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.
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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 the regular tax scheme.
- Getting registered under GST composition scheme is voluntary and optional.
- Under GST composition scheme, taxpayers need to submit a bill of supply instead of invoice of the tax to the tax authorities.
The 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 enroll 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 the intrastate 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 taxpayer can enroll 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 the composition scheme again during the same financial year.
Returns under Composition Scheme
Under the 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.
The registered taxpayer 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 the 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 taxpayer | Description | Registered as a taxpayer 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.