Federal indirect tax body the Goods and Services Tax (GST) Council on Friday eased the penalty for late filing of tax returns and agreed to explore a plan to borrow from the market to make up for revenue losses suffered by states.
The Council chaired by Union finance minister Nirmala Sitharaman also agreed in principle to correct an anomaly in the taxation of textiles and their raw materials but left the decision on rate changes for a later date. Fertilizers, footwear and their raw materials are the other items that could see rate changes because of this anomaly.
Friday’s Council meeting came amid a severe cash crunch that central and state governments are facing after a two-month national lockdown to slow down the spread of the coronavirus pandemic. The lockdown’s impact on the exchequer has already forced the Centre to rethink spending, raise its own borrowing limit for the current fiscal and allow states to borrow more. It has also limited authorities’ ability to offer a demand stimulus by way of a GST rate cut.
Sitharaman said another Council meeting will be held in July solely to discuss compensation to states, the cess levied to raise funds for the compensation and, in case there is any borrowing, who is going to pay for it and how. “All members have requested a special meeting,” the minister said. This move would calm state governments who have been asking for timely compensation payments. States were offered compensation for GST revenue loss for five years till 2022 when the Centre was negotiating the tax reform with them.
Sitharaman said the Council agreed on correcting an anomaly that has seen raw materials getting taxed at a higher rate than finished products in the case of textiles. But a decision on rate change has been postponed. “Because of inversion in duties, we get less tax revenue and end up giving a lot of tax refunds because of accumulated input tax credits,” the minister said.
Also announced was a relief on interest and late fee to businesses for late filing of monthly tax returns, which could improve tax compliance. Since monthly GST returns can only be filed sequentially, missing one month meant that returns for the next month could not be filed unless the missing month’s return was filed with a late fee, something many small businesses could not afford due to the fund crunch.
Sitharaman told reporters after a four-hour videoconference with state ministers that the late fee for filing monthly return of transactions (form 3B) has been waived or lowered to “clean up the pendency in return filing”. Accordingly, businesses that have no tax liability but have defaulted on filing monthly returns since the roll-out of GST in 2017 till January 2020 can file these returns till September 2020 without any late fee. In the case of those defaulters who have a tax liability for the period, the late fee has been capped at ₹500 a month per return.
This is a big relief to businesses as levy of late fee could go up to ₹10,000 a month, as per the earlier rate, experts said. “Providing compliance relief, even beyond September if required, to all businesses is essential at the present stage where the primary focus has to be on business revival and working capital management,“ said M.S. Mani, tax partner at Deloitte India.
The interest rate on tax liability has been halved to 9% in the case of small tax payers with sales up to ₹5 crore for late filing of return in the three months starting February. The window for filing late returns for these three months will now stay open till 30 September. For the subsequent three months of May to July, small businesses who have defaulted on filing returns can file them without interest or late fee, Sitharaman said.
Small businesses welcomed the relief measures. “The decisions to give relief to small taxpayers are highly appreciable to mitigate the daunting impact of covid-19 and will enhance ease of doing business for them,” said D.K. Aggarwal, president of the PHD Chamber of Commerce and Industry.