Major relief in service tax likely for small business

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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