SMEs in manufacturing sector will not have it easy in the GST regime: Indo-American Chamber of Commerce

New Delhi, July 17 (KNN) Small businesses in the manufacturing sector will not have it easy in the GST regime; said Indo-American Chamber of Commerce (IACC) highlighting that tax burden for many manufacturing SMEs has rather increased under GST regime.

 IACC has flagged 11 points for smooth transition of Goods and Services Tax (GST) from its truncated avatar to a full-fledged tax structure that upholds its basic principle “One India One tax”.

SK Sarkar, Chairman, Finance Committee, IACC , said, “Small businesses in the manufacturing sector will not have it easy in the GST regime. Under the excise laws, only manufacturing business with a turnover exceeding Rs. 1.50 crore had to pay excise duty.”

Under GST, the turnover limit has been reduced to Rs. 20 lakh, increasing the tax burden for many manufacturing SMEs. Many of the SMEs will find compliance tough and even if they comply with the GST norms, it would be at an additional cost, he pointed.

Sarkar further said that most businesses use accounting software or ERPs for filing tax returns, which have excise, VAT, and service tax already incorporated in them. The transition to GST will require businesses to change their ERPs either by upgrading the software or by purchasing new GST-compliant software. This will lead to increased costs of buying new software and training employees on how to use it.

“It is ideal that some support from the government flows to the small scale sector to motivate them switch over to the GST,” he added.

National Vice President of IACC, Vasant Subramanyan, said, “Political expediency has led to a very high degree of compromise in the roll out of GST. It is understandable given the federal structure of India where there is panoply of taxes at the central, state and local levels. A large number of indirect taxes have been subsumed into GST.  Yet, there are many incongruities both in the structure, uncertainties in the rollout and importantly in the impact, since a real time check at the initial stage indicates that prices of some of the goods having zero rates have gone up giving the impression that GST does not have the desired impact at least in the beginning.”

Up in the pecking order of the IACC suggestion is the need for bringing alcohol and petroleum products in the ambit of Central GST in a calibrated manner since more than 60% of the revenues are mobilized through tax realizations from these goods, IACC said in a astatement.

There is a strong pitch by the states not to give up the taxation of these sectors since the revenues from these sectors constitute a major chunk of their resource mobilization. A pragmatic approach to counter this will be citizens’ pressure for assigning this right to the Centre. This can be realized only when they (citizens) feel that they have a high  stake in the central GST, wherein they get the merit goods (essential goods) at a lower price in a seamless manner, IACC  added.

Next in importance, according to IACC, is pruning up   the  number of slabs in the GST. World over, GST or similar clone of a comprehensive indirect tax will have either one slab or at best two. In India, in effect, there are five slabs viz. 0%, 5%, 12%, 18% and 28%, which will make the tax structure complicated and difficult to comply with.

“We have to draw up a roadmap for further pruning the number of rates in a time bound manner. In the given situation, it is prudent to do away with highest slab/s and amalgamating it/them with next lower slab on account of two reasons. One, any increase in rates will lead to resistance and even protracted litigations and the two, the human ingenuity is such that a product may be given a different name, shape, texture and size to fit into a lower slab,” Sarkar said. 

Another important issue that has to be addressed to is the conceptual ambiguity in the GST structure. Now there are three categories of taxes imposed. Central GST, State GST and Inter-State GST. A close scrutiny of the structure reveals that GST has not brought any significant improvement over the earlier dispensation of VAT.

Rather, the manufacturing states feel that their interests have been jeopardized under the GST which is a destination based tax. It is important to evolve pragmatic schemes that should address the genuine concerns of manufacturing states in order to shore up their faith in the dispensation, IACC noted.   

Another anomaly in the GST structure is in the form of taxing branding packaged edible items, if the brand name is registered under the Trade Marks Act. If it is not registered under the Act, tax is not levied, irrespective of the turnover. The intention of the government is to give a sort of comfort to the unorganized sector, but in effect, it goes contrary to the Intellectual Property Rights (IPR), curb innovation and forbids companies from moving in value chain, it said. 

IACC  said it feels that under the existing GST structure, businesses outsourced to non-registered SMEs by big firms as a part of the “ job work” will get adversely affected. The onus of keeping the record of such transactions for up-linking to GST network lies with the outsourcing entity. Assuming that a small GST registered company in its business transactions with a large company has faulted in up-linking the relevant invoice, the entire transaction including availing of tax credit will be at standstill, thereby creating disruptions in the business chain.

“What we have to do is to constantly monitor the activities and take ameliorative steps as and when they are noticed. Also, there should be a strong say for the small and medium enterprises at the GST Council to articulate their problems,” said Subramanyan.

Also, Composition scheme (turnover upto Rs 75 lakhs) for traders, manufacturers  and  hotels may be done away with since this scheme militates against the GST principle of getting input credit across the supply chain. In any case, this scheme does not appear to have too many takers, said IACC.

In the export front, it is important to align two main export promotion schemes in India, the Merchandise Exports from India Scheme (MEIS) and the Services Exports from India Scheme (SEIS) with the GST. Under these schemes, exporters with a certain amount of turnover are provided with duty credit scrips. These scrips allow for the exemption of duties paid on the import of raw materials.

Under the duty drawback scheme, the exporters are provided with a refund of the customs and excise duties paid on the imported inputs. The GST legislation has a provision on a duty drawback for these inputs. This implies a refund of the taxes paid on both imported as well as domestic inputs.

The duty drawback scheme helps those exporters who produce goods that are not being taxed but still have to pay taxes on the inputs used in their manufacture. Due to a higher rate of tax under the GST, exporters might face a cash crunch due to the blockage of working capital.

 “In order to address this issue, the finance ministry should evolve schemes to fast track process of refund within a stipulated time of say 5  days,” said  Subramanyan.  (KNN Bureau)