NO EASE OF BUSINESS FOR SELF EMPLOYED AND SMALL ORGANISATIONS- GST WILL MAKE LIFE DIFFICULT

[CA DEV KUMAR KOTHARI]

Ease of doing business:

Government of India (NAMO government) is promising ease of doing business. However, feeling of business men is that doing business is becoming very difficult day by day. More formalities and obligations are being cast on businessmen – even on small self-employed people.

No ease of doing business for small supplier and service providers

As discussed hereafter even a rickshaw puller, / auto rickshaw,  a barber  shop , a pan shop,  a small provision store run by self employed shop keeper, will be required to get registered under GST and pay GST. For example,  even a  self- employed small pan shopkeeper selling pan, cigarettes, and cold drinks can have turnover of Rs.  three – four thousand daily with a net daily income of  about ₹ 250- 300  will be required to get registered and pay GST.

 It is highly feared that ease of business will be robed by GST from such self-employed entrepreneurs- suppliers/ traders and service providers.

Annual monetary limit under model GST:

As per model GST any person doing business of supply of goods and services will be required to get registered if his gross receipts during a year is Rs four lakh in NE region and Sikkim,  and ₹ 9 lakh for other part of India respectively. Playability of  GST will be just after having gross turnover of another one lakh rupees in both cases.

Self- employed people usually work on most of days in a year. Assuming break for 15 days, 350 working days are very common for self-employed  shopkeepers, service providers. Applying 350 working days the  daily turnover will be as follows:

North Eastern India, including Sikkim  Rs.400000 per year /  350 days =  ₹ 1143 per day.

Rest of India       ₹ 900000  per year / 350 days  =  ₹ 2571 per day.

Fixed expenses:

Even a small business has some fixed expenses on account of rent, interest, depreciation of assets, electricity, employee/ outsourced services cost, up-keep repair and maintenance of business space and machines, mobile and other phones, local taxes etc.

For examples, even a rickshaw puller has to pay rent to the Rickshaw owner, rent for parking,  repairs expenses for rickshaw, local tax, road tax etc. Now-a-days even a Rickshaw Puller is required to have mobile phone so that his passengers can call him and fix time for pickup.

A barber has to pay rent for shop / space, they also have to pay some trade licence or similar fees to local authorities trade associations, repairs for shop and tools, consumable tools  etc.

Income element:

Earning of income starts only  when contribution from sales and services is enough to fully recover fixed costs ( including semi-fixed costs). Before break even point, there is no profit.

NE Region:

NE Region is itself a difficult place to live and work. The limit of ₹ 4 lakh is not at all justified.

A small traders at turnover of  Rs.400000/- in NE India will not have any income, rather he may be incurring loss. In such cases an additional burden of getting registered for GST on achieving turnover of Rs. four lakh and paying GST once gross receipts exceed Rs. five lakh is not at all justified.

Other parts of India:

In other parts of India also a small traders at turnover of ₹ 900000/-  will not have any income, rather he may be incurring loss. In such cases an additional burden of getting registered for GST on achieving turnover of Rs. nine lakh and paying GST once gross receipts exceed Rs. ten  lakh is not at all justified.

Past history:

It is worth to mention that in Service Tax , similar limits of ₹ 9 and 10 lakh are in force for a long period of time. In the Finance Bill 2016 it was expected that these limits will be increased substantially to at least ₹ 20 lakh.  However, the same remained unchanged and now in GST also same amount is kept with further substantial  reduction for states in NE and Sikkim state.

In various states also for Sales Tax / VAT the exemption limits ranges around Rs. ten to fifteen lakh per annum. And these limits also require revision.

Therefore, threshold limit for liability for registration and GST payment need to be revised.  

Presumptive income-tax- a basis:

Even if we apply presumptive net income computation Rule , at turnover of Rs. five lakh deemed income is ₹ 40000/-  and on Rs. ten lakh it is ₹ 80000/-. These are far below basic exemption provided under Income-tax Act.

A person earning ₹ 40K in NE & Sikkim annually and ₹ 80K in other states should not be burdened with formalities of GST.

8% net profit is not feasible in case of small suppliers and service providers because for achieving breakeven itself, a turnover of 15-25 lakh is required. Only after achieving break even one derive net profit.

Estimation of income vis a vis turnover / gross receipts:

In case of  supply of goods, major part of turnover goes into cost of goods sold  purchases price plus expenses. Then fixed and variable expenses are to be met out.

In case of service also fixed and variable costs are involved.

Breakeven point is to be achieved so that net earning starts. In case of very small trader and service provider minimum fixed costs of ₹ 10000/- to ₹ 15000/- per month is very common.

In case of self-employed people assuming a gross addition  of 10% in case of trading and 15% in case of service the breakeven will be as follows:

Fixed costs     Rs.15K PM                                                      Rs.180000 per annum

Turnover required to break even in case of supply                Rs.18,00,000/-

Turnover required to break even in case of services              Rs.12,00,000/-

Turnover required to earn taxable income:

In case of self-employed people assuming a gross profit of 10% in case of trading and 15% in case of service the turnover required for earning income at least equal to basic exemption under Income –tax Act will be as follows:

In case of supplies:

Turnover required for break even i.e. 18,00,000  + (2,50,000 / 10%) = 43,00,000/-

In case of services:

Turnover required for break even i.e. 12,00,000  + (2,50,000 / 15%) = 28,66,667/-

Before these levels there is hardly any scope to earn taxable income.

The assumed rate of GP is on higher side and fixed expenses are on lower side.

Requirement of Tax audit u/s 44AB:

At present (for PYE 31.03.2017) Tax Audit will be required when gross receipts exceed ₹ 100 lakh in a business and ₹ 50 Lakh in any profession. These limits also need revision in view of inflation and to reduce compliance cost and make business easy.

UP ward revision of thresh hold exemption for GST is required:

There is no justification of burdening with GST requirements such small traders and service providers who are not even able to earn income which enjoys basic exemption.

In case of NE and Sikkim about half of normal exemption limits has also no justification because in those areas already it is more difficult to carry business due to lack of infrastructure, lesser working hours, more time required for travels etc.

Keeping in mind basic exemption under IT Act, requirements of tax audit under IT Act and ground realities about fixed expenses, GP margins, NP margins etc.  as discussed above, and if government really want to provide ease of business for self- employed and small businesses, the exemption limit from GST registration should be as follows:

For suppliers of goods  and other business activities  ₹ 50 Lakh

For service providers                                                    ₹ 25 lakh

The above are just half of limits prescribed for tax audit report u/s 44AB.

Discussions to this article

[SANJAY MEHTA]

Now a days a normal business entity whose turnover is 40 lakhs annually needs following expenses to run his business at lowest smooth level.

1. Rent of the shop.

2. Electric charges.

3. Salary of the staff at least 2 nos.

4. Trade licence fees both shop and Godown.

5. Profession tax.

6. Accounting charges.

7. Charges for sales tax lawyers for filing of 4 qtr returns, and one consolidate audit return annually, assessment of the cases.

8. Audit charges.

9. Filing of income tax returns.

10. Day to day Office running expenses

11. Printing and stationery

12. Telephone charges.

13. Repair and maintenance

14. Other miscellaneous.

Considering the formalities involved in GST, a small traders with a turnover of upto 80 lakhs will not have a taxable income in hand to pay an income tax.

[Gautam Singh]

Dear Sir,

I have read your article. It seems that, it is politically motivated.

You stressed much on the threshold limit for the registration which is ₹ 9 Lacs. Currently, almost all State’s VAT have the threshold limit even below 9 Lacs. What about Sikkim, where current threshold limit for VAT registration is ₹ 3 Lacs.

You have analyzed the financials of Rickshawala, Panwalas, Barbers etc. in detailed. But, are they registered under current VAT System?? I guess you know it very well as you do deal with their financial.

[DEV KUMAR KOTHARI]

With reference to observations of Shri Gautam Singh, it can be added that many of small traders and service providers are not registered though required to get registration. This leads to forced non-compliance because compliance is not possible for such people. GST must make business easy and not to impose compliance which are not practicable and are difficult. Small traders ans service providers also pay taxes on input, considering that the thresh hold limit must be much higher. My analysis is for any self employed person who want to carry a vocation in a suitable manner at minimum level / size he has to incur expenses. His comments that :

"It seems that, it is politically motivated " and that ." I guess you know it very well as you do deal with their financial" are totally uncalled for.

For the reason that without dealing with financials of poor people engaged in petty vocations as self employed people one can senses and feel their difficulties it is not necessary to have dealing with financials of such people one can visualize them .

dev kumar kothari