With the passage of the uniform Goods and Services Tax in the Rajya Sabha, the Small and Medium Enterprises (SME) in the country are caught in a state of flux. The general perception is that GST may negatively impact SMEs as aspects like excise exemption will disappear when GST rolls out.
Rajeev Dimri, the leader of Indirect Tax at BMR & Associates says the Government’s intention behind GST is to expand the taxpayers’ base and not to enhance tax burden on business/individual tax payers.
“Much aligned to this objective, Model GST law released by the Ministry of Finance seeks to bring each person with an aggregate turnover of above Rs 10 lakh within the umbrella of GST. The limit has been kept even lower at Rs 5 lakh for north eastern states.
“This should create a level playing field for organized and unorganized sector by curbing scope of various tax evasion practices such as creation of multiple entities to enjoy high exemption thresholds,” says Dimri.
However, Dimri says the flip side could be that it vitiates the existing protectionism provided by the government to Small and Medium Enterprises (SMEs) which necessitates them to get out of their comfort zone as far as indirect tax costs and benefits are concerned.
“SME manufacturers, presently exempt (if annual taxable turnover is up to Rs 1.5 crore) from paying excise duty, would be liable to pay full rate of GST. This may bring their products up for stiff competition with those of industry leaders in terms of tax costs involved. Small scale service sector is also likely to face an increase in tax rate under GST as against the present effective rate of 15 %,” says Dimri.
Dimri believes better availability of input tax credits should leave the increased tax incidence on services by only marginally. “Trading entities, on the other hand, should largely welcome GST as it creates a single uniform market for them across the country with improved ease of doing business,” he says.
Breaking things down and allaying all apprehensions, KMPG in India, Indirect Tax, Partner and Head, Sachin Menon says GST would be good for the industry especially manufacturing sector.
“SMEs in the service sector enjoys no exemption or concessions. Concessions are only for the SME manufacturers. The total tax incidence in every product that we manufacture in India is anything between 27 to 31%, which is supposed to come down to a 20%,” he adds.
The SMEs whose turnover is up to Rs 1.5 crore were availing excise exemption, but they were subject VAT/CST/entry tax etc under the state law. It is worth mentioning that the exemption to SME does not mean that the entire Rs 1.5 crore is exempt from excise.
“The inputs procured by the SMEs are excusable/taxable as it has already suffered tax. By way of Small Scale Industry (SSI) exemption, what benefit they actually get is limited to the excise duty payable only for the value addition at the SMEs end.”
“Assuming that 30% is the value addition on the exempted turnover of Rs 1.5 crore, the actual exemption from excise duty to SME is 12.5% on Rs 45 lakhs (which is Rs 5.62 lakh in a year). Thus the so called SSI exemption is actually 0.375 % of 1.5 crore, that is Rs 5.62 lakh per annum. Assuming that on Rs 1.5 crores turn over, the current taxes payable are reduced 7%, under the proposed GST regime, the saving to SMEs will be Rs 10.5 lakh as against a loss of Rs 5.62 lakh resulting in a net gain of Rs 4.88 lakhs,” says Menon.
“Hence, the feeling that SME is going to be negatively impacted by GST is a myth,” he adds.
Source: The Economic Times
