The state government has, in order to provide relief to the dealers having turnover not exceeding prescribed threshold limit and to certain other dealers, introduced the concept of Composition levy. In the composition levy the dealer has an option to pay taxes as a percentage of turnovers and avoid the cumbersome compliances and procedures involved in the regular scheme of taxation. In this article we have tried to give an idea to the reader about the differences between KVAT Act, 2003 and Model GST law released by the Ministry of Finance for public comments on 14th June, 2016.
Following dealer are eligible to opt for composition scheme:
- Dealer whose total turnover does not exceed Rs. 50 Lakhs in a year.
- Dealer executing works contract.
- Hotelier, caterer, restaurateur [dealer running sweet meat stall or ice cream parlour or bakery].
- Dealer having Mechanised stone crushing unit producing granite or any other metals.
Model GST Law:
Following Registered taxable person are eligible to opt for composition scheme:
a. Registered Taxable person whose aggregate turnover does not exceed Rs.50 lakh in a year.
Author’s View: It may be noted that under the GST law taxable persons only with aggregate turnover not exceeding 50 lakhs is eligible to opt for composition levy unlike under the KVAT Act, 2003. Thus, the dealers mentioned in b, c, d above with turnover exceeding the threshold limit are required to register under regular scheme. The important point here to note is that under GST law even a service provider shall be eligible to opt for composition scheme. However, a registered taxable person paying taxes under reverse charge cannot opt for composition scheme. With the recent deliberations regarding increasing the threshold exemption limit to Rs. 20 lakhs the limit of Rs. 50 lakhs for composition has to be increased accordingly.
Definition of Turnover:
KVAT: Total Turnover= [Taxable Sales+ Non taxable sales+ Interstate purchase or sale+ Export + Import+ Stock Transfer+ URD purchases] of a dealer at all the places of business in the state.
Model GST Law: Aggregate turnover= [Value of all taxable and non taxable supplies + Exempt supplies + Exports] but excludes [Taxes + Value of Inward Supplies+ Value of Supplies Taxable under Reverse charge] of a person having same PAN computed on an All India Basis
Author’s view: The value of inward supplies and supplies under RCM shall not form part of aggregate turnover. However, the same is the part of total turnover under KVAT Act. It may be noted that the composition dealer shall also be liable to pay taxes under RCM [Tax on import of goods/ services is charged under RCM] and the taxes so paid shall not be eligible as credit.
Interstate Purchases or imports:
KVAT: The section 15 of KVAT Act, 2003 restricts the dealer opting for composition scheme from making interstate purchases however no such restriction is placed on dealer executing works contract under composition scheme.
Model GST Law: Taxable person shall not affect any interstate supplies of goods and/ or services.
Author’s view: The government has continued the restriction on all interstate supplies. However, the ideology of “One India and Unified market “has not been considered while drafting the model law. The dealer executing works contract was allowed to effect interstate purchases on payment of relevant VAT at the rates specified as per section 4 of the KVAT law. However, no such relief has been provided under model GST law for a works contractor opting composition scheme.
Also on a close review of the Composition return in Form GSTR - 4 a column has been provided to declare Goods/Capital Goods received from overseas (Import of goods), Explanation 1 to Section 2(c) of IGST Act, 2016 states that supply of goods/services in the course of import into the territory of India shall be deemed to be a supply of goods and/or services in the course of interstate trade or commerce. However Model GST law restricts a taxable person under composition levy which is in contradiction to what is provided in the Return in form GSTR - 4.
Rate of Tax:
KVAT: The Act provides composition tax rate not exceeding five percent. Presently the tax rate is four percent.
Model GST Law: The model law provides composition rate which is not less than one percent. The rate will be decided by the government on the basis of recommendation made by GST council.
Author’s view: The composition tax rate is decided to be between a band of 1% to 2% [As decided by GST council in the first GST council meeting]. The small dealers have been allowed a relief.
KVAT: A dealer under clause (a) of Section 15 of KVAT Act, 2003 furnishes his return under Form 120 on a quarterly basis within 15 days from the end of the relevant quarter however a dealer falling under clause (b), (c) and (d) of Section 15 of KVAT Act, 2003 is required to furnish monthly return in Form 120 within 15 days from the end of the relevant month.
Model GST Law: The registered taxable person paying tax under composition scheme is required to furnish a return i.e. GSTR- 4 for each quarter within 18 days after the end of such quarter. The registered taxable person shall also be required to furnish details of inward supplies in GSTR - 4A which shall be auto populated on the basis of the GSTR- 1 by his suppliers. Dealer may add/modify the details auto populated in GSTR -4A The registered taxable person shall also be required file an annual return on or before 31st December following the end of such financial year [GSTR-9A]
Change/ withdrawal in scheme:
KVAT: The KVAT rules provides for change of scheme by a dealer once he has filed 12 consecutive returns or 4 consecutive quarterly returns as applicable.
Model GST Law: There is no such provision for change of scheme. However, the taxable person under composition scheme remains eligible unless his permission is cancelled under law or he becomes ineligible.
KVAT: Every dealers falling under clause b, c and d of section 15 of KVAT Act, 2003 whose total turnover in a year exceeds Rs. 1 crore are required get their books of accounts audited under section 31(4) by a CA or CMA or Tax practitioner.
Model GST Law: A dealer opting for composition scheme is not required to get his books of accounts audited under section 42(4) of model GST law as the turnover does not exceed Rs. 1 crore.
Collection of Taxes:
KVAT: A dealer opting for composition scheme is not allowed to collect taxes on sales however a dealer executing works contract u/s 15(b) of KVAT Act, 2003 can collect taxes on sale.
Model GST Law: A dealer opting to pay taxes under Composition Scheme is not allowed to collect taxes on supply of goods and/or services.
Author’s view: The provision for non collection of taxes by the registered taxable person leads to increase in the price of the product. Usually these small dealers deal with goods which are a necessity and are required for daily life which results in increase in the price of those goods.
Option to choose Composition Scheme for various business verticals by the same dealer
KVAT: A dealer whose nature of business is of a type falling under more than one clause of Section 15 of KVAT Act, 2003 is allowed to opt for composition scheme either for all or any business.
Model GST Law: All registered taxable persons having same PAN shall be required to opt for composition scheme even if one such person opts for composition scheme.
Author’s view: Under the present VAT regime the dealer having different business verticals have the option to opt different schemes i.e., regular or composition according to the volume of the business. However, under the GST regime the registration shall be PAN based whereby, the registered taxable person shall have option only to select regular or composition scheme and same shall be applicable to all business verticals having same PAN.
For example in case of dealer executing works contract and also into the trading business [having turnover less than 50 lakhs] can opt for composition scheme either for works contract business or trading business or both. However, when the GST is implemented, the dealer is required to register either under regular scheme or under composition scheme for both businesses as the registered taxable person shall have the same PAN and will not have an option of choosing different scheme for different business.
Input tax credit:
KVAT: The dealer is not eligible for input tax credit under the KVAT Act due to the specific restriction placed under input tax restrictions.
Model GST Law: The registered taxable person under composition scheme is also not eligible to claim input tax credit. The registered taxable person shall be required to issue bill of sale instead of tax invoice.
The dealer who will be required to register as a regular taxable person under proposed GST regime has to take care of the following things:
- Business impact study [mainly the construction industry].
- Analysis of eligible credit under the new law.
- Maintaining low inventory by postponing purchases during the end of the VAT regime.
- Training of accounting personnel.
- Requirement of restructuring of existing and ongoing contracts to cover the new taxes to be levied under the new law.
- Switching over of the scheme in the present regime if it is beneficial for the smooth transition.
- Making specific contract profitability study in order to make strategic decisions.
- Model GST law as uploaded in the Ministry of Finance website
- Draft Goods and Services Tax rules, Return formats as uploaded in the Ministry of Finance website
- Draft Goods and Services Tax - Return Rules as uploaded in the Ministry of Finance website
- Background Material on Model GST Law as published by Institute of Chartered Accountants of India.
The authors can also be reached at firstname.lastname@example.org and email@example.com
The above analyses of several provisions of GST are only for general understanding of the readers and should not be relied upon before obtaining appropriate professional advice. The authors are in no way responsible for any actions taken by the readers on the basis of this article.