GST COMPOSITION SCHEME
Goods and Service Tax is a game changer as because with its implementation, a tremendous outflow of benefits are expected. Today in India, there are numerous taxes such as Service Tax, VAT, Excise and many others that are ultimately borne by consumers leading to double taxation or having cascading effect. Post GST, around 17 taxes will be subsumed under one tax regime.
GST will apply to almost every assessee in business, thereby boosting revenues for the government. While purchasing goods or services both CGST and SGST i.e. both central and state taxes will be levied thereby eliminating all confusion. With the introduction of GST, a new regime of business compliance will be established.
Big organisations in India have the required resources and expertise that can facilitate the compliance procedures. On the other hand, small and medium enterprises (SMEs) and start-ups will have difficulty in complying with these provisions. Thus, to lower the burden of compliance for small businesses, a composition scheme has been introduced under GST law where the assessees have to pay tax at a minimum rate based on their turnover. This is mostly similar to the provisions in VAT law.
In this article, we’ve explained what is GST composition scheme, who can apply, eligibility criteria, it’s limitations and how it can benefit small businesses.
Eligibility For GST Composition Scheme
Getting registered under composition scheme is optional and voluntary. Any business which has a turnover less than Rs.50 Lakh can opt for this scheme 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. 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 that means this provision is not applicable for service providers. However, restaurant service providers are excluded.
- There should not be any interstate supply of goods that means businesses having only intra state supply of goods are eligible.
- Any dealer who is supplying goods through electronic commerce operator will be barred from being registered under composition scheme. For example: If M/s ABC sells its products through Flipkart or Amazon (Electronic Commerce Operator), then M/s. ABC cannot opt for composition scheme.
- Composition scheme is levied for all business verticals with the same PAN. A taxable person will not have the option to select composition scheme for one, opt to pay taxes for other. For example, A taxable person has the following Business verticals separately registered – Sale of footwear, the sale of mobiles, Franchisee of McDonald’s. Here the composition scheme will be available to all 3 business verticals.
- Dealers are not allowed to collect composition tax from the recipient of supplies, and neither are they allowed to take Input Tax Credit.
- If the person is not eligible under composition scheme, tax liability shall be TAX + Interest and penalty which shall be equal to the amount of tax.
- Dealers who collect Tax at source u/s 56.
Benefits Under GST Composition Scheme
Less Compliance
Under the normal scenario, a taxpayer under GST has to file minimum 3 returns monthly and one annual return. To be precise, he is compelled to file 37 returns in a year or penalty will be levied for non-compliance. For small suppliers and manufacturers, it is quite difficult to maintain so 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
Another advantage of being registered with composition scheme is the rate structure. The rate is 1% for manufacturers, 2.5% for restaurant service providers, 0.5% for other suppliers of turnover. This can be more justified with the following example.
| Particulars | Description | Registered as Normal Tax Payer | Description | Registered as a Taxpayer under composition scheme |
| A | Total Sales Value | 118000 | Total Sales Value | 118000
|
| B | Sales Value exclusive of taxes | 100000 | Sales Value exclusive of taxes | 115686 |
| C | GST @ 18% on sales value | 18000 | GST @ 2% on sales value | 2314* |
| D | Input Purchases | 65000 | Input Purchases | 65000 |
| E | GST @ 18% | 11700 | GST @ 18% | 11700 |
| F | Total Purchase Value (D+E) | 76700 | Total Purchase Value (D+E) | 76700 |
| G | Net GST Liability (C–E) | 6300 | Net GST Liability (C–E) | 2314 |
| H | Net Profit {A-(F+G)} | 35000 | Net Profit {A-(F+G)} | 38986 |
*In composition scheme, a supplier is ineligible to collect tax separately from the buyer in an invoice. The above illustration is for the basic understanding of the composite scheme.
High Liquidity
For normal taxpayers, most of his working capital will be blocked as Input Tax credit because he can avail the input only if his supplier has filed the return. The supplier has to pay tax at standard rate and credit of the input will only be availed when his supplier files the return. In composition levy, dealer need not worry about his supplier filing return as he cannot take credit and will pay tax at a nominal rate.
For Example: In the above case, a Normal taxpayer will have to pay a higher tax of Rs. 6300/- compared to Rs.2314/- and Input Tax credit of Rs. 11700/- will also be blocked till his supplier files the return. Whereas, the composition scheme tax payer, will only pay Rs. 2314.
Transitional Provisions
Any taxpayer who is in Composite Scheme under current regime and transits to Regular Taxation under GST 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 tax payer.
The inputs can only be availed subject to few conditions such as;
- Those inputs or goods are meant for making taxable outward supplies under GST provisions
- The dealer taking the Input Credit was eligible under the previous regime but could not claim due to registered under Composition Scheme
- The taxpayer claiming Input credit on goods, those goods should be eligible for such credit under GST regime.
- The taxpayer must have a valid legal document of input tax credit i.e. he must possess an invoice evidencing taxes or duties have been paid.
- Those invoices or documents should not be older than 12 months before the appointed date.
When a taxpayer is shifting from a normal scheme to composition scheme, 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 in Input Tax Credit account after such payment, then that balance will lapse and not usable.
Limitations of GST Composition Scheme
There are some of the limitations that every business owner must be aware of:
No Credit of Input Tax
Any dealer 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.
No Inter-state business
The major drawback of this scheme is that the assessee cannot deal in interstate transactions or affect import – export of goods and services. He is barred from performing such actions which limit his territory for expansion and can only conduct local or intra state transactions.
Pay tax from own pocket
Since the dealer is not allowed to charge tax from his buyer, despite the rate being very low, he has to pay out of his own pocket. He is not even allowed to issue a tax invoice, resulting the burden on the assessee to pay tax.
Strict Penal provisions
Utmost care is required while taking benefit of composition levy under GST regime as the penal provisions are quite severe. If by any chance, it is proved that the assessee is wrongly registered under this scheme, not fulfilling the required criteria and thereby avoiding taxes will face bad consequences. He will be then be asked to pay taxes along with penalty, which is equal to 100% of taxes put on him.
GST has the potential to boost revenue for the government, lower the budget deficit, which means more funds will be generated to spend on the welfare of the society and people. There will be always a section of traders, dealers or taxpayers who find it difficult to maintain books of accounts or fulfil the compliance requirements of tax laws. This may happen due to small size of their business or due to the nature of their business. To give benefit to these businesses, composition scheme was launched for such small taxpayers.
The composition scheme is quite beneficial to small suppliers, intra state local suppliers and restaurant sector as it prevents them from various procedural compliances and gives a hassle free working environment. Today, to make compliances better for small businesses, states have provisions in their VAT law about the composition scheme. Similarly even in GST, composition scheme is introduced to safeguard the interests of small businesses. GST, composition scheme is introduced to safeguard the interests of small businesses.
Khanna & Associates LLP 