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Composition Scheme - An Essential Part of GST For Small Enterprises

Shrijay Sheth 
on 31 January 2019

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A large part of compliance follows the GST registration. But for small businesses, following compliance is a difficult task. The Composition Scheme is introduced to reduce the compliance burden under GST. This further allows them to focus on developing the business. Hence, it is like a boon to the small businesses. Under this scheme, the taxpayer has to pay a lower and fixed rate of tax based on their turnover. The Composition Scheme is voluntary and optional.

CHECK THE ELIGIBILITY

Any taxpayer - supplier of goods whose turnover is less than Rs. 1.5 crore and as specified for special states (after amendment) can opt for Composition Scheme. Council in its 32nd meeting has also introduced a new composition scheme. The scheme applies to a service provider and a person dealing in services as well as goods. For such person, the turnover limit is of Rs. 50 Lakh. If turnover crosses the limit then the taxpayer needs to register under the normal scheme of GST.

Here are few conditions to follow under the scheme.

  • A taxpayer who opts for such scheme cannot claim for input tax credit.
  • Such persons cannot deal inter-state, has to supply goods intra-state only.
  • One cannot supply goods which are GST exempted goods.
  • Every bill/invoice must include ‘Composition taxable person'.
  • Such persons cannot deal through an e-commerce platform.
  • Under Reverse Charge Mechanism, tax to be paid at normal GST rate.
  • A Casual taxable person or a Non-resident taxable person cannot apply for such a scheme.

The taxpayer cannot opt for this scheme, for breach of any of the conditions.

HOW TO REGISTER UNDER COMPOSITION SCHEME?

A person can opt for composition scheme in two ways one at the time of GST registration or at a later stage.

At the time of Registration:
While making an online GST registration application, a Part-B of registration form needs to be filled to opt composition scheme. Hence the benefits of the scheme are gain from the date of registration itself.

At Later Stage/Shifting from Normal Scheme to Composition Scheme:
If the person is already registered under GST and wants to pay tax under the composition scheme then a taxpayer has to file an online form with GST department. The taxpayer has to file this form at the beginning of every financial year. Also, an additional form is filed to intimate the details containing Input tax credit related to inputs, semi-finished goods and finished goods held in stock.

TAX RATE

Under the composition scheme, the tax rate is standard for all goods and services.


Type of Tax Payer

Rate of Tax

Manufacturer and Trader

1% of turnover

Restaurant Services (not serving alcohol)

5% of turnover

Supplier of Service or Mixed Service

6% of turnover


BENEFITS AND LIMITATIONS OF COMPOSITION SCHEME

Benefits:

1. Lesser Compliance's:
Under this scheme, the post-registration compliance's are lesser as compared to normal GST scheme. To lower the burden of compliance, only quarterly return and an annual return is to be filed with the Ministry.

2. Lower Tax Rate:
The tax rate under the composition scheme is lower as above. Further, the rate is also fixed for the supplier of goods. Fixed rate also avoids confusion about the tax rate on different goods. It will be easy for a taxpayer to calculate the tax liability and payment of such tax.

3. High Liquidity:
There is no dependency on an input tax credit for liquidity. In this scheme, the taxpayer has to pay tax on a fixed lower rate based on the turnover. Otherwise, a normal taxpayer has to pay higher tax and then to claim for input tax credit. Such credit will only be available when their supplier files the GST return.

Limitations:

1. No Inter State Transactions:
The person opting composition scheme cannot carry on inter-state transactions. The person has to surrender the composition scheme to carry out such transactions.

2. No Input Tax Credit:
A person cannot get the dual benefit of the lower tax rate as well as an input tax credit. Hence such taxpayers are not eligible for input tax credit alike normal taxpayers.

3. No Business through E-commerce Portal:
In a selling through an e-commerce portal includes customers from all over the world. But in composition scheme, an interstate supply is barred hence one cannot carry on business through an e-commerce portal.

4. No supply of Exempt Goods:
The standard rate of tax is levied in the composition scheme. Hence the goods are not bifurcated according to the rate of GST. So the exempted goods cannot be sold in composition scheme. 

5. Cannot charge Tax:
In this scheme, the taxpayer cannot charge GST from the customer but has to pay tax to the government. Here taxpayer has to pay tax from the income. So it will be a burden for such people.

COMPLIANCE'S UNDER COMPOSITION SCHEME

The compliance part of this scheme is simple. The taxpayer has to file only two types of returns which are quarterly and annually.

Quarterly- 18th of the following month of each quarter
Annually- 31st December of the following financial year

WITHDRAWAL OF COMPOSITION SCHEME

There is an option of withdrawal of composition scheme and opt the normal scheme. If a dealer wants to deal inter-state or through an e-commerce portal or turnover exceeds the prescribed limit then there is a very easy way to convert to a normal scheme.

There is an online FORM GST CMP-04 to opt out from composition scheme. The taxpayer has to file the form within 7 days from the date of failure of such conditions of composition scheme.

CONCLUSION

The Composition Scheme has benefits along with some limitations. So whether to opt for such scheme or not completely depends on the form of business, the area of business, business platform, and geographical locations of business. If the business matches the criteria of composition, one should definitely opt for it to take benefits and to carry on hassle-free business.


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