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GST Composition Scheme

In every tax system, there are certain actions which need to be taken to validate the statutory provisions like filing timely returns and maintaining prescribed records, periodic payment of taxes. However, the small business enterprises (SMEs) constantly combat while dealing with such requirements due to lack of knowledge and expertise. Hence, to reduce the burden of compliance for small businesses, a composition scheme has been introduced where the enterprises can pay tax at a minimum rate based on their turnover.

Composition scheme is an extension of current Value Added Tax (VAT) law scheme where taxpayers are mandated to file summarized returns on a quarterly basis, instead of three months returns.

Contents

Key Features of GST Composition Scheme

  • A tax rate under GST composition scheme is expected to be 1% to 3%.
  • Enterprises come under GST composition scheme do not qualify for Input Tax Credit under section 16.
  • Local suppliers, who supply goods within the state, are eligible for GST Composition Scheme. Enterprises dealing in interstate supply of goods will fall under regular tax scheme.
  • Getting registered under GST composition scheme is voluntary and optional.
  • Under GST composition scheme, tax payers need to submit a bill of supply instead of invoice of the tax to the tax authorities.

Rate of Tax under Composition Scheme

There are 3 different rates under GST Composition Scheme:

Category Rate of Tax
Manufacturer, other than the manufacturer of the goods as notified by the Govt. One percent
Suppliers of Goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption) Two & a half percent
Any other eligible supplier Half percent

Eligibility Criteria for GST Composition Scheme

There are limitations of GST composition scheme. Not everyone can enrol under this scheme. Any enterprise which has a turnover less than 50 Lakh can opt for this scheme, crossing the limit, will be disentitled from the scheme and will register them in a regular scheme.

  • This provision is for suppliers dealing in goods. Service providers are exempted from this scheme. However, restaurant service providers are excluded.
  • The scheme is only for intra state supply of goods.
  • Dealer supplying goods through e – commerce sites are not eligible for the scheme such as (Flipkart, Amazon, e – bay etc)
  • In case the registered person under GST found ineligible for the scheme, then the tax authority can impose a penalty equal to the amount of tax on such person along with his tax liability.

Registration under Composition Scheme

Any desirable tax payer can enrol themselves under GST Composition Scheme from the beginning of the financial year. The application will have to be filed on or before 31st March of the Previous Year so that returns can be filed accordingly.

Dealers under composition scheme can switch to the regular scheme during the year. However, they cannot switch to composition scheme again during the same financial year.

Returns under Composition Scheme

Under composition scheme, a registered taxable person shall furnish a return for each quarter in a prescribed form in the prescribed manner within eighteen days after the end of a relevant quarter.

Registered tax payer under GST composition scheme should adhere to the GSTR 4, which is a tax return form prescribed by the Government.

Benefits under Composition Scheme

Less Compliance

Under GST, a normal taxpayer is required to file at least 3 returns monthly and 1 return annually. Whereas, in composition scheme, only a quarterly return will be uploaded under GSTR – 4.

Reduced Tax Liability

Under GST composition scheme, the rates are very low from 1% for manufacturers to 2.5% for restaurant service providers and 0.5% for other suppliers of turnover.

Particulars Description Registered as a normal tax payer Description Registered as a tax payer under composition scheme
A Total Sales Value 118000 Total Sales Value 118000
B Sales Value exclusive of taxes 100000 Sales Value exclusive of taxes 115686
C GST @ 18% on sales value 18000 GST @ 18% on sales value 2314*
D Input Purchases 65000 Input Purchases 65000
E GST @ 18% 11700 GST @ 18% 11700
F Total Purchase Value (D+E) 76700 Total Purchase Value (D+E) 76700
G Net GST Liability (C–E) 6300 Net GST Liability (C–E) 2314

Source: http://www.profitbooks.net/gst-composition-scheme/

Restrictions under Composition Dealer

Following are the restrictions on the composite dealer:

  • He is neither a causal dealer nor a Non-resident taxable person
  • He belongs to a place outside India
  • Goods have not been purchased from an unregistered supplier and where purchased he pays tax as per the provisions of the act.
  • He is required to pay central tax under reverse charge for the inward supplies of goods or services or both.
  • He shall mention the words “composition taxable person, not eligible to collect tax on supplies” at the top of the bill of supply issued by him.
  • He shall mention the words “composition taxable person” on every notice or signboard displayed at a prominent place of business and at every additional place or places of business.

FAQs

What is a Composition Scheme under the GST Act?

The composition scheme allows a registered person, whose aggregate turnover does not exceed Rs.50 lakhs in the preceding financial year, to pay a certain percentage of tax as prescribed by the GST Council

Who can opt for Composition Scheme?

Any business house dealing in goods and having an aggregate turnover not exceeding Rs.50 lakhs in the preceding financial year can opt for composition scheme.

Can a professional be registered under Composition Scheme?

No, any person providing any kind of service cannot be registered under the Composition Scheme. It is only for businesses dealing in goods.

What is the tax rate applicable if you are a composition dealer?

The tax rate applicable for a dealer registered under composition scheme is:

If you are a manufacturer – 1% of turnover.

If you are a supplier of food for human consumption – 2.5% of turnover.

Others – 0.5% of turnover.

Please note that this rate is under the CGST Act and you will have to pay the same in SGST Act as well, so in short, it will be twice the tax rate applicable to you.

What are the transition provisions if a business transits from Composition Scheme under current regime to Regular Taxation under GST?

Taxpayers registered under composition scheme under the current regime will be allowed to take credit of input held in stock, or in semi-finished goods or in finished goods on the day immediately preceding the date from which they opt to be taxed as a regular tax payer.


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