Proposal seeks to share financial burden between centre and states, which the latter are opposing
Differences have emerged between the centre and states over who will foot the bill for a big tax break for micro, small and medium enterprises (MSME) that is in the works—partial tax exemption from the Goods and Services Tax (GST) for entities with up to ?1.5 crore sales.
The proposal which is now being examined by a ministerial panel led by Union minister of state for finance Shiv Pratap Shukla seeks to share the financial burden between the centre and states, which the states are opposing.
The original proposal, discussed at the last GST Council meeting on 4 August, sought to give relief on the central government component of GST (CGST) for businesses with sales upto ?1.5 crore, similar to the excise duty exemption small businesses enjoyed in the pre-GST era. That would have led to the Union government alone losing revenue as states would continue to charge state GST on these firms, the equivalent of Value Added Tax (VAT) which they were liable to pay in the earlier regime.
The Union government now wants that states too share the burden. “The ideal way to give relief is to refund 50% of the total taxes paid by businesses with sales upto ?1.5 crore. That means, half of CGST and half of SGST may be refunded through a scheme,” an official familiar with the discussions between central and state authorities said on condition of anonymity.
“States, however, say the proposal was the Centre’s baby and that it alone should take the revenue hit,” said this person.
A second person who also did not wish to be identified said states are unlikely to yield on this issue and that the Centre may have to bear the burden on its own. This may mean that the relief for small tax payers is lower than what was initially envisaged.
“The refund may be only 15-20% of the CGST component if states don’t agree to share the financial burden,” the person said.
Around 2.8 million units were registered under Central Excise with the central government.
The second person added that the GST impact on smaller units may be overstated.
There was no credit available for excise duty, unlike that in GST. The net tax incidence may be 1-2% of the value of the product, the second person added.
The GST Council on 14 August issued the terms of reference for the Shukla panel, which allows it to come up with an interim report on all MSME-related issues it is looking into, before the next GST Council meeting on 28-29 September.
The Council also gave it enough flexibility to consider all proposals discussed during the last Council meeting as well as any new ones received afterwards, said the person cited above. This gives greater room to accommodate new suggestions on the proposals.
The central government is keen to give relief to the MSME sector which suffered earlier due to the disruption triggered by the November 2016 demonetization and the July 2017 rollout of GST. Small businesses and traders are also politically relevant as they form a key support base of political parties, including the BJP.
MSMEs form the backbone of India’s economy. According to data available with the government, more than 63 million MSME units are engaged in manufacturing, services and trade—more than half of them are in rural areas—and account for about 110 million jobs. These companies account for 29% the country’s GDP.