New Delhi: The government is unlikely to insist on implementing the reverse charge mechanism, a key anti-evasion measure proposed under the goods and services tax (GST), on concerns that the rule will adversely impact small businesses while not yielding revenue gains.
The implementation of the reverse charge mechanism is likely to be disruptive for small traders, a key electoral constituency of the ruling Bharatiya Janata Party, said two people familiar with the development. Instead, they said, alternative ways to curb tax evasion are being explored.
Under the reverse charge mechanism, entities (registered under GST) that purchase goods from small unregistered dealers have to pay a tax on behalf of the latter. This is expected to add to the compliance burden of all involved and discourage purchases from unregistered dealers.
The Narendra Modi government, in the final year of its tenure before elections are held by May, is trying to avoid further upsetting small traders, who have already been affected by the initial chaos following the implementation of GST last year.
The government is of the view that this anti-tax evasion measure will disrupt small businesses, especially those operating in the informal economy, without leading to a significant rise in revenue collections.
To be sure, a final decision on the fate of the reverse charge mechanism will be taken by the GST Council, the federal indirect tax body.
“We have to see till what extent it will help us in checking the tax evasion vis-à-vis revenue that it brings. Reverse charge mechanism may not detect too much tax evasion. It will make only a minor difference. As against that, the hassle that it will create for small people is far more," said a senior government official who did not want to be identified.
According to government estimates, around 1% of the 11.2 million taxpayers under GST pay around 80% of the taxes. “By harassing more than 9 million dealers, if we are going to get only a small revenue increase, then it is not worth it," the official added.
The implementation of the reverse charge mechanism has already been deferred several times in the past year with the latest notification postponing its implementation till 30 September.
The official pointed out that even when there is no reverse charge mechanism, the compliance level under the composition scheme for small dealers is very low. Under the composition scheme in GST, small traders can pay a 1% tax without having to file detailed returns.
“Around 1.8 million dealers who are in the composition scheme are showing an average turnover of only ₹ 15 lakh. Showing the turnover is in their hands. What is the guarantee that after implementation of the reverse charge mechanism also, they will necessarily report that I have bought from an unregistered dealer and pay the tax? It is very little," the official said, adding that the government is exploring alternative ways to check tax evasion.
“It is a sensible choice. Organized business will opt to not buy from the unregistered dealers rather than paying tax on behalf of these small suppliers. It will lead to a death of the small businesses. Also, you can’t expect small businesses to register under GST and then follow the compliance requirement," said R. Muralidharan, senior director, Deloitte India.