Ease GST pain for small businesses: Let large buyers deduct GST on small supplies–09.11.2017

The Goods and Services Tax (GST) Council should lower the levy on many products that now attract 28% GST. Only demerit goods should attract the highest GST slab, not essential products or intermediate parts supplied to industry. Small and medium enterprises (SMEs) also need a steady flow of working capital to keep their businesses afloat, and should not have to borrow money to pay tax while they wait for their customers to pay. It would make sense to move to a system in which large buyers of inputs from small suppliers deduct GST at source, while the supplier and the buyer file returns showing the tax incidence and collection. This would spare small suppliers having to borrow to pay tax.

Take a large company, Megabucks, which procures parts from a small enterprise, Antparts. If Megabucks paid Antparts for its supplies within the tax payment cycle, all would be good. However, regardless of a law mandating SME payments within 45 days, Megabucks would pay Antparts after 90 daysand Antparts has to remit the tax it has levied on Megabucks the very next month. It has no access to banks, which prefer to lend to large companies, and borrows money from, say, Shylock, to pay the tax. Shylock charges a steep rate of interest, which Antparts cannot show on its books, for fear of closing this window of credit on tap. The interest on debt incurred to pay tax cripples the small company. Suppose Megabucks is obliged to deduct tax at source on its purchase from Antparts. The onus to pay tax would be with Megabucks, while Antparts only has to file returns showing the value of its supply and the tax Megabucks has deducted and kept. This would spare Antparts from the clutches of Shylock.

This is a minor variation of the reverse tax mechanism already in place, where the qualifying threshold is on the supplier and is kept at a low Rs 20 lakh. Put the threshold on the buyer, say, a turnover of at least Rs 100 crore, and mandate registration and filing of returns for all suppliers, save those with a turnover below Rs 20 lakh. Everyone would gain.

This piece appeared as an editorial opinion in the print edition of The Economic Times.
Recommended By Colombia

via Ease GST pain for small businesses: Let large buyers deduct GST on small supplies

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s