What’s the scope of MSME Act? Do the Board and the Advisory Committee constituted under MSME Act enjoy any legal influence on financial or commercial statutes including GST? Whether the GST Council has any permanent Members from the MSME Board or the Advisory Committee? What special place/ facilities the MSMEs enjoy under GST law?
MSMEs – SIGNIFICANCE; THE MSME ACT 2006:
With around 63.4 million units throughout the country, the MSMEs contribute around 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities as well as 33.4% of India’s manufacturing output (source: CII). Share of MSME related Products in total Export from India during 2018-19 was 48.10% and as per 73rd Round of National Sample Survey (NSS) during 2015-16, the estimated number of workers in unincorporated non-agriculture MSMEs in the country were 11.10 Crores. Thus, MSME Sector is a fertile ground also for entrepreneurship development. However this Sector faces issues like sub-optimal scale of operations, technological obsolescence, supply chain inefficiencies, increasing domestic and global competition, fund shortages, change in manufacturing strategies and turbulent and uncertain market scenarios.
Considering the very important role of Micro, Small and Medium Enterprises (MSMEs) Sector in Nation’s economy and the challenges this sector faces, the Parliament enacted ‘The Micro, Small and Medium Enterprises Development Act 2006 (MSME Act)’ to ‘provide for facilitating the promotion and development and enhancing the competitiveness’ of the MSME Sector.
The MSME Board constituted under the Act to identify the measures and to advise the Government on same and on the use of the Funds established under the Act to receive the Governmental grants, comprises of 48 Members. These include 19 Ex-officio ones viz. the Minister, MoS, Secretary and the Joint Secretary of the Ministry in control of MSME affairs, the Secretaries of the Ministries of Finance, Commerce, Food Preservation and Labour and Planning, the respective Chairpersons of NABARD and the Indian Banks Association, the Ministers of 6 nominated States and the Administrator of 1 nominated UT.
An Advisory Committee comprising not more than 12 members, 9 of which are representatives of the Centre/ State Government and one each from the Association of each business type viz. Micro, Small or Medium. It is headed by the Member Secretary of the Ministry, as its Chairman also. It examines the matters referred to it by the Board on the issues mentioned above and also on the parameters defining an enterprises as a Micro, Small or Medium one under the Act. It also examines the matters referred to it by the Central Government regarding Programs/ Guidelines/ Instructions/ Policies to be issued on the matters of Promotion and Development, Procurement Preference, Credit facilities and the use of Fund.
The Act also makes it mandatory that a Buyer of goods or services from a Micro or Small enterprise shall pay interest at a rate 3 times the RBI notified rate, from the date agreed between the parties for the payment, or after 15 days of the date of acceptance of the goods or the services. No court can entertain any application without a pre-deposit of 75% of the amount determined by the Facilitation Council appointed in the State. No Order shall be passed against the Facilitation Council’s order without awarding a reasonable payment to the supplier out of the said pre-deposits. Where it is mandatory for a Buyer to get the Annual Accounts Statement audited, a detail of amounts pending for payment to the Micro and Small suppliers has to form a part of the Statement. The Buyers also have to submit a half-yearly statement into the Ministry of Corporate Affairs of the amounts due towards Micro and Small Industries. Also such interest is not allowed to be deducted from the taxable income of the Buyer ibid. The provision about payment of Interest has an overriding effect notwithstanding any contrary provisions under any other law.
Not filing a Memorandum with the Central/ State Government where mandatory, Non-submission of yearly detail in the Annual Account or of half-yearly statement with the Ministry of Corporate Affairs or Not furnishing the information required by any officer appointed under the Act, constitute offence. Trial thereof has to be by a Magistrate of First Class or above.
There is a also a special scheme for closure of businesses by an MSME.
With effect from 1.07.2020, in terms of MSME Act, the Criteria for classification of a business enterprise as Micro, Small or Medium is as under: –
- a micro enterprise, where the investment in Plant and Machinery or Equipment does not exceed one crore rupees and turnover does not exceed five crore rupees;
- a small enterprise, where the investment in Plant and Machinery or Equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees;
- a medium enterprise, where the investment in Plant and Machinery or Equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.
Until 01.07.2020 the Criteria had remained unchanged ever since it was prescribed under Section 7 of the MSME Act in 2006.
REPRESENTATION OF MSMEs IN GST
The GST Law doesn’t carve out any tailor made provisions specific to the Micro, Small or Medium Enterprises as defined on the basis of dual criteria of Investment and Turnover under the MSME Act. However given the potential to grow and the hindrances the small businesses face, the enterprises with smaller turnover have been given due regards within the overall scheme of GST Law, to enable them grow and compete.
Such provisions are given effect as decided by the GST Council. One of the mandated functions of GST Council is determining threshold limit of turnover for exemption from Registration and payment of Tax.
[Article 279A, the Constitution of India].
The Council has the Union Minister of Finance, the Minister of State for Finance and the Ministers of Finance of all the States, as Members. Thus the MSME Board is duly represented in the GST Council, through 8 common Members.
[Article 279A, the Constitution of India].
RELAXATION AND FACILITIES FOR MSMEs IN GST
On the date (09.09.2020) of this compilation, the following relaxations have been provided to the businesses with smaller turnover.
The threshold limit of aggregate turnover for exemption from registration and payment of GST for suppliers of services is Rs.20 Lakhs.
This limit is Rs.10 Lakhs for States of Manipur, Mizoram, Nagaland and Tripura.
The threshold limit of aggregate turnover for exemption from registration and payment of GST for suppliers of goods only, is Rs.40 Lakhs.
This limit is Rs.20 Lakhs in the States of Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Puducherry, Sikkim, Telangana, Tripura and Uttarakhand.
[Section 22; CGST Act 2017].
Voluntary Registration: Persons having aggregate turnover below specified threshold limit may also get themselves registered, and pass on the GST paid, to their customers. They will be entitled to the Input Tax Credit (ITC) like any other Taxpayers registered under GST.
[Section 25(3); CGST Act 2017].
Aggregate Turnover: The term ‘aggregate turnover’ means the aggregate value of all taxable, non-taxable and Exempt supplies and the exports, of goods or services or both; and includes inter-State supplies. For this, the total such supplies from all establishments operating all over India under one Permanent Account Number, have to be taken into account, but taxes levied under GST Acts need to be excluded.
[Section 2(6); CGST Act 2017].
Aggregate turnover includes supplies made by a person on behalf of his principals, but excludes the value of job-worked goods for the principal.
[Section 22, Explanation(ii); CGST Act 2017].
Exempt supplies include the supplies not taxable under GST viz. Liquor.
[Section 2(47); CGST Act 2017].
Special registration provisions for MSME Sector:
As a trade facilitation measure based on turnover, following smaller enterprises are not required to obtain GST registration:
[Section 22; CGST Act 2017].
- Persons involved in Intra–State taxable supply of GOODs, if aggregate turnover in a financial year does not exceed prescribed amount of threshold exemption limit i.e. Rs.40 Lakhs (Rs.20 Lakhs in case of certain States, as listed above).
- Persons involved in Intra–State taxable supply of GOODs and SERVICEs both, if aggregate turnover in a financial year does not exceed prescribed amount of threshold exemption limit i.e. Rs.20 Lakhs (Rs.10 Lakhs in case of certain States, as listed above).
- Persons involved in Inter–State taxable supply of SERVICEs only (not goods), if his aggregate turnover in a financial year does not exceed prescribed amount of threshold exemption limit i.e. Rs.20 Lakhs (Rs.10 Lakhs in case of certain States, as listed above).
However, the GST Acts requires compulsory registration of certain suppliers even if their aggregate turnover is below the abovementioned threshold limits.
[Section 24; CGST Act 2017].
Some of these suppliers are: (i) Persons making Inter-State taxable supply of goods; (ii) Casual taxable persons making taxable supply; (iii) Persons required to pay tax under reverse charge; (iv) Persons making taxable supply on behalf of another taxable person whether as an agent or otherwise; etc. MSMEs need to be mindful of these provisions as registration and payment of tax is mandatory even for smaller enterprises engaged in said activities, except as mentioned below.
Persons not liable for compulsory registration:
Further, the following categories of persons are not liable for compulsory registration: –
[Section 23(1); CGST Act 2017].
(i) A person engaged in the business of supplying only non-taxable goods or services under GST Acts, (ii) An agriculturist, to the extent of supply of produce out of cultivation of land,
Further, the following categories of persons are not liable for compulsory registration: –
[Notifications under Section 23(2); CGST Act 2017].
(iii) A person only engaged in making taxable supplies of goods or services or both, the entire tax on which is payable under reverse charge by the recipient
[Notification 5/2017-CT dated 19.06.2017]
(iv) A casual taxable person making supply of goods within threshold limit if these are all handicraft goods,
[Notification 56/2018-CT dated 23.10.2018]
(v) A supplier (except of the services notified under Section 9(5) as they are already excluded from compulsive registration) of services up to threshold limit of Rs.20 Lakhs (Rs.10 Lakhs in Special Category States) through e-commerce operator,
[Notification 65/2017-CT dated 15.11.2017]
(vi) The Intra-state supplier exclusively of Goods, when turnover is within threshold limit of Rs.40 Lakhs (Rs.20 Lakhs in the Special Category States) and he is not otherwise required to register under Section 24 e.g. a supplier of Ice-Cream, Pan-Masala or Tobacco/substitutes,
[Notification 10/2019-CT dated 07.03.2019]
(vii) Job-worker making inter-state supply of the job-work service to a registered person, if within threshold limit of Rs.20/10 Lakhs and has not provided job-work service in respect of jewellery or gold/silver smith’s articles,
[Notification 07/2017-IT dated 14.09.2017]
(viii) Supplier of handicraft goods enlisted in Notification 03/2018-IT dated 22.10.2018 viz. Articles of leather, carved wood, bamboo, paper mache, textile hand printing, hand embroidery, zari thread, carpets, theatre costumes, coir products, carved stones etc. etc.
[Notification 03/2018-IT dated 22.10.2018]
(ix) Inter-state supplier of Taxable services of value within threshold limits of Rs.20/10 Lakhs.
[Notification 10/2017-IT dated 13.10.2017]
- COMPOSITION SCHEME:
[Section 10; CGST Act 2017].
Composition levy scheme in GST is an alternative method of levy of tax designed for smaller enterprises. To be eligible to avail this scheme, the annual turnover during the previous financial year, in case of a supplier of Goods only, has to be up to Rs.1.5 Crores (Rs.75 Lakhs in special category states: Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand.
In case the taxpayer also supplies Services, or supplies Only Services, the turnover has to be up to Rs.50 Lakhs in during the previous financial year.
It is a voluntary and optional scheme. A person opting to pay tax under composition levy scheme cannot take Input Tax credit, nor can he collect the GST paid, from the recipients of the supplies.
[Section 2(67),17(5)(e), 31(3)(c); CGST Act 2017]
Once opted, one can continue to avail the scheme so far his turnover remains within the aforementioned limits during the year of availment of the scheme. When the limits gets crossed one has to pay the normal rate of GST on the next value of supplies and can use the Input Tax Credit available on the inputs contained in these next supplies.
[Section 18(1)(c); CGST Act 2017]
Manufacturers of Ice cream, pan masala and tobacco cannot opt for the composition levy scheme.
[Notification 14/2019-CT dated 07.03.2019].
A taxpayer having opted and registered under the composition levy scheme, has to pay GST at the following rates: –
- 1% of the turnover in the State or UT, in case of eligible manufacturers.
- 1% of the turnover of taxable supplies in the State or UT, in case of traders.
- 1% of the turnover of taxable supplies in the State or UT, in case where supplies include services also but the quantum of services is not more than 10% of the value of supply of Goods, whether manufactured or traded.
- 5% of the turnover in the State of UT, in case supplies are of restaurant services or of works contracts services.
- 6% of the turnover of taxable supplies in the State or UT, in case of suppliers dealing in services only or in both goods and services but value of services is more than 10% of the value of Goods supplied.
[S.10; Notification 02/2019-CT dated 29.03.2019].
Where any registered person who has availed of input tax credit opts to pay tax under composition levy scheme under section 10, he shall pay an amount equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock, and on capital goods reduced by 5 percentage points per quarter from the date of Invoice of these Capital Goods. The amount shall be paid by way of debit in the electronic credit ledger or in the electronic cash ledger, on the day immediately preceding the date of exercising of such option. After such payment the balance of input tax credit lying in electronic credit ledger shall lapse.
[Section 18(4), Rule 40(1)(a); CGST Act 2017]
The tax under the scheme has to be paid on quarterly basis. Such taxpayer does not have to maintain elaborate accounts and records. Also, unlike a normal taxpayer who has to file two monthly statements and one monthly return and an Annual return, the composition taxpayer has to only file one brief quarterly statement of tax paid every quarter, and one return on annual basis.
[Rule 62; CGST Rules 2017]
A taxable person opting for the scheme has to issue bill of supply as he is not eligible to issue taxable invoice under GST and charge GST from recipient of supply. 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.
[Section 31(3)(c); CGST Act 2017]
An enterprises operating in the Composition Scheme when comes out of the scheme on crossing the turnover limit, he has to pay GST at applicable normal rate, and can collect the GST on the Invoice raised to the recipient of supply. shall be entitled to take credit of input tax in respect of inputs held in stock, inputs contained in semi-finished or finished goods held in stock and on capital goods, on the day immediately preceding the date from which he becomes liable to pay tax normally viz. under section 9.
[Section 18(1)(c); CGST Act 2017]
During the entire tenure under the composition scheme, the taxpayer has to discharge his tax liability arisen under his Electronic Liability Ledger, through cash i.e. by way of debits from his Electronic Cash Ledger only.
[Section 18(4); CGST Act 2017]
- Tax Invoice in GST:
GST act provides for issuance of tax invoice within prescribed period (i.e. before removal of goods for supply in case of supply of goods and up to a maximum of 30 days from the date of provision of service, in case of supply of services. There is no specific format prescribed as such but the Invoice needs to mention certain particulars viz. GSTINs of the buyer and seller, the addresses of both and description of goods/ service and the Value and the Tax involved in the Supply, etc. Against the description of Goods/ Services in the Invoice, the mentioning of HSN code has been done away for taxpayers up to annual turnover of up to ₹ 1.5 Crore. It is required to mention first two digits of HSN code in their invoices where taxpayers have annual turnover between ₹ 1.5 Crore to ₹ 5 Crores. And taxpayers need to mention full 4 digit HSN code in their invoices where annual turnover is above ₹ 5 Crores.
[Section 31, Rule 46, Notfn.12/2017-CT dated 28.06.2017]
Tax invoice, delivery challans, bill of supply, credit note, debit note, revised tax invoice, receipt voucher, payment voucher etc. documents are recognized in GST laws.
In case of supply of goods, the tax invoice has to be prepared in triplicate (original for buyer, duplicate for transporter and triplicate for supplier);
[Rule 48(1) CGST Rules 2017]
In case of service, the invoice has to be prepared in duplicate (original for buyer and duplicate for supplier).
[Rule 48(2) CGST Rules 2017]
Special invoice provisions for MSME Sector:
The HSN code required to be mentioned in tax invoice has been done away for taxpayers up to annual turnover of up to ₹ 1.5 Crore. Further, taxpayers having annual turnover between ₹ 1.5 Crore to ₹ 5 Crore may mention first two digits of HSN code in their invoices and taxpayers having annual turnover above ₹ 5 Crore need to mention full 4 digit HSN code in their invoices.
[Rule 46/ CGSTRs-2017; Notfn.12/2017-CT dated 28.06.2017]
- Exemption from Compulsory Audit
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 exempted the registered persons having annual turnover up to Rs.2 Crores from getting their accounts audited by a chartered accountant or a cost accountant. For the year 2018-19 this limit was fixed at Rs.5 Crores.
[Rule 80(3); CGST Rules 2017]
Every normal Taxpayer viz. other than under Composition Scheme or a Non-Resident Taxable Person, needs to furnish details of outward supplies in Form GSTR-1, details of inward supplies in Form GSTR-2 and a consolidated Return in Form GSTR-3/ 3B containing both these and also containing the Input Tax Credit availed, the total Tax applicable and the Tax paid in cash, every month.
[Sections 37, 38 and 39; CGST Act 2017]
Special return filing provisions for smaller enterprises:
As a facilitation measure, the government has notified that all eligible registered person having annual turnover up to ₹ 1.5 Crore may opt for filing the Details of outward supply in Form GSTR-1 on quarterly basis instead of every month. The furnishing of GSTR-2 and GSTR-3 stands postponed till the dates are notified for filing of these. The payment of Tax and furnishing of summery GSTR-3B is on monthly basis only.
[Rule 62, 80; CGST Rules 2017]
Taxpayers who have no purchases, no output tax liability and no input tax credit to avail in any quarter of the financial year, shall file one Nil return for the entire quarter.
Facility for filing such a NIL quarterly return is also available by an SMS.
[Rule 67A; CGST Rules 2017]
- Other measures taken for smaller Industries on the advice of GST Council:
Other decisions taken by the GST Council in its meetings for the benefit of the MSME sector which have been implemented in GST are as below:
- Goods predominantly manufactured and/or used in the unorganised MSME sector have been kept at lower rates or are exempted. For instance, electrical switches and wires, pipeline, plastic products, etc. are largely produced by MSMEs and they earlier did not pay Central Excise duty and therefore tax rate on these have been brought down from 28% to 18%.
- Similarly, rates of GST on jute and coir like hand bags, ropes etc., which are mainly made in the cottage sector, have been reduced from 12 to 5%. Rate on Fishing hooks largely used by the fisherman – the industry being largely labour intensive with insignificant ITC have been reduced from 12 to 5%.
In case the recipient fails to pay the due amount to the supplier within 180 days from the date of issue of invoice, the input tax credit availed by the recipient will be reversed.
[Section 16(2); CGST Act 2017]