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Background - Pre GST

The composition scheme under the various VAT laws was applicable to many works contracts without limit in many States. In some States limits were put in place. The conditions were normally that:

  • No credit on inputs
  • No interstate procurement
  • In some States only composition tax could not be collected. In Some States the composition tax can be collected from the customers.

Simple returns with gross turnover and tax payable and paid were being captured.

India has uneducated and unorganised entrepreneurs who are adding value to  the economy. Many of them start very small but over period of time due to hard work and diligence inspite of their challenges grow into bigger entities. The construction industry which has the highest number of small contractors, workers who rise to be head of small groups of workers, those who take up small jobs was using this option. Hitherto on an estimate at least 25 lakh + assessees were covered. The cases where 1 or 2 interstate purchases were made when such restriction was there led to denial of the scheme itself and the dealers/ works contractors were exposed to a demand of 10% tax, interest and penalty for years together. If complied they could be wiped out. This led to harassment and huge corruption due to their lack of awareness.

In today's VAT system 75% of the officers may not know the law and may not be able to pass an examination. In this scenario expecting an uneducated entrepreneur to follow cumbersome procedures and end up with unpayable liabilities should not be the result of the GST movement.

Provisions in Model GST

Under GST section 8 the composition scheme suffers from much more restrictions and would not be practically useful to the unorganised or the uneducated and lead to bankruptcy / closure of all small dealers. The conditions for opting for GST leading to grave concerns are as under:

Only traders would be eligible. Works contractors or pure service providers as we understand are not eligible for the composition scheme.

No interstate supplies would be possible. However interstate receipts are not barred.

Permission (which has been given up in 2000 itself in Central excise) of proper officer required.

If there is reverse charge one has to pay as there is no exemption.

No credit of GST, which is fair enough.

No passing on the tax to the customer. In normal course the small dealer would be selling only to the consumer and there may be no need. The dealers who wish to grow and start B2B transactions would not be able to compete as they are unable to pass on the ITC as well as the composition tax payable by them. [this may be 2%]   

The quarterly return (GSTR-4) for composition dealer is quite cumbersome with auto population of  State wise supplies received + imported goods and services being confirmed - partially akin to normal return. In this aspect alone it is expected that in the 1s year or 2 there would be 90% non compliance.

In case of genuine error the penalty is 100% of the differential tax.

The right to do business as enshrined in the Constitution under Article 19 maybe violated if there is a need to close their activities. There may also be a possible challenge under Article 14 relating to equality.

It appears that the law drafter wish to forbid anybody to opt for composition considering the draconian and outdated provisions presently in the model law. In the view of the paper writer this is against the national interest while not endorsing that anybody should be in a position to evade taxes. Unless GST law is simple and certain and not cumbersome to follow it would be fine. It is not that at present. 100’s of rough edges are to be blunted / removed. It is hoped that some would be done in the coming weeks.

It is fervently hoped in the interest of smaller entities that the following relaxations be considered.                                                     

  1. Eligibility to works contractors be extended as well as identified small unorganized entities providing services who everyone knows cannot comply with the complicated returns.
  2. No permission.*
  3. Buyer able to avail the composition credit.
  4. Interstate supplies by such composition dealers be enabled at full rate but scheme not disabled.*
  5. Quarterly returns only related to gross turnover and tax payment are insisted on.
  6. Penalty provision as applicable to any other assessee or less rigorous than others be put in place.*

This article is meant to bring out the other side which may not be represented as the large industries represented by powerful associations would take care of themselves. The smaller associations may not even be aware of the impact. After the law is in place making changes maybe more difficult. The fact that drafting is being done by the executive is not a good practice. After implementation small scale associations would raise their voice and call for bundhs due to non working ability. It should have been drafted by a mix of experts, trade and the executive to ensure that the wealth creators of this great country are not stopped and forced to close shop. 21st October 2016.

The author can also be reached at  


Published by

Madhukar N Hiregange
(Chartered Accountant)
Category GST   Report

5 Likes   30 Shares   8532 Views


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