GST law for SMEs And Startups Government has taken various measures to boost this segment by introducing various schemes, bringing in various tax reforms and various technology driven changes and programmes

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SMEs are the growth engine of Indian economy. As per the latest announcement by the Union minister, they have a great opportunity of being integrated in the global supply chain as many countries are undergoing significant restructuring in their supply chain and also looking to diversify their supply out of China.

Government has taken various measures to boost this segment by introducing various schemes, bringing in various tax reforms and various technology driven changes and programmes. There have been major reforms announced in the Budget 2021-22 for this segment like review of more than 400 old custom exemptions, increase of limit for tax audit from INR 5 crore to INR 10 crore, rationalization of exemptions on import of duty free items as an in incentive to exporters of garments, leather and handicraft items, most of which are manufactured by MSMEs. With so many incentives, this segment is lucrative and thus it becomes imperative to understand what are the key compliances required under GST law. Few of the provisions under GST as discussed in this article would give an insight to these compliances:

GST Registration

Every supplier in the state or Union Territory from where he makes a taxable supply of goods or services or both, if his aggregate turnover in a financial exceeds prescribed amount of threshold exemption limit (INR 20 lakh/10 lakh with certain exceptions and conditions) has to take registration in that state. Further, registration is required in a State from where taxable supplies are made and not the State to which taxable supplies are made. Thus, it is imperative to identify the origin of supply for the purpose of obtaining the registration. The origin of supply must be determined based on the relevant provisions under the GST law along with the facts of the case. It is pertinent to note that location of supplier of services has been defined under GST law, but the location of supplier of goods has not been defined. However, reference shall be made to Place of business definition under GST to determine the same. Place of business as defined under GST includes a place from where the business is ordinarily carried on and also includes the place where they are stored i.e. emphasis has been laid on a place where goods to be supplied are located. Thus, as per the legal interpretation of the provisions, in case a person has a registered office for accounting and other operations in State A, however goods supplied are stored in a warehouse in another state B, registration is needed in the State B as the taxable supplies are being made from state B. However, there is no requirement to take registration in the state A (assuming no other services being provided from State A, only book keeping is being done). However, there have been various rulings in case of imports where it has been held that no registration is needed in each state where the goods imported are stored and thereafter sold to different states. The invoices can be raised from the registration taken in one state of registered office.

Composition Levy Scheme

Composition levy scheme in GST is an alternative method of levy of tax designed for small and medium taxpayers whose turnover is up to the prescribed limit. It is very simple, hassle free compliance scheme for small taxpayers. A person opting to pay tax under composition levy scheme can neither take credit of taxes paid on procurements nor can collect any tax from the recipient. Under the said scheme, the registered person opting to pay tax needs only to ascertain the aggregate value of outward taxable supplies and compute the tax liability at a fixed rate , regardless of actual tax rate applicable on the said outward supply. The rate of tax under composition levy scheme varies from 1 per cent to maximum of 5 per cent depending on the nature of supplier. Such taxpayer does not have to maintain elaborate accounts and records and instead of 2 monthly returns (which a normal taxpayer has to file under GST), he needs to file only one return on an annual basis. Further, he needs to pay the taxes quarterly based on a declaration. A taxable person opting for the scheme has to issue bill of supply instead of tax invoice. He has to mention the words "composition taxable person, not eligible to collect tax on supplies" at the top of every bill of supply issued by him.

Input Tax Credit

In GST regime, there is a free flow of credit. Unlike erstwhile regime, input tax credit is available of services as well to a manufacturing unit without any requirement of separate registration. A registered person is entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business.

Increased compliance of HSN code

With effect from April 1, 2021, registered taxpayer with aggregate turnover up to INR 5 crore in the preceding financial year has to report 4 digit HSN/SAC code in the invoice (except with the exemption given in case of supplies made to unregistered person) and 6 digit HSN/SAC code to be mentioned in case of aggregate turnover being more than 5 crores. There are specific cases where the 8 digits HSN code is required to be mentioned. Thus, this change has increased the compliance burden on SMEs thereby requiring them to do the detailed analysis of each and every supply made by them and identify the applicable 4 digit and 6 digit codes. Further, this also needed the changes in the software and thus increased the financial burden on them.

Exemption from Compulsory Audit by Professional

In GST regime, every registered person whose turnover during a financial year exceeds the prescribed limit is required to get his accounts audited by a chartered accountant or a cost accountant. As a trade facilitation measure, government has notified that registered persons having annual turnover up to INR 2 crore are exempted from getting their accounts audited by a chartered accountant or a cost accountant.

Returns in GST

All eligible registered persons need to furnish electronically, in Form GSTR-1, the details of outward supplies of goods or services or both effected during a tax period on or before the 10th day of succeeding month. Similarly, all eligible registered persons are required to furnish electronically, in Form GSTR-3B, a summary return of liabilities, input tax credit and payment of tax pertaining to the month on or before the 20th day of succeeding month. As a trade facilitation measure, the government has notified that all eligible registered person having annual turnover up to INR 1.5 Crore may opt for filing of quarterly return, in Form GSTR-1 (i.e. the details of outward supplies of goods or services or both effected during the quarter). With a view to do the simplification, QRMP scheme was introduced. However, the same rather is very complicated and increases the burden of compliance and is complex to understand and created confusion in the industry. However, there have been various other changes implemented which have eased the compliance like filing of nil return by SMS, auto-drafted GSTR-3B reflecting on portal, red flags for variations more than 10 per cent so as to minimize the clerical errors.

GST has resulted in streamlining of processes and reduction of compliance burden. GST was designed to have minimal human interface and was ought to be implemented through strong IT platform run by GSTN. At the initial stages, there were hiccups and challenges being faced by the tax payers. However, it will meet its very purpose of "one interface with no face-to-face meeting between taxpayers and tax authorities" soon and practically every activity will be done online and MSMEs are expected to be benefitted with these changes.

Rajat Mohan & Priyanka Sachdeva

Senior Partner and Partner, AMRG & Associates

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