By Shailesh P. Sheth, Advocate
[Author’s Note: The issue of determination of ‘exemption threshold’ for CGST and SGST purposes has always been a contentious issue between the Centre and the States. While Centre favoured a realistically high threshold, the States always insisted upon a lower threshold to safeguard their revenue. The States’ wish appear to have finally prevailed upon. Model GST Law provides a very low exemption threshold of Rs.10 lakh or Rs.5 lakh, as the case may be. The registration-related provisions are also quite exhaustive and seek to bring within the tax net, a wide category of persons. In this Part, certain salient aspects of the provisions governing the exemption thresholds and registration are briefly analysed]
“Laws are like cobwebs, which may catch small flies,
but let wasps and hornets break through.”
Exemption thres hold and Registration – “Casting the net wider, but who will hold it together?”
“One of the most important decisions to be taken in designing a value-added tax (VAT) is the threshold level of turnover above which firms are required to charge VAT on their outputs (and entitled to reclaim tax on their inputs). Too high a threshold compromises the basic objective of raising revenue; too low a threshold may leave the authorities overwhelmed by the difficulties of implementation and impose excessive compliance costs on taxpayers. The design problem is further complicated, moreover, by the distortion of competition associated with the differential tax treatment of firms above and below the threshold .” [“The optimal threshold for a value-added tax” – Keen and Mintz (2004)]
I am acutely reminded of the above sage words of Keen and Mintz since one of the thorny issues between the Centre and the States has been the ‘choice of threshold’ for the purposes of CGST and SGST. The Centre had been arguing for a higher threshold, based on due consideration of the administrative expediency, feasibility of control over large number of small taxable persons and generation of negligible revenue from such persons compared to the ‘cost of collection’, On the other hand, the States, fearing the erosion of their tax-base, were insisting on a much lower threshold of Rs.10 lakh and even Rs.5 lakh for the NE States.
The States appear to have a ‘final say’ on this thorny issue as is evident from the provisions of the Act (i.e. Model GST Law) relating to thresholds.
b. S.9 and Sch. III of the Act – Thresholds
On a conjoint reading of S.9 of the Act and Sch.III thereto, it will be observed that a common exemption threshold is prescribed for CGST and SGST as under:
(a) Aggregate turnover of Rs.10 lakh in a financial year in a State (other than NE States including Sikkim);
(b) Aggregate turnover of Rs.5 lakh in a financial year in case of NE States including Sikkim.
Sub-section (1) of S. 9 of the Act states that a “taxable person means a person who carries on any business at any place in India/State of ___ and who is registered or required to be registered under Schedule III of this Act” . Second and Third proviso to sub-section (1) provide that until the aggregate turnover of a person in a financial year exceeds Rs. ten lakh or Rs. five lakh, as the case may be, the person required to be registered under paragraph 1 of Sch.III of the Act shall not be considered as a taxable person.
The general threshold of “Rs.10 lakh” may remind the netizens of the existing exemption limit under the service tax regime. However, the similarity ends there. As per para (B) of the Explanation appended to the existing Not. No. 33/2012-ST dt. 20.06.2012, as amended, the “aggregate value” for the purposes of Notification does not include the value of the wholly exempt services.
As against this, the term ‘aggregate turnover’ as defined vide S.2(6) of the Act, inter alia, provides that the aggregate value of the following types of supplies shall be included in the ‘aggregate turnover’, viz:
– all taxable and non-taxable supplies;
– exempt supplies;
– exports of goods and/or services.
The value of such supplies are to be computed in respect of a person having the same PAN, on all India basis. However, the following are to be excluded while computing the ‘aggregate turnover’, viz:
– taxes, if any, charged under the CGST Act, SGST Act and the IGST Act, as the case may be;
– value of supplies on which tax is levied on reverse charge; and,
– value of inward supplies.
It will be evident that the definition of the term ‘aggregate turnover’ is quite wide and expansive and covers even those supplies, like non-taxable supplies or exempt supplies or even exports, which one would have ordinarily expected to be excluded from the scope of the term. These are ‘surprise inclusions’ and mark a clear departure from the existing practice followed in respect of the small scale exemption granted under central excise and service tax. Such inclusions within the scope of ‘aggregate turnover’ renders the thresholds – which in any case is abysmally low – quite meaningless and illusory! It is also to be noted that the exclusions of ‘taxes’ is restricted only to the ‘taxes paid under CGST Act, SGST Act and IGST Act’ and taxes paid or payable under any other legislation will have to be considered for the purposes of computing ‘aggregate turnover’. It is, therefore, obvious that ‘tax net‘ is being cast very wide in a rather opaque manner with a clear intention to expand the ‘tax base’.
C. Implications of the low thresholds:
If one considers the ‘exemption thresholds’ as proposed, it would be evident that neither wiser counsel nor international experience has prevailed upon our policymakers. In their book titled “The VAT in Developing and Transitional Countries“, Richard M. Bird and Pierre -Pascal Gendron observe that “When VAT came into the world, the usual expert advice was to set this entry point, which is usually defined in terms of annual turnover, as low as possible. The idea was essentially to ensure that all potentially taxable transactions were caught in the fiscal net by having the VAT base as wide as possible….. As time went on, however, and more experience with the difficulties of imposing general sales taxes in fragmented economies with high informal sectors was accumulated, conventional wisdom changed.”
The experiments of ‘low thresholds’ have hardly, if ever, succeeded. It is realised that the over-zealousness in expanding the tax base results in administrative nightmares, galloping collection costs and sky-rocketing compliance costs, not to speak of the mounting resentment from the small businesses. Ultimately, the ‘low threshold’ , instead of achieving the perceived aims, more often than not, backfires!
It is, therefore, rather disturbing to witness such ‘failed experiment’ being attempted by our policymakers and the prescription of such meagre, almost non-existent, thresholds of Rs.10 lakh/Rs.5 lakh. Is it realised that these extremely low thresholds will result in an exponential widening of the ‘tax base’ and put the entire tax administration, which is already bursting at the seams, under tremendous stress ? Do we have the wherewithal to administer such massive tax base and ensure effective implementation of the levy? Has anyone also thought of the excessive burden of compliance costs of such low thresholds on small businesses? GST is a highly compliance-driven tax system and ‘automation of the process’ is a pre-requisite to ensure its compliance. How many of the small businesses spread over the entire length, breadth and width of the country possess such infrastructure and capability? Let us not forget that, though, small in size or in turnover, these small businesses make a handsome contribution to the exports of the country, its GDP and job creation. The low threshold means punishing such small businesses by subjecting them to an abnormal rise in the compliance costs and also exposing them to unbridled corruption. A very low threshold would force such small businesses to develop, even willy-nilly, a tendency to remain outside the ‘tax net’ by any means possible and the result would be chaos, disputes and open invitation to corruption!
Why can’t, therefore, we have a realistic threshold? The threshold should be chosen to balance the collection cost with marginal revenue gains as Keen and Mintz (2004) show. While arguing in favour of a higher VAT threshold, the authors observe that even if some revenue is lost by dropping small tax payers, the administration can be freed to make greater effort on those who can contribute more. On low threshold, the International Tax Dialogue (2005) notes that it is a bit puzzling that most developing countries establish and maintain low thresholds for VAT registrations, thus encumbering their already overburdened administrations ‘with a large amount of essentially useless work ‘. The international experience also shows that high thresholds are also important for equity because the consumption of the poor largely comprises purchases from small traders [M. Govinda Rao (2011)]. As noted by Netherlands-based and internationally acclaimed VAT expert Sijbren Cnossen in his paper titled ‘Will a True GST Ever Come to India?’  , ‘A common rule of thumb is that 80 per cent of the tax is collected from 20 per cent of the taxable firms. In other words, it is not worth the cost to dealing with hundreds of thousands small businesses that contribute very little to revenue. In any case, over time, inflation would erode the size of the threshold.’
Considering the socio-political-economic and ground realities of the indian economy, it is desirable – well-nigh, inevitable – that a reasonably high threshold of ‘Rs.75 lakh to Rs.100 lakh’ is prescribed. Even for the ‘composition scheme’, the proposed limit of Rs.50 lakh is very low and the same ought to be at least Rs. 150 lakh, if not more. It is worth to mention here that in its ‘Report on the Revenue Neutral Rate and Structure of Rates for the Goods and Services Tax (GST)’ released in December, 2015, the Committee led by Dr. Arvind Subramanian, CEA, MoF also favoured a high threshold of Rs. 40 lakh. At the same time, it is equally essential that the GST laws and its implementation should be such as would entice and encourage even the small businesses, otherwise entitled for exemption, to forgo the exemption and embrace the tax net willingly so as to be a part of an uninterrupted, seamless credit chain , instead of forever devising new ‘ways and means’ to escape the tax net ! After all, as a country, what shall we look for – ‘willing taxpayers’ or ‘ unwilling tax-avoiders’?
Let us remember this caution advanced by Keen and Mintz : “The issues at stake in setting the threshold for a value added tax are important – experience shows indeed, that they can be critical to the success or failure of the tax – and their neglect has been unfortunate.”
“There are times, too, when the law doesn’t give a damn who gets caught beneath its wheels”.
d. Ss19 and 19A read with Sch.III – Registration
As explained above, the term ‘taxable person’ as defined vide S.2(96) read with S.9(1) of the Act is linked to ‘registration or the necessity of obtaining the registration by a person’ as specified under Sch.III of the Act. Pragraph 1 of Sch.III provides that every supplier shall be liable to be registered under the Act, in the State from where he makes a taxable supply of goods and/or services, if his aggregate turnover in a financial year exceeds Rs.9 lakh (for the States other than NE States including Sikkim) or Rs.4 lakh (for the NE States including Sikkim). Thus, the current practice prevalent under Service Tax of providing for Registration before the threshold is reached or exhausted is proposed to be continued under GST regime also.
Aside from the above, certain other persons, as specified under paragraphs 2 to 5 to Sch.III of the Act, shall also be liable to obtain registration under the Act. Such ‘specified persons’ include:
– persons making inter-state taxable supply, irrespective of the threshold;
– casual taxable persons, irrespective of the threshold;
– non-resident taxable persons, irrespective of the threshold;
– input service distributors, amongst other persons.
It will be observed that the Registration provisions are quite exhaustive and hardly provide any ‘ escape window’ to any person engaged in the business of taxable supply of goods and/or services.
Certain issues arising from the provisions governing the ‘Registration’ are briefly discussed below:
i. S.2(21) read with S. 19A – ‘Casual taxable person’ – “Nothing casual about this one …!
S.2 (21) of the Act defines the term ‘ casual taxable person’ as under:
“S.2 (21) – ” casual taxable person” means a person who occasionally undertakes transactions involving supply of goods and/or services in the course or furtherance of business whether as principal, agent or in any other capacity, in a taxable territory where he has no fixed place of business.”
S.19A of the Act contains special provisions relating to ‘casual taxable persons’ (and also ‘non-resident taxable persons’). Sch-III, vide Paragraph 5, mandates a ‘casual taxable person’ to obtain registration irrespective of the threshold of ‘Rs.10 lakh’ or ‘Rs.5 lakh’, as the case may be. Consequently, the benefit of ‘exemption threshold’ will not be available to such persons, who would be required to discharge the tax liability from the first taxable supply itself. This would also mean that such persons shall be entitled to avail the benefit of Input Tax Credit on inward supplies/procurements of goods and/or services.
Having said so, it must be stated that the definition provided vide S.2(21) is quite vague, loosely worded and may lead to practical difficulties and interpretation-related disputes. First , the word ‘occasionally’ used in the definition is ambiguous, to say the least and susceptible to varied interpretations. Second , as will be observed from the definition, a ‘casual taxable person’ is one who occasionally undertakes transactions involving taxable supply, in a taxable territory where he has no fixed place. The term ‘taxable territory’ is defined vide S.2(98) of the Act so as ‘ to mean the territory to which the provisions of the Act apply “. As per S. 1(2) of the Act, the provisions of the Act extend to whole of India/State. On conjoint reading of all these provisions, a question that arises is, can a person, who is already registered in a particular State be entitled to obtain a registration as ‘casual taxable person’ in another State? Or is it that only an unregistered person will be granted such registration in a state where he intends to undertake taxable transactions for a limited period and where he has no fixed place of business? Going by the scheme of the things, it appears that a person already ‘Registered’ in a particular state may not be entitled to obtain Registration as a ‘casual taxable person’ in another State. To this extent, the concept is at variance with the concept of ‘ Non-localised Dealer ‘ (NLD) at present prevalent in many State VAT laws.
Yet another vital question that arises is , will a person registered as ‘casual taxable person’ be entitled to opt for ‘composition scheme’ contained in S.8 of the Act? It is worth noting here that the ‘ Report on Business Processes under GST on GST Registration’ (“Report on GST Registration”) of the Joint Committee of EC released in October, 2015, at para 2.4 thereof, clearly suggests that such persons shall not be allowed to opt for composition scheme. However, neither S. 19A nor any other provisions of the Act expressly provide so. Even on the conjoint reading of S.8, S.19A and Sch.III of the Act, no such inference about the ineligibility of a person registered as ‘casual taxable person’ to the ‘composition scheme’ can be drawn. This is more so since S. 8(1) starts with ‘non-obstante clause’ , i.e. the words ” Notwithstanding anything to the contrary in the Act… ” and is overriding all provisions of the Act, except S.7(3) of the Act relating to ‘Reverse charge”. Therefore, in case of a ‘casual taxable person’ engaged exclusively in intra-state taxable supplies , it cannot be said that there is any restriction on him in opting for the ‘composition scheme’ under S.8 of the Act.
S.19A, inter alia, provides that the registration granted to such ‘casual taxable person’ shall be valid for 90 days that can further be extended by a maximum period of 90 days by the proper officer on the request of such person. It is further provided, vide sub-section (2), that such person shall himself determine his estimated tax liability for the period for which registration is sought and deposit an amount equal to the same as ‘ advance deposit of tax’ in cash at the time of opting for the registration. Sub-section (3) provides that the amount so deposited shall be credited to ‘electronic cash ledger’ of such person and shall be utilized in the manner provided under S.35 of the Act. Significantly, in the Report on GST Registration referred to above, it was suggested that the amount (as advance tax) would be deposited by such person, by way of two Demand Drafts (one for Centre and other for State) which would be returned to the taxpayer after he has discharged his final liability. It was further suggested that the GST Law Drafting Committee may provide for the conditions for registration and tax payments (para 2.4 of the Report refers).
It would be observed that the suggestion has not been accepted by the ‘GST Law Drafting Committee’ in as much as, instead of treating the amount deposited as ‘security deposit’, it is proposed to be adjusted towards the tax liability to be incurred by such person during the registration period. Why this display of ‘lack of trust; in the taxpayers? Or is this a collection of revenue in advance at the expense of the taxpayers? Or is it both? And what happens if, at the end of the period, there remains a balance in ‘electronic cash ledger’ of such person? It appears that the refund of such balance amount is permissible and can be claimed under S.38(1) of the Act, subject to the conditions as prescribed. However, why should such ‘casual taxable person’ be subjected to thisrigmarole of refund procedure? Imagine the plight of a person based in say, Maharashtra and registered as ‘casual taxable person’ in a distant State, say, West Bengal, running helter-skelter for refund of his balance in electronic cash ledger! The suggestion of the Joint Committee as above was obviously pragmatic, practical and would have advanced the cause of ‘ ease of doing business’ in India. Unfortunately, the State VAT authorities appear to have had their way here also!
Ss.2 (69) and 19A – ‘Non-resident taxable person’ -“Welcome in India?!”
S.2 (69) defines the term “non-resident taxable person” so as ” to mean a taxable person who occasionally undertakes transactions involving supply of goods and/or services whether as principal or agent or in any other capacity but who has no fixed place of business in India .”
The casual approach in drafting of such important expression is also clearly visible here! The opening words of the definition are ‘…. means a taxable person ….’. Needless to say, theuse of the word ‘ taxable’ in the definition part is not only improper, but also absurd since the term that is being defined itself reads as ‘non-resident taxable person’. It is pertinent to note here that the definition of ‘casual taxable person’ does not use the word ‘taxable’ in the descriptive part, but only uses the word ‘person’ and wisely so. One cannot define ‘a non-resident taxable person’ so as ‘to mean taxable person!’In fact, in both the terms, the use of the adjective ‘taxable’ itself is totally unnecessary since the term ‘ taxable person’ has already been defined separately vide S.2(96) of the Act and when harmoniously read with S.9(1) and Sch.III of the Act, both, the ‘casual persons’ and ‘non-resident persons’ are covered within the scope of the term. The correct and proper terms ought to be ‘casual supplier’ and ‘non-resident supplier’.
At first glance, there may not appear to be much difference between the definitions of ‘non-resident taxable person’ and ‘casual taxable person’. However, on a careful study of both the definitions, the following significant differences between the two would become apparent, viz.:
– the definition of ‘casual taxable person’ refers to ‘ taxable territory’ , whereas, that of ‘non-resident taxable person’ refers to ‘ india’;
– the phrase ‘in the course or furtherance of business’ appearing in the definition of ‘casual taxable person’ is conspicuous by its absence in the definition of ‘non-resident taxable person’.
The use of two different expressions i.e. ‘taxable territory’ and ‘india’ is curious, to say the least, since as per S.1(2) read with S.2(98) of the Act, ‘India’, as a whole, is a ‘taxable territory’. Therefore, it is difficult to comprehend what distinction is sought to be achieved by the use of thesedifferent expressions. It may be pointed out here that the Report on GST Registration, vide para 2.5 thereof,describes a non-resident supplier as ‘ a person who, in the course of business, makes an intra-state supply of goods or services or both, but is not a resident in the state in which he has applied for registration, but is already registered in any other state.’ It would be observed that the concept of ‘non-resident supplier’ as envisaged in the Report was almost akin to the concept of ‘non-localised dealer’ prevalent in many states under the respective State VAT laws. However, the Report went one step further and suggested dispensing with security deposit or advance tax in case of such non-resident suppliers, unlike the practice being followed under State VAT laws to obtain cash security considered appropriate by the VAT authorities while granting registration to a person as ‘non-localised dealer’.
The concept of ‘non-resident taxable person’ as being propagated under the Act is neither same as ‘non-resident supplier’ that was envisaged under the Report nor same as ‘non-localised dealer’ as in vogue under the State VAT laws. The concept of ‘non-resident taxable person’, on the other hand, appears to have been articulated and based on the OECD’s ‘International VAT/GST Guidelines’ [ Feb.2015] (‘the Guidelines’). Considering its importance and relevance, the relevant Guidelines and the concept of ‘non-resident taxable person’ in the context thereof are briefly discussed below.
a. The destination principle – A background
The Guidelinesnotes that VAT neutrality in international trade is generally achieved through the implementation of the “destination principle”. The destination principle is designed to ensure that tax on cross-border supplies is ultimately levied only in the taxing jurisdiction where the final consumption occurs, thereby, maintaining neutrality within the VAT system as it applies to international trade. Place of taxation rules are needed for supplies of goods as well as for supplies of services and intangibles with a view to implement the destination principle. Whereas, implementing the destination principle with respect to cross-border supplies of goods is facilitated by the existence of border controls or fiscal frontiers,the task is rendered much more difficult with respect to international trade in services and intangiblesthat cannot be subject to border controls in the same way as goods. The issue becomes more complex when the supplier of the service is a non-resident supplier and does not have any place of business in the taxing jurisdiction.
b. Service Tax on cross-border B2B and B2C transactions – ‘An Indian experiment!’
The provisions of the Finance Act, 1994 governing the tax treatment, for the purpose of levy of service tax, of the B2B (business-to-business) and B2C (business-to-consumers) transactions involving cross-border provision of services are quite different.
In case of cross-border B2B transactions, the levy of service tax is implemented through revere charge mechanism and is broadly based on the OECD Guidelines.
However, in case of cross-border B2C transactions, by and large, the same are not subject to service tax at present when the provision of service is by a service provider based outside India and the individual recipient of service based in India and where the provision of service is for the personal consumption of the latter. Thus, neither the service provider based in foreign jurisdiction nor the service recipient based in India pay any service tax on such cross-border transactions. As noted by the Guidelines, reverse charge mechanism does not offer a viable and appropriate solution for collecting VAT on B2C supplies of services and intangibles from non-resident suppliers. The level of compliance with such a reverse charge mechanism for B2C supplies is likely to be low, as private consumer have little incentive to declare and pay the tax due and enforcing the collection of small amounts of VAT from large numbers of private consumers is likely to involve considerable costs that would outweigh the revenue involved.
c. Taxation of cross-border B2C transactions – OECD Guidelines
Against the above background, the Guidelines recommend that the most effective and efficient approach to ensure the appropriate collection of VAT on such cross-border business-to-consumer supplies is to require the non-resident supplier to register and account for the VAT in the jurisdiction of taxation.
It may be pointed out here that India, to a limited extent, followed these Guidelines, by bringing the service aggregators under the service tax net through the Finance Act, 2015. The relevant statutory provisions require a service aggregator to make payment of service tax either by himself andif he does not have presence in India, then through his representative present in India. However, the levy of service tax has remained confined to this category of persons.
The Guidelines further recommend a simplified registration and compliance regime to facilitate compliance for non-resident suppliers. It further lays emphasis on the appropriate simplification to facilitate compliance for businesses faced with obligations in multiple jurisdictions. It cautions that maintaining traditional registration and compliance procedures for non-resident suppliers of B2C services and intangibles would risk creating barriers that may lead to non-compliance or to certain suppliers declining to serve customers in jurisdictions that impose such burdens. The Guidelines recommend that a simplified registration and compliance regime for such non-resident suppliers of B2C services and intangibles would operate separately from the traditional registration and compliance regime, without the same rights (e.g. input tax recovery) and obligations (e.g. full reporting) as a traditional regime.
d. “Non-resident taxable persons” under Model GST Law
As discussed above, the Report on GST Registration, though envisaged the concept of ‘non-resident supplier’, the concept was more akin to the concept of ‘non-localised dealer’ as prevalent, at present, under the State VAT Laws. The Report did not talk about a ‘non-resident supplier’ who do not have any business presence in India, but, nevertheless, engaged in cross-border supply to a consumer in India.
The Act i.e. Model GST Law, however, refers to a ‘non-resident taxable person’, a concept articulated on the basis of the Guidelines discussed above. The concept would apply, in effect to the non-resident suppliers located in foreign jurisdictions and who do not have any place of business in India. Sch.III of the Act provides for mandatory registration for such ‘non-resident taxable person’ occasionally undertaking transactions involving supply of goods and/or services.
Unfortunately, while whole-heartedly embracing the Guidelines and its recommendations to bring the non-resident suppliers of cross-border B2C services and intangibles within the tax net, the other advice of the Guidelines regarding simplified registration and compliance regime have apparently been ignored. The limited 90 days’ validity of registration with further extension by maximum 90 days would mean that such ‘non-resident taxable person’ would be required to obtain fresh registration on expiry of 180 days. Moreover, such ‘non-resident taxable person’ will also be required to obtain the separate registration in each State from where he makes a taxable supply. The necessity to apply for extension and/or fresh registration on expiry of 90 or 180 days, as the case may be, can horrify such non-resident supplier!
Aside from the above, the stipulation regarding ‘advance deposit of tax’ in cash (ignoring the suggestion of the Report) would also dampen the spirit of such non-resident suppliers. On other aspects, the discussion made hereinabove in the context of ‘casual taxable person’ will hold good for the ‘non-resident taxable person’ as well.
The Guidelines recognised that a proper balance needs to be struck between simplification and the needs of tax administrations to safeguard the revenue. Tax administrations need to ensure that the right amount of tax is collected and remitted from suppliers with which they may have no jurisdictional relationship. Against this background, the Guidance Note sets out the possible main features of a simplified registration and a compliance regime for non-resident suppliers of B2C services and intangibles, balancing the said twin objectives. One can only fervently hope that due and serious consideration will be paid to these Guidelines and its recommendations while bringing such ‘non-resident suppliers’ within the GST Regime and imposing the levy on them!
“Laws are generally not understood by three sorts of persons,
namely, by those who make them, by those who execute them,
and by those who suffer if they break them.”
(To be concluded)