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All you want to know about the GST Composition Scheme

GST Composition Scheme

Need to Introduce GST Composition Scheme

Every tax administration aims towards timely recovery of taxes, filing of returns, simplified generation and maintenance of records, invoices and others documents. Such elements are often a challenge for small businesses. To overcome this shortcoming a composition scheme was introduced under the respective State VAT Laws with conditions applied on eligibility for the scheme accordingly. GST Composition Scheme also contains an option for a registered taxable person having turnover less than the limit to pay tax at a lower rate respect to certain specified conditions.

GST Composition Scheme is an option available to a registered taxpayer who needs to inform the tax authorities of his intention to be registered under the scheme. In case the registered taxpayer fails to comply with the same he would be treated a normal tax payer and administered accordingly. Such option needs to be for all businesses of the tax payers ie both for goods as well as services.

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Turnover and Rate of Tax Under GST Composition Scheme

A registered taxpayer, whose aggregate turnover does not exceed Rs fifty lakh in the preceding financial year pay tax at a rate not less than 2.5% fo a manufacturer and 1% for others.

Taxable Persons Excluded from the Composition Scheme

Following taxable persons are not granted permission to opt for the scheme who:

  • Supplies goods not leviable under the Act
  • Supplies services
  • Makes a supply of goods other than intra state ie interstate or import/ export
  • Makes a supply of goods through Electronic Commerce Operator ie Ecommerce and liable to collect taxes
  • Manufactures such goods as may be notified

Further, it is also if in case a taxable person has different business segments having same PAN as held by the taxable person, he must register all such businesses under the scheme.

If an individual has different business segments such as:

  1. Textile

  2. Electronics and accessories

  3. Groceries

Then he must register all the above segments collectively under the composite scheme or simply opt not for the scheme.

No Tax, No Credit

No Credit of Input Tax There has been no provision of input credit on B2B transactions. Thus, if any taxable person is carrying out business on B2B model, such person will not be allowed the credit of input tax paid from the output liability. Also, the buyer of such goods will not get any credit of tax paid, resulting in price distortion and cascading. This will further result into a loss of business as buyers might avoid purchases from a taxpayer under composition scheme. Scheme holder cannot claim input tax credit even if he makes taxable purchases from a regular taxable dealer. Ideally, the taxable amount would be added to the composite tax payer’s cost.

No Collection of TaxThough the rate of composition tax is kept very nominal at 1% or 2.5%, a taxpayer under composition scheme is not allowed to recover such tax from his buyer, as he is not allowed to raise a tax invoice. Consequently, the burden of such tax is kept on the taxpayer himself and this must be paid out of his own pocket. Thus, the fundamental principle of limited compliance and tax burden on small taxpayer is defeated here.

Lesser Compliances

A normal taxpayer is required to submit a minimum of three returns on monthly basis and one yearly consolidated return i.e. 37 returns in a whole year non-filing of which will attract penalty. Under the scheme a tax payer is required to file one return in each quarter, he need not worry on record keeping and focus more on his business. Since a scheme holder is not required to pay taxes at regular rates, he is not liable to issue a Tax Invoice rather issue a Bill of Supply making this a more convenient option as lesser details are required.

Strict Penal Provisions

Under GST if in the opinion of proper officer, it is found that a taxable person not being eligible for the scheme have opted for the scheme, he shall be liable to pay differential taxes along with penalty and provisions of demand and recovery will apply to him.

This means that before opting for the scheme a taxable person must be free from any or all doubts of his eligibility for the scheme to avoid such penal provisions. However, if a small taxpayer who has limited knowledge of tax laws and compliances makes any mistake under composition scheme, he shall be liable to pay tax at standard rate on his total turnover along with a penalty which will be equal to the total tax liability.

Merits of the Scheme

Below are some of the prominent reasons why you should choose to get registered as a supplier under the composition scheme:

Limited Compliance: Lesser compliance w.r.t. furnishing of returns, maintenance of books of records, issuance of invoices more focus on business

Limited Tax Liability: on comparison with regular taxpayers, person taxed under Composite Scheme will be liable to pay tax at a rate not less than 2.5% for manufacturer and 1% in any other cases instead of a standard rate of 18%

High Liquidity: Unlike normal tax payers, tax payers under Composite Scheme will be liable to pay taxes at a lower rate resulting in lesser chunk on his working capital

Demerits of the Scheme

The demerits of registering under Composite Scheme by a taxable person are as follows:

Limited Territory for Business: A taxpayer registered under the composition scheme is barred from carrying out inter-state transactions and cannot affect import-export of goods and services.

No Credit of Input Tax: Under the scheme, the credit of input tax paid on the purchases of inputs from a normal tax payer will not be allowed. The buyer of goods supplier by scheme holder will also not enjoy input tax credit resulting in price distortion, cascading, loss of business to scheme holders.

No Collection of Tax: Though the rate of tax for a scheme holder is lower the burden of such tax is kept on the taxpayer himself, leading to higher cost of sales.

Penal Provision:  As per the Model GST Law, if the taxpayer who has previously been given registration under composition scheme is found to be not eligible to the composition scheme or if the permission granted earlier was incorrectly granted, then such taxpayer will be liable to pay the differential tax along with a penalty

Not applicable to the supplier supplying goods through E-commerce

GST Composition Scheme Transition Provision 

As current regime provides for the composition scheme subject to certain conditions, GST Composition Scheme transition provision provides for allowance of credit of eligible duties and taxes on inputs held in stock subject to certain conditions.

Article authored by ClearTax

GST Billing & Return Filing at ClearTax GST - India's Easiest GST Software



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