Threshold limit for Registration under Proposed GST: Analysis

So the dice is finally rolling and it’s expected that it would gather momentum in the coming days. The government has come out with “Report of the Joint Committee on Business Processes for GST on GST Registration”. Although the report is silent on major controversial issues but still it gives a sneak peak into the future. We would now dwell upon the key highlights of the Report with regard to the threshold limit under GST for Registration. This article would not go into the details of procedural aspect specified in the report but would only critically analyse its features relating to threshold limit and what it points out for the coming future.

At the outset it can be outlined that document published in general for submission of comments from common public who have been treated as stakeholder, should have following salient features:

a) Document should be detailed enough so as to have easy understanding of the subject by the stakeholders. It is paramount to understand that the general public is not part of the process of drafting of such document and therefore do not have the knowledge of the backdrop in which particular issue has been referred in the document. Therefore an effort should be made to spell out every detail on the subject.

b) Clear and unambiguous terms should be used so to communicate clearly with the public. Releasing of document and submission of comments is at the outset one way communication and even if one argues that it’s a two way communication as comments have been invited from public, it’s not a real time two way communication. General public cannot clarify their doubts if any on the understanding of the subject. Therefore, public gives comments on the basis of its own understanding whether the same might be correct or not. Easy and clear words provide the public with better understanding of the subject matter.

c) Details should be grouped in such a manner so that each subject can be identified and located at one place in the document.

d) Document should have examples so as to lay down the details in a lucid manner.

If we go through the “Report of the Joint Committee on Business Processes for GST on GST Registration”, it seems that the report is silent on controversial issues and issues wherein the modalities are not yet clear, they have not been spelt out explicitly and in detail in the report.

One such area is the subject which this article intends to cover i.e Threshold limit for registration. This has to be one of the most important subjects for the document which intends to spell out the details for registration. There should have been a detailed analysis on the subject of “threshold limit” and should have been discussed separately in the report so that the stakeholders may have a clear understanding and then they may submit their comments. This is one thing which would have direct impact on the persons entering into business dealings. There is dispersed information in the report on the modalities of the given subject and that too in ambiguous and vague wordings. It is understood that this document pertains to business process and is not intend to communicate the law position but the process of determination of the threshold limit is a part of the business process of registration.

The document should have come out clearly on how the threshold limit would be determined for a dealer under CGST, SGST and IGST with clear examples, whether the details in the report are in line with the earlier discussion paper issued by the Empowered Committee or there is a shift from the same so that general public would know the reasoning of the implementation of law etc. The report should have intended to clarify the matter with regard to threshold limit with clearly laid out discussion.

In the end it might be concluded that release of report for comments of the public is a good initiative but leaves a lot to be desired.

For understanding the Report of the Joint Committee, it’s important to understand what exactly is Joint Committee and how it’s formed and where does it stands in the hierarchy of the entire structure brought in place for the Implementation of GST in India.

♠  What exactly is Joint Committee:-

Joint Committee has been formed under the co-convenership of the Additional Secretary (Revenue), Government of India and the Member Secretary, Empowered Committee. Various sub groups have been formed for preparing and forwarding report to the Joint Committee on various subjects. The Joint Committee in turn would be forwarding the report with their recommendations to the Empowered Committee.

Under the report in consideration, Joint Committee has reviewed and submitted its report on the report of the Sub-Group-I on Business Processes for GST. The Joint Committee has submitted its recommendations in the form of “Report of the Joint Committee on Business Processes for GST on GST Registration”.

♠ Threshold of Annual Gross Turnover of Goods and Service for Registration:

There would be a threshold Annual Gross Turnover limit below which any person engaged in supply of goods and services would not be required to take registration. The report is silent on the threshold limit to be set with regard to registration.

i) Threshold for goods and services would be same.

The report provides in Para 2.0 sub-para (2) that

“There will be a threshold of Gross Annual Turnover including exports and exempted supplies (to be calculated on all-India basis) below which any person engaged in supply of Goods or Services or both will not be required to take registration”

The report further goes onto provide in “Annexure VIII- Extract Of The Report Of The Committee On The Problem Of Dual Control, Threshold And Exemptions In GST Regime” to the Report that

“It was also felt by the Committee that the threshold both for services and goods should be same.”

It further states in Annexure-8 to the report that

“The threshold should be worked out taking into account both the supply of goods and services on gross turnover basis. Such turnover would include the turnover of exempted goods and services (including non-taxable) and exports. It was also agreed that the turnover so calculated would be applicable for the purposes of Threshold, Compounding Scheme and Dual Control.”

Therefore, threshold for both goods and services would be same. The threshold limit would be worked out on an All India basis and would be arrived at by taking into account both supply of goods and services and also including exports and exempted supplies of goods and services.

For Eg. if the person is having a turnover of Rs 5 Lakh in respect of supply of services and 8 Lakh in respect of supply of goods. If suppose the threshold limit is Rs 10 Lakh then supply of both goods and service would be added to arrive at the gross turnover. In the given case, as the aggregate turnover of supply of goods and services is Rs 13 Lakh, therefore the dealer would be required to get registration.

ii. Threshold limit for SGST and CGST would be common and threshold limit for SGST and CGST would not be calculated state-wise but would be calculated on an all India basis

Annexure- 8 to the report provides that

“It was felt that the threshold, both for SGST and CGST should be common except for North-eastern States where the threshold could be prescribed at lower level.”

The threshold for SGST and CGST would not be calculated state-wise but it would be calculated on an All India Basis. There is one very interesting discussion provided in the Annexure-8 to the report of the joint committee which states as follows:

“While the State representatives felt that turnover should be State-wise of a legal entity, the representatives of Government of India strongly felt that it should be All India turnover of a legal entity, otherwise it may lead to tax evasion. It was pointed out by the Centre‟s representatives that if the turnover of an entity is considered State-wise, the threshold for CGST would increase steeply when calculating the turnover of the entity on an All India basis. This would adversely affect the revenue of the Centre. What would happen is that an entity will open office in States and Union Territories (which are 37 in number) for availing of State-wise threshold for SGST purposes. In such a scenario, the threshold for CGST purposes would work out to Rs. 9.25 Crores (Rs. 25 Lacs * 37). Similar impact would be there for the compounding scheme as well as for the issue relating to dual control. The suggestion of the Central Board of Excise and Customs (CBEC) that legal entity on all India basis should be taken was considered by the Committee and after due deliberations the suggestion was agreed to avoid tax evasion by the manufacturers/traders/dealers.”

Therefore, it can be ascertained from the above extract of the report that the threshold for the dealer under SGST and CGST would be calculated on All India Turnover basis.

The report provides in Para 2.2 that

“For each State the taxable person will have to take a separate registration, even though the taxable person may be supplying goods or services or both from more than one State as a single legal entity.”

The report further provides in Para 11.6 that

“As has been discussed earlier, the taxable person in the GST regime will be required to take State specific single registration for CGST, IGST and SGST purposes.”

Thus what has been contemplated is a state specific registration for SGST, IGST and CGST. Separate Registration would be required to be taken for each State. It would increase compliance burden of small dealers.

For Example, if a person is having one office each in Maharashtra and Rajasthan and is having a gross annual turnover of Rs 5 Lakhs and 12 Lakhs respectively. The threshold limit in the given case is suppose Rs 10 Lakh for SGST and CGST. Therefore, dealer crossing All India Turnover of Rs 10 Lakh would be required to be registered under both SGST and CGST.

a. Calculation of Threshold for SGST: The dealer in the above example would be required to be registered under SGST in both Maharashtra and Rajasthan as his All India Turnover exceeds Rs 10 Lacs. The dealer cannot argue that as his turnover in Maharashtra is Rs 5 lakh and less than Rs 10 Lakh he would be required to be registered in Rajasthan only and not in Maharashtra under SGST. The state-wise turnover has no relevance. It’s the All India Turnover which is relevant for determining the Gross Annual Turnover for determining threshold limit for registration.

b. Calculation of Threshold for CGST: For the purposes of CGST, the threshold limit would also be calculated on an All India Basis and not state-wise. Therefore, the dealer would have to get himself registered under CGST in both the States as his All India Gross turnover including both Rajasthan and Maharashtra is Rs 17 Lakh i.e. exceeding Rs 10 Lakh.

Thus in a nutshell, state specific registration would be required to be taken by the dealer in both Rajasthan and Maharashtra. This state specific registration would be covering SGST and CGST.

Impact of having common limit for CGST and SGST: It can be analyzed from the above that while States were asking for state-wise limit but the Central Representatives provided that if the threshold limit would be provided on a state to state basis then the threshold limit for CGST would increase in numerously. Therefore, it was decided to have threshold limit for the purpose of SGST and CGST to be determined on an All India Basis and should be common except for north-eastern states where it may be prescribed at lower level.

The process for determination of the threshold limit as per the provisions laid out by the Report of the Joint Committee can be summarized as follows:

a. Aggregation of turnover of supplies of goods and services,

b. Threshold to be calculated on an All India Basis both for CGST and SGST and

c. Threshold common in respect of CSGT and SGST except for North –Eastern States wherein lower limit may be prescribed.

Take an example as in present scenario, Service Tax is applicable on receipts above Rs 10 Lakh, VAT is applicable on turnover above Rs 10 Lakh and Central Excise is applicable on turnover above Rs 1.5 Crore. Now what would happen all these taxes would be subsumed in CGST and SGST and would be applicable from a much lower limit may be Rs 10 Lakh or as may be decided as there is lack of clarity of the same.

This would in one way enlarge the tax base of the government and further in my view it would lower the Revenue Neutral Rate for GST but this would also increase the tax burden on the supply of goods and services and compliance requirement enormously. Small dealers would be levying both SGST and CGST and even if small dealer goes into composition then although he might not be collecting tax separately but his selling price would include the component of the taxes paid at the time of purchase. There would also be problems of dual control for small dealers.

iii. Threshold for inter-state dealers would be zero.

The report provides in Para No. 2 and Point No. 7 that

“(7) Irrespective of turnover, if a taxable person carries out any inter-state supply and / or is liable to pay GST under reverse charge, he will be compulsorily required to take registration.”

It further goes on to provide in Annexure-8 that

“However, for inter-state dealers, the threshold should be zero.”

The threshold for the Inter-State dealers would be zero. Therefore, if any inter-state transaction for supply of goods or services is carried out, there would be requirement for the dealer to be registered.

The report does not dwell upon the fact that if the person is recipient of service or receives supply of goods in an inter-state transaction and carries out supply the goods or services or both within the state, then also whether he would also be required to get registration irrespective of the turnover i.e. even though his turnover of supply of goods and services on an All India Basis is less than Threshold limit.

The scenario is not very clear as the report only specifies that if a taxable person makes any inter-state supply, then the threshold would be zero and further in very ambiguous terms provide that for inter-state dealers threshold would be zero. Now whether the term used as “inter-state dealers” in Annexure-8 of the report would cover only transaction of inter-state supply or would also cover transaction of recipient of service or receiver of goods in an inter-state transaction who is only supplying the goods or services within the state and is having turnover less than the threshold limit is not clear.

However in my view, registration in such circumstances might be compulsory irrespective of the turnover. Taking a parallel from current scenario, where the dealer is importing goods from other state under CST for sale within the state, the dealer is required registration under CST irrespective of the turnover. Further as registration in GST would also be separate for each state, therefore in my view, in such a scenario registration would be required irrespective of turnover.

However, more clarity on the subject was required in the report.

iv. No threshold limit for liability to pay GST under reverse charge mechanism:

Although no details have been shared about the dealers liable to pay tax under reverse charge mechanism, but if we take parallel under the current scenario and the taxes sought to be subsumed and applying the concept of destination based taxation then in my view it would be generally covering dealers importing goods and services from outside India in addition to the specific entries as may be provided.

v. Recommendations in the “Report of the Joint Committee on Business Processes for GST on GST Registration” with reference to the recommendations in “First Discussion Paper On Goods and Services Tax In India by The Empowered Committee Of State Finance Ministers”

“Report of the Joint Committee on Business Processes for GST on GST Registration” in my view are more in line with the comments of the department of Revenue to the “First Discussion Paper On Goods and Services Tax In India by The Empowered Committee Of State Finance Ministers.

a. “First Discussion Paper On Goods and Services Tax In India- The Empowered Committee Of State Finance Ministers” : – The First Discussion Paper provided as follows:

“(ix) The present threshold 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, it is considered that a threshold of gross annual turnover of Rs.10 lakh both for goods and services for all the States and Union Territories may 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 at Rs.1.5 crore and the threshold for Central GST for services may also be appropriately high. It may be mentioned that even now there is a separate threshold of services (Rs. 10 lakh) and goods (Rs. 1.5 crore) in the Service Tax and CENVAT.”

The First discussion paper provided that although for State GST, the threshold for Goods and Services would be kept at Rs 10 Lakh but under CGST, threshold limit for goods may be Rs 1.5 crore and for services it might be appropriately high.

Thus what was contemplated in the First discussion paper was that there would be a threshold limit of Rs 10 lakh both for Goods and Services for all states and a threshold limit of Rs 1.5 Crore in respect of Goods in CGST and Rs 10 lakh or appropriately high in respect of services in CGST keeping view the interest of small dealers and traders and to avoid dual control.

b. Comments of the Department of Revenue to the First Discussion Paper: The Department of revenue earlier in reply to the above recommendations of the Empowered Committee provided their comments as follows:

“There should be a uniform threshold for goods and services for both SGST and CGST. This annual turnover threshold could be Rs.10 lakh or even more than that. The threshold exemption should not apply to dealers and service providers who undertake inter-State supplies. The problem of dual control is better addressed through a compounding scheme as well as administrative simplification for small dealers through measures 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 / CAs etc.
• Audit in 1-2% cases based on risk parameters
• Lenient penal provisions”

c. Study of National Institute Of Public Finance And Policy in released in January 2013 on “Revenue Implications of GST and Estimation of Revenue Neutral Rate: A State Wise Analysis”: The relevant extract is as follows:

“In the proposed model, manufacturers for goods with a gross turnover exceeding 1.5 crores will belong to both the centre and the state and the other tax payers for goods will be assigned exclusively to the states for other procedures like registration etc. for both central and state GST. The present threshold limits prevalent in states (which differ) may be adopted for GST and the same thresholds applicable to goods should be applicable to Services also in the respective states.”

The above references have been provided just to highlight that what has come out in the report of the Joint Committee is more in line with the comments of the Department of Revenue to the First Discussion Paper.

This report is however only a draft business process of GST and final verdict is still awaited in the matter as this might be the game changing event for many purposes like widening of Tax Base, Revenue Neutral Rate and the Tax Liability in GST etc.

Conclusion: The report of the Joint Committee with regard to the threshold limit is more or less in consonance with the Comments of the Department of Revenue to the First Discussion Paper on GST. This is however only draft proposal for business process on registration and yet to be finalized after comments from the various stakeholders.

In the end, it can be concluded on the basis of draft business process for registration with regard to the threshold limit that

a. Threshold limit would be same for both goods and services,

b. Threshold limit would be worked out after taking into account supplies of both goods and services,

c. The threshold for CGST and SGST would be common except for North-eastern states wherein lower levels may be prescribed.

d. The dealers engaged in inter-state supply of goods and services would be required to be registered irrespective of their turnover. However, clarity is required in case of dealer who is recipient of inter-state supply of goods or services and is carrying out supply of goods and services within the state and is having aggregate turnover on an All India Basis less than the threshold limit.

e. The dealers required to pay tax under reverse charge would be required to be registered irrespective of their turnover.