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The government is likely to raise the service tax exemption threshold for small businesses sharply besides introducing a simple turnover-based regime for those just above the limit for goods. The moves will mark a significant advance in ease of doing business and pave the way for the goods and services tax (GST), one of the most crucial reforms on the government's agenda.

Lifting the cap will keep small businesses outside the service tax net while significantly easing the compliance burden on the indirect tax administration, allowing it to focus on bigger taxpayers. The service tax limit is expected to be raised to Rs 25 lakh from the current Rs 10 lakh. "There is a case for raising the threshold limit," a government official told ET.

The announcement could be made in the budget. Finance minister Arun Jaitley will unveil the budget at the end of next month. An increase in the limit will be consistent with GST, expected to be rolled out next year, although it's unlikely that it will be in place by April 1 as promised by the government, given the political opposition. The central government and many states are in favour of a Rs 25 lakh GST threshold though some states want a lower Rs 10 lakh limit. The excise duty threshold could be lowered from Rs 1.5 crore but with the option of compounding.

"The threshold limits of service tax and Cenvat (central value added tax) can be aligned with the eventual GST limits," said Bipin Sapra, tax partner, EY, endorsing an increase in the threshold. He sounded a note of caution. "While it would benefit the small service players, care needs to be taken that small manufacturers are not exposed to stringent excise procedures till GST is implemented," he said. Service tax is the fastest growing of the all indirect taxes—the others being excise and customs--having risen to a budgeted Rs 2.1 lakh crore in FY16 from Rs 37,600 crore in FY-06.

The compounding scheme for small manufacturers, on the lines of one that many states provide for sales tax and value added tax, will improve the compliance burden for them. These producers, just above the exemption threshold and up to a limit, can pay a flat rate of excise or service tax based on their turnover. Such compounding duty is levied at a flat percentage of the turnover and preferred by small businesses that will then not be required to keep detailed books of account. This will allow them to prepare for GST and send out a strong signal on the government's resolve to introduce the reform.

Give Small Businesses A Choice A higher threshold is a good idea as it will ease the burden on small taxpayers. It also achieves a social goal as poorer households often buy more from smaller outlets or kirana shops. While endorsing this, the Arvind Subramanian Panel cautions that a high threshold undermines the value-added chain which is critical for the governance benefits of having a GST. GST creates multiple audit trails that help to curb evasion. So, it is sensible to give small businesses the option to be a part of the GST chain.

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