Here’s how the proposed changes to GST could affect businesses

  • The goods and services tax (GST) council has proposed a total of 46 possible changes that can be made to the GST.
  • Amendments to input tax compensation (ITC) aren't only business friendly, but employee friendly as well.
  • Suggested changes to the reverse charge mechanism and composition scheme are a boom for micro, small and medium enterprises (MSMEs).

It’s been a little more than a year that the goods and services tax (GST) was implemented in India. The move has been subject to a mixed bag of reactions. Yesterday, to allay at least some of the concerns in the market, the GST council unveiled a draft of changes that they will be proposing at the upcoming session of Parliament on July 18.

And it’s not just a couple of changes, but a total of 46 suggestions. Though most of the changes were primarily put forth by the GST council, a few proposals from the industry have been included as well.

The primary ask from businesses in India was the transfer of cess credits, which was not present in this draft. But that being said, changes that are present include measures to provide relief to operations, including toning down some of the compliance norms.

Business friendly changes may be employee friendly too

Employers can now claim input tax compensation (ITC) for some pretty basic transactions that weren’t eligible earlier. For instance, life insurance and health services to employees can earn tax credits.

Provided that insurance is mandated by law, employers will can now claim life insurance for security guards and cash van drivers. Even in states where health cover is a prerequisite for nurses, employers will be able to claim ITC.

Currently, the issue is that employees themselves don’t opt for insurance because they can’t claim any compensation against it. With the ITC mechanism, the cost of such expenses can be adjusted against future tax liability. That in turn, will be provide an incentive for banks and hospitals to incur such costs.

Even late night drop facilities for women, as well as outsource creche facilities, will come under the ITC umbrella.

This change would align the GST laws with labour laws, resulting in a more employee friendly environment.

Disparity caused by the lack of the reverse charge mechanism (RCM)

This particular recommendation has been stuck in the pipeline since the implementation of GST last year. The delay has caused a disparity between registered and unregistered dealers.

Basically, the issue is that an unregistered dealer can’t issue an invoice of the good or services provided. Which is why, in turn, registered suppliers don’t want to buy from them since they won’t be able to claim any refund without proof of purchase.

In the current scenario unregistered dealers, which form the unorganised sector of the economy, are going out of business.

The problem lies within the fact that some suppliers are so small that their revenue generation is below the threshold that requires them to pay tax.

Once RCM comes into play, registered dealers will be able to claim refunds against purchases made from unregistered entities, which should hopefully bring bring back into business. That being said, it doesn’t really result in any tax generation for the government.

The underlying motive, at the end of the day, is no potential suppliers are left unregistered.

More businesses under the composition scheme

The composition scheme is basically a watered down version of the GST meant for small taxpayers. Currently, eligibility for this scheme is capped at Rs 1 crore, but the new version is proposing a hike to Rs 1.5 crore.

The GST council’s even recommended bringing more services into the fold. Currently, it’s only the restaurant sector. Rather than approach it by industry, the proposal wants to include services based on the value they provide. If the business’ worth doesn’t exceed 10% of its turnover, or Rs 5 lakh, it will be eligible to apply for the composition scheme.

This brings the service micro, small and medium enterprises (MSMEs) into the fold of the composition scheme. Considering that MSMEs contribute to 8% of the GDP and areInp responsible for 69% of employment, such a measure would liquidate more funds for growth.

The proposals go in line with the World Bank’s suggestion that the GST needs to simplified and streamlined in order to be successful. That being said, while the changes are for the better, some of the key concerns with GST are still neglected like the pending compensation claims.
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