GST has been a game changer because, with its implementation, there is a tremendous outflow of benefits.
Earlier in India, there were numerous taxes such as Service Tax, VAT, Excise and many others that were ultimately borne by consumers leading to double taxation or having cascading effect. Post GST, around 17 taxes are subsumed under one tax regime.
GST applies to almost every assessee in business, thereby it has boosted the revenues for the government. While purchasing goods or services both CGST and SGST i.e. both central and state taxes are levied thereby eliminating all confusion.
With the introduction of GST, a new regime of business compliance are established.
Big organizations 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 assessee has to pay tax at a minimum rate based on their turnover. This is mostly similar to the provisions in VAT laws.
In this article, it has been 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 Aggregate turnover of less than Rs. One crore or 75 lakhs for the specified states 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.
Aggregate Turnover 2(6) of CGST Act 2017 Explained
Aggregate turnover of the preceding financial year is the determining factor for ascertaining whether a dealer is eligible for a composition scheme or not. Therefore, it becomes important to know the items which are to be included/excluded at the time of computation of aggregate turnover.
Inclusions and Exclusions Of Aggregate Turnover
Following outward supplies made by all entities registered under same Pan across India:
Value of Inward Supplies on which tax is Payable under RCM
RCM = Reverse Charge Mechanism
- 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.
Persons who cannot opt for the composition scheme
- Supplier of service other than restaurant owners(Serving foods and non-alcoholic drinks)
- Supplier of non-taxable goods
- If the person in engage in the inter-state supply of goods
- Supplier supplying goods through E-commerce operator, who is eligible to collect TCS
- Supplier of tobacco, pan masala, and ice cream
Bill of supply
As the composition scheme dealer cannot pass on the credit of the tax, he is required to issue the bill of supply. Details to be mentioned in the bill of supply are as follows -
- Name, address, and GSTIN of the supplier
- A consecutive serial number which is a unique number for every financial year
- Date of issue
- If the recipient is registered then the name, address, and GSTIN of the recipient
- HSN Code of goods or Accounting Code for services
- Description of goods/services
- Value of the goods/services after adjusting any discount or abatement
- Signature or digital signature of the supplier or his authorized representative
Benefits Under GST Composition Scheme
A) 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.
B) Reduced tax liability
Another advantage of being registered with composition scheme is the rate structure.
For Manufacturer = 0.50%(CGST) + 0.50(SGST) = 1% of turnover of State/ Union Territory
For supplier supplying food other than alcoholic liquor for human consumption =
2.5% (CGST)+ 2.5% (SGST) = 5% of turnover of State/ Union Territory
For other supplier = 0.50% (CGST) + 0.50% (SGST) = 1% of taxable turnover of State/ Union Territory
For other Service Providers 3% (CGST) + 3% (SGST) = 6% of Taxable Turnover of state/UT
C) 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.
Procedure for taking registration
If the person is already registered under the earlier law and has been granted registration on the provisional basis under GST Law, he can opt to pay under composition scheme by filing form GST CMP-01.
He is also required to file form GST CMP-03 within 60days of an exercise of the option. The form must contain the details about stock and inward supplies of goods received from the unregistered person which are held by him on the date preceding the day of the exercise of an option.
If a taxpayer who is in Composite Scheme under earlier 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 taxpayer.
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.
Taking fresh registration
If the person is taking fresh registration under GST Law and wants to opt for composition scheme, he must fill Part B of form GST REG-01.
Switching from Normal scheme to Composition Scheme
If the person is already registered under normal scheme and later on he opts to pay under composition scheme, then he must file an intimation in form GST CMP-02 and form ITC-03(form should be filed within a period of 60 days from the commencement of the relevant financial year)containing the details about ITC related to inputs, semi-finished and finished goods held in stock.
Withdrawal from the scheme of composition
If the registered person wants to withdraw from the composition scheme, he should file an application in form GST CMP-04 before the date of such withdrawal.
The procedure of filling the form GSTR-4 and its auto population
- Form GSTR-4A is auto-populated from form GSTR-1(filed by the supplier), Form GSTR-5(filed by the non- resident taxable person) and Form GSTR-7(Deductor of tax).
- Form GSTR-4 contains the details regarding purchases(which is incorporated from form GSTR-4A) and sales made by the dealer during the quarter.
- On filing the form GSTR-4, the sales details will get auto-populated in form GSTR-2A for the recipient.
Limitations of GST Composition Scheme
There are some of the limitations that every business owner must be aware of:
A) 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.
B) 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 intrastate transactions.
C) 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 in the burden on the assessee to pay tax.
D) 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 and provisions of Section 73 and 74 shall attract but no adverse actions shall be initiated without following the principles of natural Justice.
Recent Amendments To facilitate Ease Of Business For small taxpayers: Sec 10(2A)
- A simplified scheme has been introduced with effect from 1st April 2019 for small service providers (and those who are suppliers of goods as well as services) whose aggregate turnover during the preceding financial year does not exceed Rs. 50 Lakhs. This scheme has been introduced vide Notification No 2/2019-CT (Rate) dated 7th March 2019
- The taxable person opting for this scheme is required to pay GST @ 6% on supplies made on or after 1st April 2019 (3% CGST+3% SGST).
- A person who has opted to pay under this scheme is required to issue a bill of supply for supplies made instead of a tax invoice. On the top of each bill of supply, the following words need to be added “Taxable person paying tax in term Notification No. 2/2019-CT (Rate) dated 7th March 2019 not eligible to collect tax on supplies”
The Composition scheme provides a short window for those who fulfill the criterion to organize themselves as the limit of Rs. 1 crore / 75 Lakhs is meagre. The possibility of many of the uneducated/ unorganized traders and manufacturers (job workers) not understanding GST and its implications is very high. Only those who are selling to consumers in the last mile of the supply chain would find Composition worthwhile. The trade associations catering to the smaller businesses wish to have the restriction on interstate sale be removed and tax the same at full rate with credit.
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.
Every effort has been taken to provide a deep insight about this topic and to cover all important areas of it , any suggestions and improvements are highly appreciated.