GST Composition scheme

GST Composition Scheme in India

Goods and Service Tax (GST) is new tax regime introduced in India which has replaced major indirect taxes. After GST implementation approximately 17 indirect taxes regime will be substituted under one tax regime.This new tax regime is expected to bring a better control mechanism for tracking and payment of indirect taxes.GST will apply to almost every assesse in business, thereby boosting revenues for the government.

Implementing GST in larger organizations in India is much simpler as they have the required resources and expertise that can facilitate the compliance procedures and undertake a smoother transition under GST regime. On the other hand, small and medium enterprises (SMEs) and start-ups may face difficulty in understanding and comply with these provisions.

Thus to help and support these smaller organization and also to lower the burden of compliance for the businesses, a composition scheme has been introduced under GST law. GST Composition Scheme is a simple and easy scheme under GST for taxpayers. Small taxpayers can get rid of tedious GST formalities and pay GST at a fixed rate of turnover.Under this scheme, the assesse have to pay tax at a minimum rate based on their turnover.

Who can opt for GST composition scheme?

Note: Registering under the composition scheme is optional and voluntary.

Any business owner which has a turnover less than Rs.1.5 crore in a financial year can opt for the composition scheme.(In case of North-Eastern states (Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim and Tripura) and Himachal Pradesh, the limit is now Rs.75 lakh.)But on any given day if turnover crosses the above-mentioned limit, then he becomes ineligible and has to take registration under the regular scheme and pay regular taxes. Composition levy scheme on a general basis is opted by persons who are supplying goods & services or both to the end consumer.

There are certain conditions that need to be fulfilled before opting for composition levy. They are as follows:

  • Any assessee who only deals in supply of goods can opt for this scheme. In other words, this provision is not applicable to service providers.
  • There should not be any inter-state supply of goods. The business owners who have the business transaction which is intrastate alone are eligible to apply.
  • Any dealer who is supplying goods through electronic commerce operator will not be eligible for registering under composition scheme.
  • Composition scheme is levied for all business verticals with the same PAN. Thus an individual does not have the option to select composition scheme for one of his business and opt to pay regular taxes for other.
  • The composition scheme is allowed for dealers who collect Tax at source u/s 56.

 

Note: For calculating threshold aggregate turnover, the calculation would be computed on the basis of turnover on an all India basis and will include value of all taxable supplies, exempt supplies and exports made by all persons with same PAN, but would exclude inward supplies under reverse charge as well as central, State/Union Territory and Integrated taxes and cess.

 

Who cannot apply for composition scheme?

The following people cannot opt for the scheme:

  • Taxpayer supplying exempt supplies.
  • Supplier of services other than restaurant related services
  • Person or business who are the manufacturer of ice cream, pan masala, or tobacco
  • Casual taxable person or a non-resident taxable person
  • Businesses which supply goods through an e-commerce operator
  • The supplier who has purchased any goods or services from an unregistered supplier unless he has paid GST on such goods or services on a reverse charge basis.
  • Persons or business owners who are involved any inter-State supplies of goods and services.

Note: There is no restriction on procuring goods from inter-state suppliers by persons opting for the composition scheme.

 

 

How to apply for composition scheme?

  • Any person who was granted composition scheme under previous tax regime: VAT Act, Service Tax, Central Excise laws etc, can opt for registration on a provisional basis. Such a tax-payer needs to file intimation in FORM GST CMP-01, duly signed, before or within 30 days of the appointed date. This is the link of official government website of GST.
  • For fresh registration under the scheme, intimation in FORM GST REG- 01 must be filed.
  • For every registered person under normal GST tax regime and wants to opt to pay taxes under Composition Scheme, must follow the below process:
  1. a) Intimation in FORM GST CMP- 02 for exercise option and registration.
  2. b) The statement in FORM GST ITC- 3. This form provides details of ITC relating to inputs lying in stock, inputs contained in semi-finished or finished goods within 60 days of commencement of the relevant financial year

Benefits under GST Composition Scheme:

Lesser Compliance requirement: Under the regular GST tax regime, a taxpayer has to file minimum 3 returns monthly and one annual return i.e. in all every such tax-payer must file 37 returns in a year and would have to bear heavy penalty might be levied for any and every non-compliance.

For small suppliers and manufacturers, it is quite difficult to maintain such detailed books of accounts on a daily basis and record every transaction with supporting documents.

Whereas, in composition scheme, only a quarterly return will be uploaded under GSTR-4 by:

18th July – 1st quarter

18th October – 2nd quarter

18th January – 3rd quarter

18th April – 4th quarter

This will ease the compliance burden for SMEs, and they can focus more on their business rather than getting occupied in compliance procedures.

Reduced tax liability:

The tax-payer registered under the composition scheme is liable to pay lower taxes. The rate under composition scheme is as below:

  • 1% for manufacturers,
  • 5% for restaurant service providers,
  • 5% for any other traders or any other supplier eligible for composition levy

Note: However, the above rates are only in respect of CGST Act, Equivalent Rates would be prescribed under SGST Act. Thus effective rates would be 2% for manufacturers, 5% for persons making the supply of food etc. and 1% in case if other suppliers.

Disadvantages under GST Composition scheme

  1. No Credit of Input Tax: Any dealer, who is registered under Composition scheme will not be eligible to take credit of Input Tax credit on purchases. Also, the buyer of those goods will not get the credit of taxes paid.
  2. No Inter-state business: The major drawback of this scheme is that the assesse cannot deal in interstate transactions or affect import-export of goods and services. He is barred from performing such actions. These restrictions limit the tax payer’s territory for expansion and can only conduct local or intrastate transactions.
  3. Pay tax from own pocket: Since the dealer is not allowed to charge tax from his buyer or claim any input tax credit, the GST tax-payer has to pay out GST liability out of his or her own pocket.
  4. Strict Penal provisions: Penal provisions under the GST composition scheme are quite severe. The penalty for any non-compliance, fraudulent activities or any other reasons is equal to 100% of taxes put on him.
  5. Cannot Issue tax invoices: The person who has opted for composition scheme cannot issue the tax invoices to his buyers.

 

 

GST composition scheme to GST regular tax-payer transitional Provisions

Any taxpayer who is in under Composite Scheme, at any time can either voluntarily or due to exceeding the requisite limit of amount transits to regular taxation scheme under GST.

  • Once the GST taxpayers are changed from GST composition scheme to regular scheme, then he or she will be allowed to take the credit of Input, semi-finished goods and finished goods on the day immediately preceding the date from which they opt to be taxed as a regular taxpayer.

Also, the taxpayer can anytime transit from normal scheme to composition scheme (only if the taxpayer satisfies the eligibility criteria and conditions)

  • The taxpayer has to pay an amount which shall be equal to the credit of input tax in respect to those inputs which are held as stock on the immediately preceding date from the date of such switchover. Any balance which is left on Input Tax Credit account after such payment, then that balance will lapse and not usable.

Penalties in case of non-compliance with any rules and regulation under composition scheme

Where any contravention is observed by the proper officer wherein the registered person was not eligible to pay tax under the composition scheme or has contravened the provisions of the CGST Act, 2017, then the officer may issue a notice to such person to show cause. The person in default within fifteen days of the receipt of such notice must show cause as to why the option to pay tax under the composition scheme should not be denied.

Upon receipt of the reply, the proper officer shall issue an order within a period of thirty days of the receipt of such reply, either accepting the reply or denying the option to pay tax under the composition scheme from the date of the option or from the date of the event concerning.

 

The GST composition scheme is quite beneficial policy to be adopted by small suppliers, intra-state local suppliers and restaurant sector as it supports them to be better complaint towards all GST procedures and have a hassle free working environment. This scheme can be a huge help to small enterprises.

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