Threshold Limit of Turnover in GST – Constitutional Right of Petty Businesses

Clause (4) (d) of Article 279A of the Constitution of India (Constitution) provides that the Goods and Services Tax Council shall make recommendations 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”. In my personal opinion, the said provision of the Constitution has been made to provide relief to petty business by providing exemption to goods and services from goods and services tax (hereinafter referred to as GST), where turnover of such petty businesses is below a certain limit. I am also of the view that such limit of turnover will, without exception, apply to all petty businesses, who deal in goods and services, irrespective of the nature of supply of goods or services or both. However, the Goods and Services Tax Council, in the Model GST Law drafts recommended by it to the Union and the States, has, subject to exclusion of several types of supplies of goods, or of services, or both, recommended the limit of aggregate turnover exceeding which a person shall be liable for payment of GST. In my opinion, provisions of section 24 of the Central Goods and Services Tax Act, 2017 are not in conformity with Clause (4)(d) of Article 279A of the Constitution.

In a business of supply of goods, or of services, or both, aggregate turnover, for a given period of time, is understood as the aggregate of amounts for which goods or services or both are supplied, whether directly, or otherwise. Annual turnover of a business is understood as aggregate amount of all supplies of goods, or of services, or both made by a person during a period of twelve consecutive calendar months. Annual turnover is generally used for classifying big and small business.

In the Commissioner, Hindu Religious Endowments, Madras vs. Sri Lakshmindra Thirtha Swamiar of Sri Shirpur Mutt. Judgment Dated: 16/04/1954, the Honorable Supreme Court of India, with approval has quoted following definition of word “Tax”, namely:-

“A neat definition of what “tax” means has been given by Latham C. J. of the High Court of Australia, in Matthews v. Chicory Marketing Board(1). A tax”, according to the learned Chief Justice, “is a compulsory exaction of money by public authority for public purposes enforceable by law and is not payment for services rendered.”

The Honorable Supreme Court, in the same judgment, in reference to tax, has made following observations:-

“This definition brings out, in our opinion, the essential characteristics of a tax as distinguished from other forms of imposition which, in a general sense, are included within it. It is said that the essence of taxation is compulsion, that is to say, it is imposed under statutory power without the taxpayer’s consent and the payment is enforced by law. The second characteristic of tax is that it is an imposition made for public purpose without reference to any special benefit to be conferred on the payer of the tax. This is expressed by saying that the levy of tax is for the purposes of general revenue, which when collected revenues of the State. As the object of a tax is not to confer any special benefit upon any particular individual, there is, as it is said, no element of quid pro quo between the taxpayer and the public authority. Another feature of taxation is that as it is a part of the common burden, the quantum of imposition upon the taxpayer depends generally upon his capacity to pay.”

Sales Tax, VAT and GST are indirect taxes. Normally, businessmen are allowed to collect amount of tax, which is payable by them to the Government on sales, or supply of goods or services made by them, from persons to whom such goods or services are sold or supplied. Even then such taxes (Sales Tax, VAT or GST) cast burden on the business due to compliance cost and administrative feasibility. For small business, such cost may be significant, and may also bring adverse effect on their businesses and earnings. Small growing businesses also feel difficulty in competing with big businesses. In such cases, exemption from tax gives them stimulus. For these reasons, small businesses are allowed exemption from payment of tax. For identifying small business, limit of aggregate turnover is required. Such limit of turnover may be declared in two ways as follows:–

(i) A business may be exempted from tax till its turnover during a year, from beginning of such year, remains below some specified limit of turnover. In such a case business becomes liable for payment of tax as soon as it touches the specified limit of turnover. Let us assume that such specified limit of turnover is INR 10, 00,000.00 INR. In this case, business shall be exempt till his turnover remains less than 10, 00,000.00 INR and as soon as its turnover becomes 10, 00,000.00 INR, business becomes liable for payment of tax.

(ii) A small business may become liable for payment of tax if its turnover exceeds certain limit of turnover during a year from beginning of the year. In such a case business does not become liable for payment of tax unless its turnover during the year, from beginning of the year, exceeds the specified limit of turnover. Let us assume that in such a case, specified limit of turnover is INR 10, 00,000.00 INR. In this case, business shall be exempt if its turnover is 10, 00,000.00 INR or less than 10, 00,000.00 INR.

If we compare two cases, mentioned in clauses (i) and (ii) of the preceding paragraph, we find that in case (i), a business whose, turnover is exactly 10,00,000.00 INR, will be liable for payment of tax, and in case (ii), a business whose turnover is exactly 10,00,000.00 INR, will not be liable for payment of tax.

In order to keep businesses outside the tax net, for identifying small businesses, a limit of turnover is fixed. Such limit of turnover is referred to as threshold limit of turnover. According to dictionaries, word “threshold” has the meaning of “a strip of wood or stone forming the bottom of a doorway and crossed in entering a house or room”. The word “threshold” has also been defined as “A point of entry or beginning; A threshold is an amount, level, or limit on a scale. When the threshold is reached, something else happens or changes; the place or point of entering or beginning”. Article 279A of the Constitution, which was added in the Constitution by the Constitution (One Hundred and First Amendment) Act, 2016, is related to Constitution, assignments and working of the Goods and Services Tax Council. Sub-clause (d) of clause (4) of the said Article 279A runs as follows:–

“(4) The Goods and Services Tax Council shall make recommendations to the Union and the States on▬

(a) —

(b) —

(c) —

(d) the threshold limit of turnover below which goods and services may be exempted from goods and services tax;”

A reading of above clause (4)(d) of Article 279A of the Constitution reveals that in cases of businesses, having their turnover below a specified limit of turnover, goods and services may be exempted from goods and services tax (GST). All goods and services may be treated as if goods and services tax does not apply to them. The provision will unconditionally apply to all businesses till their aggregate turnover does not reach the threshold limit of turnover. The exemption shall be of general nature (i) irrespective of goods and services, (ii) irrespective of nature of supply, and irrespective of category of business or businessman.

In the Constitution, following supplies of goods or services or both, referred to in clauses (i) to (iv), have been referred to by their names, namely:-

(i)  Supply of goods or services or both which takes place in the course of inter-State trade or commerce;

(ii) Supply of goods or services or both which takes place outside the State;

(iii) Supply of goods or services or both which takes place in the course of import of the goods or services or both into the territory of India;

(iv) Supply of goods or services or both which takes place in the course of the export of the goods or services or both out of the territory of India;

The Constitution does not refer to, by name, any other supply of goods or services or both, in respect of which goods and services tax law can be made by the Parliament, or Legislatures of the States in execution of their powers under the Constitution. Such supplies of goods or services or both may be described as follows:-

(v) Supply of goods or services or both with which a State has real territorial nexus, except a supply of goods or services or both which takes place in any of the ways referred to in any of the clauses (i) to (iv) above;

(vi) any supply of goods or services or both which takes place within India, except a supply of goods or services or both which is covered in any of the clauses (i) to (v) above.

(vii) Any supply of goods or services or both which takes place outside India and is made by a supplier who is located in India. (extra-territorial operation).

Aggregate turnover will include values of all supplies referred to above in clauses (i) to (vii), except values of supplies of goods or services or both which take place in the course of import of goods or services or both into the territory of India. Therefore, threshold limit of turnover will also include values of all such supplies of goods or services or both. Here it is noteworthy that clause (4) (d) of Article 279A of the Constitution refers to threshold limit of turnover below which goods and services may be exempted from GST. At the same time, said provision does not specify supply(s) of goods or services or both, values of which shall be included in turnover, and threshold limit of turnover. The word “turnover”, used in the expression “threshold limit of turnover”, shall be understood in its ordinary meanings. The provision also does not specify any person or class of persons who will enjoy benefit of threshold limit of turnover.

Earlier to GST, there had been nothing like threshold limit of turnover, below which goods could be exempted from tax on sale or purchase thereof. For a particular class of dealers who used to purchase and sell goods within the State, States have prescribed their own limit of turnover of goods, which were sold or purchased by a dealer within the State. The Central Sales Tax Act has been enacted by the Parliament for the Union. The said law does not provide any threshold limit of turnover for levy of, or exemption from, the central sales tax. Can it be made a basis for denying benefit of threshold limit of turnover for allowing exemption from GST? I am of the view that on this basis benefit cannot be denied in the GST regime because, with respect to central sales tax or the sales tax, in the Constitution. In matters of Central Excise and Service Tax, the Parliament has given power to the Government to issue notification for granting exemption to manufactures on the basis of threshold. Threshold of 90, 00,000.00 INR was generally available. In case of Services Tax, threshold of 10, 00,000.00 INR was available in respect of taxable services, except in respect of branded services. There was no Inter-State supply concept in the Central Excise Act and the Services Tax Act.

In my personal opinion, the Parliament had, while passing the Constitution Amendment Bill related to GST, been fully aware of the difficulties of small businesses in the coming goods and services tax regime. In my opinion, benefit allowed by the Constitution cannot be curtailed by the Goods and Services Tax Council, while making its recommendation to the Union and the States.

Clause (4) (c) of Article 279A of the Constitution provides that the Goods and Services Tax Council shall make recommendations to the Union and the States on 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. At the same time, clause (4) (d) of the same Article of the Constitution provides that the Goods and Services Tax Council shall make recommendations 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. In view of this, Goods and Services Council, while recommending model Goods and Services Tax Laws, cannot provide any other scheme for allowing exemption from liability of tax in cases of small businesses by bypassing the threshold limit of turnover referred to in clause (4) (d) of Article 279A of the Constitution.

In case of a person whose aggregate turnover is to remain below the threshold limit of turnover, what may be exempted are goods and services, and goods and services may be exempted from goods and services tax. Tax leviable on any supply of goods or services or both, (except on any supply of alcoholic liquor for human consumption), is covered under the definition, of expression “goods and services tax”, provided in clause (12A) of Article 366 of the Constitution. Threshold limit of turnover under clause (4) (d) of Article 279A is to apply to all, ▬

(i) persons carrying on business of supply of goods, or services or both whose aggregate turnover remains below the threshold limit of turnover;

(ii) goods and services in respect of which goods and services tax law can be made; and

(iii) supplies of goods or services or both, irrespective of the nature of supply.

Clause (4) (g) of Article 279A of the Constitution runs as follows:–

“(4) The Goods and Services Tax Council shall make recommendations to the Union and the States on▬

(a) —

(b) —

(c) —

(d) —

(e) —

(f) —-

(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”

In view of provision of clause (4)(g) of Article 279A of the Constitution, special provision of threshold limit of turnover for exempting goods and services, special provision may be made for businesses located in special category States..

First meeting of the Goods and Services Tax Council, constituted under Article 279A of the Constitution, was held on September 22-23, 2016. Agenda for the meeting has also included agenda item -3 as “(iii) Thresholds for exemption and composition under GST”.

Para 9 of the minutes of the meeting runs as follows:–

“9. A presentation was made by Shri Manish K. Sinha, Commissioner, Central Excise, CBEC in which it was suggested that in the GST regime, the threshold limit for a taxpayer to get registered should be Rs. 25 lakhs for all States other than the eleven Special Category States mentioned in Article 279A of the Constitution. The Composition threshold was suggested to be Rs. 50 lakhs. It was also suggested that Service providers should be kept out of the Composition scheme.”

Decision of the Goods and Services Tax Council on threshold for exemption has been recorded in paras 13 and 14 of the minutes of the meeting as follows:–

“13. Given the difference in opinions, the issue was deferred for reconsideration to the next day. In the meeting of 23rd September 2016, after further discussion, it was agreed that the threshold exemption shall be Rs. 20 lakhs. The Chairperson also observed that taking note of the concerns expressed by the Hon’ble Chief Minister of Puducherry, this decision would be reviewed after 5 years (during which compensation for any loss of revenue is guaranteed) and a decision regarding any modification to the exemption threshold would be taken thereafter.

14. As regards the Special Category States enumerated in Article 279A of the Constitution, it was decided that the threshold exemption shall be Rs. 10 lakh”

Sub-clause (d) of clause (4) of Article 279A of the Constitution runs as “(d) the threshold limit of turnover below which goods and services may be exempted from goods and services tax”. In this clause three things are noteworthy:

(i) what may be exempted?, The answer is that goods and services may be exempted;

(ii) goods and services may be exempted from what? The answer is that goods and services may be exempted from goods and services tax. In clause (12A) of Article 366 of the Constitution expression “goods and services tax” has been defined to mean any tax on supply of goods or services or both except taxes on the supply of the alcoholic liquor for human consumption. Therefore, goods and services may be exempted from all kinds of taxes those may be levied on supply of goods or services or both except taxes on the supply of the alcoholic liquor for human consumption.

(iii) Period in which exemption will operate? Exemption will commence on first day of financial year and continue till the value of aggregate turnover remains below the threshold limit of turnover. Once the threshold limit of turnover has been reached during any financial year, goods and services will not remain exempt from goods and services tax.

In view of the discussion above, possible law provision may be suggested as follows:–

*In relation to-

(i) any financial year, earlier to the first financial year in which aggregate turnover of a person exceeds threshold limit of turnover; and

(ii) the first financial year for which aggregate turnover of a person exceeds the threshold limit of turnover, for the period for which progressive turnover remains below the threshold limit of turnover,

all goods and services shall be exempt from goods and services tax.

Explanation.-

(1) For the purposes of clauses (i) and (ii), where person has been carrying on business from any date prior to first day of the financial year, or the first financial year, as the case may be, aggregate turnover shall be computed for the period commencing on first day of April of that year and ending on the last day of that financial year; and in case of a person who starts new business during the said financial year, or the first financial year, as the case may be, aggregate turnover shall be computed for the period commencing on the day on which the person has started the business and ending on the last day of the financial year, or the first financial year, as the case may be,.

(2) For the purpose of clause (ii), progressive turnover shall be aggregate value of supplies of goods or services or both taken in chronological order but does not include the value of the supply of goods or services or both which makes the progressive turnover greater than the threshold limit of turnover, and any supply of goods or services or both made thereafter.*

Section 24 of the Central Goods and Services Tax Act, 2017 provides that threshold limit of turnover will not apply to cases listed in the said section and to such other cases in respect of which notification may be issued. The said section 24 runs as follows:–

“Compulsory registration in certain cases

24. 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.”

In my personal opinion, these provisions are not in conformity of clause (4) (d) of Article 279A of the Constitution.

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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.