prescribed.
8. Proviso of sub-section (1) of section 35 of the CGST Act provides that where more than one place of business is specified in the certificate of registration, the accounts relating to each place of business shall be kept at such places of business:
Provided further that the registered person may keep and maintain such accounts and other particulars in electronic form in such manner as may be prescribed.
9. Sub-section (1) of section 37 of the CGST Act provides that every registered person, other than an Input Service Distributor, a non-resident taxable person and a person paying tax under the provisions of section 10 or section 51 or section 52, is required to furnish, electronically, in such form and manner as may be prescribed, the details of outward supplies of goods or services or both effected during a tax period on or before the tenth day of the month succeeding the said tax period and such details shall be communicated to the recipient of the said supplies within such time and in such manner as may be prescribed:
10. Sub-section (1) of section 38 of the CGST Act provides that every registered person, other than an Input Service Distributor or a non-resident taxable person or a person paying tax under the provisions of section 10 or section 51 or section 52, shall verify, validate, modify or delete, if required, the details relating to outward supplies and credit or debit notes communicated under sub-section (1) of section 37 to prepare the details of his inward supplies and credit or debit notes and may include therein, the details of inward supplies and credit or debit notes received by him in respect of such supplies that have not been declared by the supplier under sub-section (1) of section 37.
11. Sub-section (1) of section 39 of the CGST Act provides that every registered person, other than an Input Service Distributor or a non-resident taxable person or a person paying tax under the provisions of section 10 or section 51 or section 52 is required, for every calendar month or part thereof, shall furnish, in such form and manner as may be prescribed, a return, electronically, of inward and outward supplies of goods or services or both, input tax credit availed, tax payable, tax paid and such other particulars as may be prescribed, on or before the twentieth day of the month succeeding such calendar month or part thereof.
12. Sub-section (2) of section 39 of the CGST Act provides that a registered person paying tax under the provisions of section 10 is required, for each quarter or part thereof, shall furnish, in such form and manner as may be prescribed, a return, electronically, of turnover in the State or Union territory, inward supplies of goods or services or both, tax payable and tax paid within eighteen days after the end of such quarter.
13. Sub-section (1) of section 42 of the CGST Act provides that the details of every inward supply furnished by a registered person (hereafter in this section referred to as the “recipient”) for a tax period shall, in such manner and within such time as may be prescribed, be matched––
(a) with the corresponding details of outward supply furnished by the corresponding registered person (hereafter in this section referred to as the “supplier”) in his valid return for the same tax period or any preceding tax period;
(b) with the integrated goods and services tax paid under section 3 of the Customs Tariff Act, 1975 in respect of goods imported by him; and
(c) for duplication of claims of input tax credit.
14. Sub-section (1) of section 44 of the CGST Act provides that every registered person, other than an Input Service Distributor, a person paying tax under section 51 or section 52, a casual taxable person and a non-resident taxable person, is required to furnish an annual return for every financial year electronically in such form and manner as may be prescribed on or before the thirty-first day of December following the end of such financial year.
15. Sub-section (2) of section 44 of the CGST Act provides that every registered person who is required to get his accounts audited in accordance with the provisions of sub-section (5) of section 35 is required to furnish, electronically, the annual return under sub-section (1) along with a copy of the audited annual accounts and a reconciliation statement, reconciling the value of supplies declared in the return furnished for the financial year with the audited annual financial statement, and such other particulars as may be prescribed.
16. Sub-section (2) of section 48 of the CGST Act provides that a registered person may authorise an approved goods and services tax practitioner to furnish the details of outward supplies under section 37, the details of inward supplies under section 38 and the return under section 39 or section 44 or section 45 in such manner as may be prescribed. Sub-section (3) of section 48 of the CGST Act provides that notwithstanding anything contained in sub-section (2), the responsibility for correctness of any particulars furnished in the return or other details filed by the goods and services tax practitioners shall continue to rest with the registered person on whose behalf such return and details are furnished.
17. Section 59 of the CGST Act provides that every registered person shall self-assess the taxes payable under this Act and furnish a return for each tax period as specified under section 39.
Few provisions of the CGST Act run as follows:-
1. Section 122 (1)(i) of the CGST Act provides that where a taxable person who is liable to be registered under this Act but fails to obtain registration he shall be liable to pay a penalty of ten thousand rupees or an amount equivalent to the tax evaded or the tax not deducted under section 51 or short deducted or deducted but not paid to the Government or tax not collected under section 52 or short collected or collected but not paid to the Government or input tax credit availed of or passed on or distributed irregularly, or the refund claimed fraudulently, whichever is higher.
2. Section 122 (1)(xvi) of the CGST Act provides that where a taxable person fails to keep, maintain or retain books of account and other documents in accordance with the provisions of this Act or the rules made thereunder he shall be liable to pay a penalty of ten thousand rupees or an amount equivalent to the tax evaded or the tax not deducted under section 51 or short deducted or deducted but not paid to the Government or tax not collected under section 52 or short collected or collected but not paid to the Government or input tax credit availed of or passed on or distributed irregularly, or the refund claimed fraudulently, whichever is higher.
3. Section 125 of the CGST Act provides that a person, who contravenes any of the provisions of the said Act or any rules made thereunder for which no penalty is separately provided for in this Act, shall be liable to a penalty which may extend to twenty-five thousand rupees.
4. Section 130 (1)(iii) of the CGST Act provides that if a person supplies any goods liable to tax under the CGST Act without having applied for registration then, all such goods or conveyances shall be liable to confiscation and the person shall be liable to penalty under section 122.
Parliament has enacted the Central Goods and Services Tax Act, 2017 (the CGST Act) on the basis of recommendations made by the GST Council to the Union. Section 24 of the said Act runs as follows:–
“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;
(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;
(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.”
Section 21(1), referred to in section 24 of the CGST Act runs as follows:–
“22. Persons liable for registration.— (1) Every supplier shall be liable to be registered under this Act in the State or Union territory, other than special category States, from where he makes a taxable supply of goods or services or both, if his aggregate turnover in a financial year exceeds twenty lakh rupees:
Provided that where such person makes taxable supplies of goods or services or both from any of the special category States, he shall be liable to be registered if his aggregate turnover in a financial year exceeds ten lakh rupees:
Provided further that the Government may, at the request of a special category State and on the recommendations of the Council, enhance the aggregate turnover referred to in the first proviso from ten lakh rupees to such amount, not exceeding twenty lakh rupees and subject to such conditions and limitations, as may be so notified:
Provided also that the Government may, at the request of a State and on the recommendations of the Council, enhance the aggregate turnover from twenty lakh rupees to such amount not exceeding forty lakh rupees in case of supplier who is engaged exclusively in the supply of goods, subject to such conditions and limitations, as may be notified:
Explanation.––For the purposes of this sub-section, a person shall be considered to be engaged exclusively in the supply of goods even if he is engaged in exempt supply of services provided by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount.”
Section 23 of the CGST Act relates to “Persons not liable for registration”. Section 23 of the CGST Act runs as follows:–
“23. Persons not liable for registration. — (1) The following persons shall not be liable to registration, namely:––
(a) any person engaged exclusively in the business of supplying goods or services or both that are not liable to tax or wholly exempt from tax under this Act or under the Integrated Goods and Services Tax Act;
(b) an agriculturist, to the extent of supply of produce out of cultivation of land.
(2) The Government may, on the recommendations of the Council, by notification, specify the category of persons who may be exempted from obtaining registration under this Act.”
Conjoint reading of sections 22, 23 and 24 of the CGST Act reveals that all persons mentioned in clauses (i) to (xi) of section 24, and such other persons or class of persons who may be notified by the Government on recommendation of the Council, except the persons who have been declared not liable to registration in, or who may be notified not liable to registration under, section 23, have been made liable for registration irrespective of their turnover.
Section 25 (1) of the CGST Act requires that every person who is liable to be registered under section 22 or section 24 shall apply for registration. Section 25 (8) of the said CGST Act provides that where a person who is liable to be registered under this Act fails to obtain registration, the proper officer may, without prejudice to any action which may be taken under this Act or under any other law for the time being in force, proceed to register such person in such manner as may be prescribed. Section 122 (1)(i) of the CGST Act provides that where a taxable person who is liable to be registered under this Act but fails to obtain registration he shall be liable to pay a penalty of ten thousand rupees or an amount equivalent to the tax evaded. Section 125 of the CGST Act provides that a person, who contravenes any of the provisions of the said Act or any rules made thereunder for which no penalty is separately provided for in this Act, shall be liable to a penalty which may extend to twenty-five thousand rupees. Section 130 (1)(iii) of the CGST Act provides that if a person supplies any goods liable to tax under the CGST Act without having applied for registration then, all such goods or conveyances shall be liable to confiscation and the person shall be liable to penalty under section 122. Under the said Act, provisions make it mandatory to submit various statements and returns. Sub-section (1) of section 35 of the CGST Act provides that every registered person shall keep and maintain, at his principal place of business, as mentioned in the certificate of registration, a true and correct account of—
(a) production or manufacture of goods;
(b) inward and outward supply of goods or services or both;
(c) stock of goods;
(d) input tax credit availed;
(e) output tax payable and paid; and
(f) such other particulars as may be prescribed.
Provisions of GST Laws (CGST Act and other GST Acts) go to show that a person, who is liable to registration under the said laws, cannot carry on business without making compliance of provisions of GST Laws. In making compliance of provisions of the GST Laws, businessman has to bear compliance costs over and above the amount of tax payable by him to the Government.
In GST, along with value of supply of goods, or services, or both, taxpayers are allowed to collect the amount of tax which is payable by them to the Government. But they cannot collect GST compliance costs from their customers. Such costs are to be borne by taxpayers themselves out of their earnings from the business. It is noteworthy that there is no direct relation in between total compliance cost and aggregate turnover of business. In cases of businesses having small turnover, GST compliance cost proves to be significant part of their earning from the business whereas in cases of big businesses compliance cost proves to be insignificant or nominal in view of their earnings from the business. Earnings from business may also vary depending on nature of business and margin of profit in the business. In cases of businesses having small turnovers, there may be cases in which total GST compliance cost may, even in normal course of business, exceed the amount that would have been earned by the taxpayer in non-GST regime. In order to study effect of compliance cost on a person running business with small turnover, let us assume that for the same financial year, all other facts remaining same, ──
(i) net amount of profit of a businessman from business in non-GST regime is amount A; and
(ii) net amount of profit of the same businessman in GST regime is amount B.
In non-GST regime the businessman will not have to bear any compliance cost of GST Laws whereas in GST regime the businessman will have to bear compliance cost of GST Laws. Compliance cost of GST Laws will be the cost incurred by the businessman in making compliance of GST Laws. Difference in between two amounts of net profit, one for non-GST regime and the other for GST regime, will be of the amount of compliance cost incurred by the businessman in making compliance of GST Laws. If amount of compliance cost is C, then we can write following equation, namely: ─
Net profit in GST regime (B) = Net profit in non-GST regime (A) – Compliance cost of GST (C)
In the above equation, if amount of compliance cost of GST Laws C is, –
(i) equal to amount of net profit in non-GST regime, i.e. A, then amount of net profit in GST regime, i.e. B, shall be 0 (zero); and
(ii) greater than the amount of net profit in non-GST regime, i.e. A, then amount of net profit in GST regime, i.e. B, shall be a negative figure and its value shall be – (A – C).
In first case, in the GST regime, there will not be any net profit in the business, and in second case, there will be net loss of amount of (C -A) in the business. If this situation continues, no person will like to continue business. Because of compliance cost of GST Laws, businessman shall be forced to close down his business.
One can say that GST compliance cost can be recovered by the supplier of goods or services by increasing value of supply of goods, or services. But such practice cannot be adopted for the following reasons, namely:-
(1) Due to difference in compliance costs, which will be borne by small business, and big business, supply value fixed by small businesses will be higher than the supply value that will be fixed by big businesses.
(2) Any increase in value of goods or services will result in increase in the amount of tax payable by businesses. This will further increase the difference in between gross values of supply of same goods or services made by a small business, and by a big business.
In such circumstances, no customer will like to purchase goods or services from small business by paying more than what he will be required to pay on purchase of same goods or services from a big business. In the process, small supplier will lose his business and will be forced to close down his business due to GST compliance cost.
Presently, unemployment is a big problem. A person, who does not have any other source of his income, often thinks of starting small business of purchase and sale/ supply of goods. Suppose, a person starts small business of supply of goods with small investment of 25,000.00 rupees. During a financial year his turnover of supply of goods, in the normal course of business, turns out to be 3 lakh rupees. Let us consider two situations. In first situation, businessman is not required to bear compliance of GST Laws, and in second situation, businessman is required to bear compliance of GST Laws. Suppose that in first situation in the assessment year businessman is not required to bear compliance of GST Laws, the businessman earns net profit of 24,000.00 rupees @ 8% of his turnover. In second situation, i.e. when GST Law will be applicable, the businessman will be liable for bearing compliance of GST Laws. As the maintenance of accounts for GST payment demands a series of necessary duties imposed by the GST Laws, the businessman, for maintaining account books and day to day details of all transactions, and for preparing tax details for the tax professionals, will acquire services of an accountant having adequate knowledge of GST requirements. In order to keep expenditure on low side, the businessman would prefer a part time accountant. In order to keep up with changes in policies and rates, for submitting GST statements and returns, and for obtaining operational and advisory services, the businessman will have to engage a GST professional. The businessman will also be required to bear cost incurred in travelling from and to his business place to and from the place of business of tax professional. He may also incur expenses on purchase of stationery, maintenance of computer and GST related software. He would have also spent some of his own time in performing GST related tasks.
Suppose, a businessman running small business pays 2000.00 rupees per month to part time accountant, 5,000.00 rupees annually to tax professional , and 2000.00 rupees under other GST related expenditure heads. Cost of self efforts in making compliance of GST provisions will be separate. These are GST compliance costs. GST being applicable, the businessman, for the assessment year, will have to bear these compliance costs of 31,000.00 rupees. In this case, if turnover of business is 3, 00,000.00 rupees and rate of profit inclusive of compliance cost is 8%, ─
(i) had GST been not applicable, the businessman would have earned 24,000.00 rupees as net profit; and
(ii) had GST been applicable, the businessman would have spent 31,000.00 as compliance cost and his net profit would have been (-) 7,000.00 (24,000.00- 31,000.00), i.e. net loss of 7,000.00 rupees.
In the above case, compliance cost will force the businessman to close down its business and where business is run by a citizen, the citizen shall be denied his right to carry on business of supply of goods, or services, or both.
Part III of the Constitution relates to ‘Fundamental Rights’. Article 19 of the Constitution relates to Protection of certain rights regarding freedom of speech, etc. Article 19(1) (g) of the Constitution runs as follows:-
“(1) All citizens shall have the right—
(g) to practise any profession, or to carry on any occupation, trade or business.”
Clause (6) of article 19 of the Constitution runs as follows:–
“(6) Nothing in sub-clause (g) of the said clause shall affect the operation of any existing law in so far as it imposes, or prevent the State from making any law imposing, in the interests of the general public, reasonable restrictions on the exercise of the right conferred by the said sub-clause, and, in particular, nothing in the said sub-clause shall affect the operation of any existing law in so far as it relates to, or prevent the State from making any law relating to,—
(i) the professional or technical qualifications necessary for practising any profession or carrying on any occupation, trade or business, or
(ii) the carrying on by the State, or by a corporation owned or controlled by the State, of any trade, business, industry or service, whether to the exclusion, complete or partial, of citizens or otherwise.”
In view of clause (1) (g), and clause (6), of article 19 of the Constitution, every citizen has right to carry on business of supply of goods, or services, or both. However, the State, in the interests of general public, can impose reasonable restrictions on such right of the citizens. GST is levied in public interests. Secondly, under the GST law businessman can collect amount of GST payable by him to the Government from his customers. Therefore, levy of GST itself does not put any restriction on the right of citizens to carry on business of supply of goods, or services, or both. However, compliance of GST Laws requires a businessman to bear fiscal compliance costs and time compliance costs.
Value of a supply of goods or services may be understood as aggregate of cost incurred in acquiring or producing goods or services, and amount of profit included in the value of supply. Over and above the value of supply, businessman collects amount of GST payable on such supply. It is noteworthy that there is no direct relation in between total compliance cost and aggregate turnover of business. A tax professional may charge same amount (say 12,000,00 rupees) from all businessmen whose turnover does not exceed (say) 50,00,000.00 rupees. The tax professional may charge a single amount (say 24,000.00 rupees) from a businessman whose turnover falls in the range of 50, 00,001.00 rupees to 5, 00, 00,000.00 rupees). In the same manner tax professional may charge another amount from persons whose turnover exceeds 5,00,00,000,00 rupees. Let there be two persons such that annual turnover of one person (Due is 5, 00,000.00 (let us call him first person) and annual turnover of other person is 45, 00,000.00 rupees (let us call him second person). Since annual turnovers of both persons do not exceed 50, 00,000.00 rupees, both persons will pay same amount of 12,000.00 rupees per year to the tax professional. Similarly, a part time accountant may fix his services charges on the basis working hours. Suppose, first person and second person, both persons, engage same accountant for one hour daily services. Suppose, for providing one hour daily accounting services, accountant charges its services charges 2,500.00 rupees per month, (rupees 30,000.00 for one year). Both persons will have to bear same compliance cost of 42,000.00 rupees towards services provided to each person, by the accountant, and the tax professional. If these two compliance costs are to be realised by the said persons by increasing value of supply of goods or services, first person should increase value of supply by 42,000 x 100 / 5,00,000, i.e. by 8.4 percent, and similarly, second person should increase value of supply by 42,000 x 100/ 45,00,000, i.e. by 0.93 percent. Suppose, before revision of value of supply of some specific goods by both persons, value of some specific goods had been 100.00 rupees without amount of GST and 112.00 rupees inclusive of GST where rate of GST is 12%. Then revised value of supply of same goods by first person, without amount of GST, shall become 108.4 rupees, and for second person such revised value of the supply, without amount of GST, shall become 100.93 rupees. Increase in value of supply will also result in increase in the amount of GST payable. Since rate of 12 % of GST is applicable, therefore, before revision of value of supply, for both persons, amount of GST would have been 12.00 rupees. Due to increase in value of supply of same goods, amounts of GST will also be increased. In case of first person, amount of GST on revised value of supply will become 108.4 x 12 /100 rupees, i.e. 13.00 rupees (approx). Due to increase in tax, in case of first person value of supply will be increased by Re. 1.00. In case of second person, amount of GST on revised value of supply will become 100.93 x 12 /100 rupees, i.e. 12.12 rupees (approx). Due to increase in tax, value of supply in case of second person will be increased by Re. 0.12. In view of these facts, revised value of supply of goods with GST for first person shall become 121.40 rupees and revised value of supply of goods with GST for second person shall become 113.05 rupees. Here, we see that gross revised value of supply of same goods charged by first person shall be 121.40 rupees and gross revised value of supply of same goods charged by second person shall be 113.05 (approximately 113.10) rupees. Thus we see that revised value of supply fixed by first person shall be higher by 8.35% than the revised value of supply of same goods fixed by second person. In this scenario, no customer would like to pay 8.35% extra to first person. This will lead to unfair competition in between the first and second person. Being so, first person will lose his customers and business. In order to make prices compatible with second person, first person will be required to cut down value of supply. But by doing so, first person will have to bear part of the compliance cost from its profits.
In the foregoing paragraph I have taken an example of a person whose annual turnover had been 5,00,000.00 rupees and who had received services of (i) a part time accountant who would have charged 2,500.00 rupees per month (rupees 30,000.00 annually), and (ii) a tax professional who would have charged 12,000.00 rupees annually. There I have not considered other GST compliance costs. Suppose, value of other compliance costs would have been 3,000.00 rupees. In view of these figures, total amount of GST compliance cost would have been 30,000.00 + 12,000.00 + 3,000.00, i.e. 45,000.00 rupees. Suppose that had the GST not been applicable, the person, in the normal course of business, would have earned net profit of 8 percent of his gross turnover. His total net profit would have been 5, 00,000.00 x 8 /100 rupees, i.e. 40,000.00 rupees. Had GST been applicable, the person would have been liable for bearing GST compliance costs of 45,000.00 rupees. In this situation, the person would have suffered net loss of 5,000.00 rupees. Suppose, turnover of the person would have been 2, 00,000.00 and net profit, @ 8% of the turnover in non-GST period, had been 16, 000, 00 rupees. In GST period, the person would have paid fixed services charges of the accountant and the tax professional. Such charges would have been 42,000.00 rupees. Other compliance costs may be assumed somewhere in between 0 – to 3,000.00, say 1,500.00 rupees. In that case, in GST regime, the person would have suffered a net loss of 27,500.00 rupees. Under these circumstances, businessman would have been compelled for closing down his business.
In cases of businesses which have small turnover, compliance cost of GST Laws may erase such net profit as would have been earned by the businessman had GST Laws not been applicable. In some cases, in GST regime, compliance cost of GST Laws may even exceed such amount of net profit as would have been earned had GST Laws not been applicable. In both circumstances, a businessman will be forced to close down his business. In my opinion, in such cases, provisions which require compliance under GST Laws hit fundamental right, of citizens of this country, of carrying on business of supply of goods, or services, or both.
In our country, idea of moving towards GST was first mooted by the then Union Finance Minister in his Budget speech for 2006-07. Initially, it was proposed that GST would be introduced from 1st April 2010.The Empowered Committee of State Finance Ministers (EC) which had formulated the design of State VAT was requested to come up with a roadmap and structure for GST. Joint Working Groups of officials having representatives of the States as well as the Centre were set up to examine various aspects of GST and draw up reports specifically on exemptions and thresholds, taxation of services and taxation of inter-State supplies. Based on discussions within and between it and the Central Government, the EC had released its First Discussion Paper (FDP) on the GST in November, 2009.
Annexure of the First Discussion Paper on GST had been related to “Frequently Asked Questions and Answers on GST”. Question 13 of the annexure had been related to provision of “threshold exemption”. Said question and its answer had run as follows:–
“Question 13: What is the concept of providing threshold exemption for GST?
Answer: Threshold exemption is built into a tax regime to keep small traders out of tax net. This has three-fold objectives:
a) It is difficult to administer small traders and cost of administering of such traders is very high in comparison to the tax paid by them.
b) The compliance cost and compliance effort would be saved for such small traders.
c) Small traders get relative advantage over large enterprises on account of lower tax incidence.
The present thresholds prescribed in different State VAT Acts below which VAT is not applicable varies from State to State. A uniform State GST threshold across States is desirable and, therefore, as already mentioned in Answer to Question 6, it has been considered that a threshold of gross annual turnover of Rs. 10 lakh both for goods and services for all the States and Union Territories might be adopted with adequate compensation for the States (particularly, the States in North-Eastern Region and Special Category States) where lower threshold had prevailed in the VAT regime. Keeping in view the interest of small traders and small scale industries and to avoid dual control, the States also considered that the threshold for Central GST for goods may be kept Rs.1.5 Crore and the threshold for services should also be appropriately high.”
In reply to question No. 13 of the ‘Frequently Asked Questions and Answers on GST’ of the First Discussion Paper on GST, released by the EC, one of the reasons for allowing threshold exemption has been stated to be compliance cost and compliance efforts. However, matter of allowing threshold exemption is cases of those persons who make inter-State supply of goods or services, or both was not discussed in the First Discussion Paper on GST.
Before the GST related constitutional amendments were made, in the Constitution in September 2016, the Empowered Committee of State Finance Ministers (EC) had released Model Goods and Services Tax Law in public domain in June 2016. Conjoint reading of charging section, section 9, and Schedule III, of the Model GST Law (The Central / State Goods and Services Tax Act, 2016) reveals that several persons mentioned in the Schedule III, and such other persons or class of persons as may be notified by the Central Government or a State Government on the recommendations of the Council, were made liable for Registration and liable for payment of tax irrespective of value of their turnover. sub-clauses (i) to (xi) of para 5 of Schedule III have run as follows:–
“5. Notwithstanding anything contained in paragraph 1 and 2 above, the following categories of persons shall be required to be registered under this Act:
(i) persons making any inter-State taxable supply, irrespective of the threshold specified under paragraph 1;
(ii) casual taxable persons, irrespective of the threshold specified under paragraph 1;
(iii) persons who are required to pay tax under reverse charge, irrespective of the threshold specified under paragraph 1;
(iv) non-resident taxable persons, irrespective of the threshold specified under paragraph 1;
(v) persons who are required to deduct tax under section 37;
(vi) persons who supply goods and/or services on behalf of other registered taxable persons whether as an agent or otherwise, irrespective of the threshold specified under paragraph 1;
(vii) input service distributor;
(viii) persons who supply goods and/or services, other than branded services, through electronic commerce operator, irrespective of the threshold specified in paragraph 1;
(ix) every electronic commerce operator, irrespective of the threshold specified in paragraph 1;
(x) an aggregator who supplies services under his brand name or his trade name, irrespective of the threshold specified in paragraph 1; and
(xi) such other person or class of persons as may be notified by the Central Government or a State Government on the recommendations of the Council.”
This is noteworthy that the Empowered Committee of Finance Ministers of the States (EC), in the First Discussion Paper on GST has found “compliance cost and compliance efforts” as one of the reasons for allowing “threshold exemption”, i.e. “threshold limit of turnover below which taxpayers were not to be made liable for registration”, how the EC was legally justified in proposing provisions of para 5 of Schedule III of the Model GST Law released by it in June 2016.
After amendment of the Constitution, by the Constitution (One Hundred and First Amendment) Act, 2016, in September 2016, article 279A (4) of the Constitution runs as follows:–
“(4) The Goods and Services Tax Council shall make recommendations to the Union and the States on—
(a) the taxes, cesses and surcharges levied by the Union, the States and the local bodies which may be subsumed in the goods and services tax;
(b) the goods and services that may be subjected to, or exempted from the goods and services tax;
(c) model Goods and Services Tax Laws, principles of levy, apportionment of Goods and Services Tax levied on supplies in the course of inter-State trade or commerce under article 269A and the principles that govern the place of supply;
(d) the threshold limit of turnover below which goods and services may be exempted from goods and services tax;
(e) the rates including floor rates with bands of goods and services tax;
(f) any special rate or rates for a specified period, to raise additional resources during any natural calamity or disaster;
(g) special provision with respect to the States of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand; and
(h) any other matter relating to the goods and services tax, as the Council may decide.”
Above quoted article 279A(4) of the Constitution reveals that sub-clause (d) of clause (4) of article 279A of the Constitution mandatorily requires the Goods and Services Tax Council to make recommendation to the Union and the States on ‘the threshold limit of turnover below which goods and services may be exempted from goods and services tax’. This provision suggests that all goods and services are to be kept exempt from GST till turnover of a person does not exceed such threshold limit of turnover as may be recommended by the GST Council under sub-clause (d) of clause (4) of article 279A of the Constitution. For reasons best known to the GST Council, the GST Council has not recommended threshold limit of turnover below which goods and services could have been exempted from GST. Said provision of the Constitution is meant for providing exemption to all businesses from levy of goods and services tax on all kinds of supplies of all goods and services till their turnover of business does not cross such threshold limit of turnover as is recommended by the GST Council. Contrary to this, on the basis of recommendation made by the GST Council, Parliament has enacted section 24 in the CGST Act against the spirit of article 279A(4)(d) of the Constitution.
GST compliance costs are borne by taxpayers themselves out of their earnings from the business. In cases of businesses having small turnover, GST compliance cost proves to be significant as compared to their earning from the business whereas in cases of big businesses, GST compliance cost remains insignificant or nominal in view of their earnings from the business. Depending on nature of business and margin of profit in the business, earnings from business may also vary from business to business. In cases of businesses having small turnovers, there may be cases in which total GST compliance cost may, in normal circumstances, exceed total earnings of the taxpayer from the business.
In cases of businesses which have small turnover, compliance cost of GST Laws may erase such net profit as would have been earned by the businessman in absence of applicability of GST Laws. In some cases, compliance cost of GST Laws may even exceed such amount of net profit. In both circumstances, burden of GST compliance cost will force a businessman, having small turnover, to close down his business. In my opinion, in such cases, provisions requiring compliances of GST Laws hit fundamental right, to carry on business of supply of goods, or services, or both, provided by article 19(1) (g) to citizens of this country.
Article 279A (4)(d) has been enacted in the Constitution to provide exemption to small businesses from compliance cost of GST Laws, till the turnover of a business does not exceed such threshold limit of turnover as is recommended by the GST Council. Said provision requires that the GST Council shall make recommendation to the Union and the States on ‘the threshold limit of turnover below which goods and services may be exempted from goods and services tax’. However, the GST Council has not recommended such threshold limit of turnover.
Except the persons or class of persons referred to, or mentioned, in section 24 of the CGST Act, and such other persons or class of persons who may be notified by the Government under clause (xii) of said section 24, on recommendation of the GST Council, all other persons shall be liable to registration if their aggregate turnover during a financial year exceeds the limit of turnover specified in section 22(1) of the CGST Act. Persons not liable to registration are free from making compliance of provisions of GST Laws.
Clause (I) of section 24 of the CGST Act provides that notwithstanding anything contained in sub-section (1) of section 22, ‘Persons making any inter-State taxable supply” shall be required to be registered under the said Act. Words “any taxable inter-State supply” refer to any inter-State taxable supply of goods, or services, or both”. Initially, a person making inter-State taxable supply of services had been liable to registration. Person making inter-State taxable supply of services has been allowed same benefit which is available under section 22(1) of the CGST Act. The Union Government, on recommendation of the GST Council has issued Notification No. 10/2017 – Integrated Tax New Delhi, the 13th October, 2017 as follows:–
“G.S.R. …..(E).— In exercise of the powers conferred by section 20 of the Integrated Goods and Services Tax Act, 2017 (13 of 2017) read with sub-section (2) of section 23 of the Central Goods and Services Tax Act, 2017 (12 of 2017) (hereafter in this notification referred to as the said Act), the Central Government, on the recommendations of the Council, hereby specifies the persons making inter-State supplies of taxable services and having an aggregate turnover, to be computed on all India basis, not exceeding an amount of twenty lakh rupees in a financial year as the category of persons exempted from obtaining registration under the said Act:
Provided that the aggregate value of such supplies, to be computed on all India basis, should not exceed an amount of ten lakh rupees in case of “special category States” as specified in sub-clause (g) of clause (4) of article 279A of the Constitution, other than the State of Jammu and Kashmir. “
Minutes of 22nd GST Council Meeting held on 6 October 2017 reveals that decision for allowing exemption from liability of registration to service providers, whose turnover does not exceed 20 lakh rupees and 10 lakh rupees for special category States, was taken by the GST Council keeping in view the difficulties of the small taxpayers.
In my personal opinion, limits of turnover mentioned in section 22(1) of the CGST Act cannot be treated threshold limits of turnover. Word “threshold” has specific meaning. Values mentioned in section 22(1) of the CGST Act are simple values of aggregate turnover. Dictionary meaning of word ‘threshold’ is ‘a strip of wood or stone forming the bottom of a doorway and crossed in entering a house or room’. In various dictionaries, definitions of word ‘threshold’ have been provided as follows:–
(a) Oxford Dictionary: The magnitude or intensity that must be exceeded for a certain reaction, phenomenon, result, or condition to occur or be manifested’.
(b).Cambridge Dictionary: The level or point at which you start to experience something, or at which something starts to happen;
(c) Merriam Webster: A level, point, or value above which something is true or will take place and below which it is not or will not;
(d) Collins Dictionary: A threshold is an amount, level, or limit on a scale. When the threshold is reached, something else happens or changes.
In Webster’s law dictionary term threshold is defined as under:-
“a point of beginning, a minimum requirement for further action”
Issues of threshold limit of turnover referred to in sub-clause (d) of clause (4) of article 279A of the Constitution and threshold exemptions decided by the GST Council may be discussed separately.
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Disclaimer: Except the quoted versions, interpretations made and all other views expressed here are my personal views and are meant only for academic discussion. Readers are advised to follow the provisions of the law and to seek opinion of their legal advisors before acting upon the views expressed here. I and the publishers of this article disown any liability on account of any loss or damage that may be caused on account of use of views expressed here.
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