The retail sector plays a vital role in the Indian economy, contributing approximately 10% to the nation's GDP. With India's GDP estimated at ₹174 lakh crore, the retail sector's contribution amounts to ₹17.4 lakh crore. Assuming an average GST rate of 12% on retail transactions, the potential GST collection from this sector could reach ₹2.088 lakh crore (Including from ITC) annually but cash collection is not sure, based on a taxable turnover of ₹17.4 lakh crore. However, widespread GST evasion at the retail level significantly undermines this potential revenue generation. This article proposes a focused approach to address this challenge, specifically targeting businesses engaged exclusively in Business-to-Consumer (B2C) transactions.
GST evasion in retail manifests through various
means, including underreporting sales, issuing fake invoices, and operating
outside the formal tax system. This not only leads to revenue loss for the
government but also creates an uneven playing field for compliant businesses.
Addressing this issue requires a multi-pronged strategy that simplifies
compliance, strengthens enforcement, and leverages technology.
Current Challenges and Their Impact:
The current GST regime, while designed to
streamline indirect taxation, presents certain challenges for small retailers.
Complex filing procedures, the need for detailed record-keeping, and the
perceived burden of compliance can incentivize evasion, especially for
businesses operating on thin margins. The prevalence of cash transactions
further complicates tracking and verification, making it easier to conceal
sales.
A Proposed Solution: Mandatory Composition Scheme
for B2C Retailers
This article proposes a significant shift in the
approach to GST compliance for businesses exclusively engaged in B2C retail
transactions. The core of the proposal is to mandate the composition scheme for
such businesses.
Rationale:
- Simplified Compliance: The
composition scheme offers a simplified approach to GST, requiring
businesses to pay a fixed percentage of their turnover as tax, instead of
maintaining detailed records and filing complex returns. This
significantly reduces the compliance burden for small retailers, making it
easier for them to participate in the formal tax system.
- Reduced Scope for Evasion: By
simplifying the process and focusing on turnover-based taxation, the
composition scheme reduces the incentive and opportunity for evasion. The
fixed tax rate provides greater predictability and transparency, making it
harder to manipulate sales figures.
- Enhanced Revenue Collection: While
the composition scheme involves a lower tax rate (typically 1% or 2%),
mandatory implementation for all B2C retailers could potentially lead to
higher overall revenue collection due to increased compliance and a wider
tax base. Our estimated collection under the composition scheme with rates
of 1 or 2 % would be 0.174 Lakh Crore. This is based on the same taxable
turnover of ₹17.4 Lakh Crore as mentioned earlier.
Implementation Details:
- Eligibility: This mandatory
composition scheme would apply to all businesses that are 100% retail,
i.e., exclusively engaged in B2C transactions. Clear criteria would need
to be established to define "retail" and "B2C"
transactions to avoid ambiguity.
- Tax Rate: The specific tax rate under the composition
scheme (1% or 2%) would need to be determined based on the nature of the
retail business and its average profit margins. A lower rate could
encourage greater participation and compliance.
- Monitoring and Enforcement: While
the composition scheme simplifies compliance, it is crucial to maintain
effective monitoring and enforcement mechanisms to prevent misuse. Regular
audits and inspections should be conducted to verify turnover and ensure
compliance with the scheme's provisions.
- Technology Integration:
Technology can play a crucial role in facilitating compliance and
monitoring. Simple and affordable POS systems can be provided to retailers
to record sales and generate invoices. These systems can be linked to the
GST portal for seamless reporting and data analysis.
Projected Impact:
By implementing this mandatory composition scheme,
the following benefits can be realized:
- Increased GST Revenue: As
mentioned earlier, the estimated GST collection under the composition
scheme is ₹0.174 Lakh Crore. This can be further enhanced by increasing the
compliance rate.
- Improved Tax Compliance:
Simplifying the tax process will encourage more retailers to join the
formal tax system, leading to improved overall tax compliance.
- Level Playing Field:
Mandatory compliance will create a level playing field for all retailers,
eliminating the unfair advantage enjoyed by those who evade taxes.
- Reduced Administrative Burden: The
simplified compliance requirements will reduce the administrative burden
on both retailers and tax authorities.
Conclusion:
GST evasion at the retail level poses a significant
challenge to India's revenue generation and economic growth. The proposed mandatory
composition scheme for B2C retailers offers a viable solution by simplifying
compliance, reducing the scope for evasion, and potentially increasing overall
revenue collection. By combining this approach with strengthened enforcement
and technology integration, the government can effectively address this issue
and unlock the full revenue potential of the retail sector. The estimated GST
collection under the composition scheme is ₹0.174 Lakh Crore. With better
enforcement and increased awareness, we can expect increased GST collection in coming years. This will significantly contribute to the nation's economic
development.
