Big brands and Businesses have the resources and expertise required to facilitate the GST compliance procedures.
On the contrary, it is quite possible that Small and Medium Enterprises or SMEs as they are so-called, as well as start-ups, can face a few challenges in keeping up with these provisions.
To help reduce this burden, a GST composition scheme has been introduced.
Under this law, the assessee can pay the tax at a minimum rate based on the turnover.
This is quite similar to the provision in VAT law.
In this article, we shall address some of the basic queries around the Composition Scheme under Goods and Services Tax Law and everything pertaining to the GST composition scheme, the eligibility criteria, limitations, and the benefits.
Eligibility criteria for the GST composition scheme
Registering yourself under the composition scheme is not a mandatory activity.
As stated in Section 10 of the CGST Act, 2017, a registered taxable individual who has an annual aggregate turnover of up to Rs.1 Crores with respect to goods and restaurant services and Rs.50 Lakhs in the case of services other than the restaurant services as stated earlier in the previous financial year can opt for this scheme.
But if you have a business operating under that special category other than Jammu-Kashmir and Uttarakhand, no such limit on the turnover has been stated by the Government.
However, there are certain conditions that you must fulfill before you opt for this composition scheme. These conditions are listed below:
- Any assessee who deals only in the supply of goods can opt for this scheme. In other words, this scheme is not applicable to other service providers. (Restaurant service providers are excluded).
- There must not be any interstate supply of goods. So, only businesses having an intra-state supply chain are eligible.
- If you are a dealer and supply good through electronic commerce operators, then you are barred from these schemes.
- The composition scheme is levied for business verticals with the same PAN. This means that no taxable individual can select the composition scheme, nor can he pay taxes.
- Dealers are barred from collecting composition tax from the recipients of supplies, and they also cannot collect Input Tax Credit.
- If the taxpayer is not eligible under the composition scheme, the tax liability is calculated as Tax in addition to the interest and penalty. The resultant is equal to the total amount of tax.
Individuals who cannot register for the composition scheme
The following is the list of taxable persons who are not eligible to opt for the composition scheme.
- A taxable person who has no fixed place of business and occasionally undertakes supplies in a state or union territory.
- A taxable person who is not a resident of India has no fixed place of business and occasionally undertakes supplies.
- Suppliers engaged in inter-state supply of goods.
- Individuals who are supplying non-taxable goods. In other words, goods that are not taxable under the GST Act.
- Individuals who are collecting goods through an electronic commerce operator. The operator also collects tax at source (TCS) as stated under Section 52 of the CGST Act.
- An individual who has purchased goods from an unregistered supplier and pays tax under reverse charge mechanism.
- Individuals engaged in the manufacture of ice-cream and other edible ice-cream irrespective of the content of cocoa.
- Individuals engaged in the manufacture of pan masala, tobacco, and other tobacco substitutes.
Calculating the Aggregate turnover
The aggregate turnover is an important parameter that helps qualify taxpayers for the composition scheme.
It is, therefore, crucial to know what exactly constitutes the aggregate turnover.
The aggregate turnover is calculated on the basis of aggregate supplies made by an individual under the same PAN.
It is, therefore, the sum total of all the outward supplies that fall under four categories. These categories are listed below.
- Taxable supplies.
- Exempt supplies.
- Export of goods and services.
- Inter-state supplies.
The addition of the values of these supplies does not need to comprise of the taxes and the cess paid.
Nor should it comprise the inward supplied on which the tax is paid by a person on a reverse charge basis.
Composition dealer and issuance of the tax invoice
A composition dealer does not have the permission to issue a tax invoice.
The reason for this is that a composition dealer cannot charge tax from customers.
The tax needs to be paid for, from his own pocket. Therefore, the composition dealer is required to issue a bill of supply.
Bill of Supply
A taxable individual is not eligible to issue a taxable invoice.
Therefore, he is required to issue a bill of supply.
There are a few important details that the dealer must mention on the bill of supply.
These are listed below.
Name, address, and the GSTIN of the supplier. The GSTIN is the serial number or the unique number for every financial year.
- The date of issuance.
- The name, address, and the GSTIN of the recipient.
- The HSN code of good or the accounting code in case of a supply of services.
- A detailed description of the goods or services
- The amount or the value of the goods or services after the discount is adjusted.
- A physical or a digital signature of the supplier or the authorized personnel.
Registering GST under the composition scheme
If you wish to register for the composition scheme, it is mandatory to also register under the GST law.
The process of this registration is divided into two categories.
Let’s analyze each of these individually.
Registering under GST for the first time
In the event that an individual is not registered under any of the indirect laws prior to GST and now wants to apply for a GST registration for the first time, then the FORM GST REG-01 needs to be filled.
Such an individual should select the option ‘registration as a composite business owner in part B’ of that form.
This is also stated in detail under Section 10 of the CGST Act.
Already registered under the GST
In the event that an individual is already registered under the GST law but now wants to register as a composite dealer, then an electronic intimation needs to be filed in FORM GST CMP-02.
It should be noted that such an intimation must be filed before the commencement of the financial year.
Also, additional details of the ITC need to be furnished like the semi-finished or finished goods held in stock.
All of this needs to be filled within 90 days from the commencement of the financial year.
Apart from the above, if a taxpayer is registered in more than one state under a single PAN can also opt for the composition scheme.
In such a case, the taxpayer must fulfill all the eligibility criteria in the concerned states.
The validity of the composition scheme
A composition dealer can continue to pay GST under the composition scheme as long as he meets all the eligibility conditions.
He does not need to apply for new applications for registration under the composition scheme every financial year.
But in the event that an individual fails to satisfy any of the conditions, he would be liable to pay tax under Section 9(1) of the CGST Act.
Additionally, he must issue a tax invoice for every supply made from the day he didn’t satisfy the condition of the composition scheme.
He would also be required to file a withdrawal from this scheme.
Modes of GST payment made by a composition dealer
The GST payment to be made by a composition dealer constitutes the following.
- GST on the supplies made.
- Tax on reverse charge.
- Tax on purchase from an unregistered dealer.
Withdrawal from the composition scheme
A registered individual who wishes to withdraw from the said scheme needs to file an intimation for the same.
This intimation is filed in FORM GST CMP-04 before the date of withdrawal.
But if the individual needs to withdraw because he failed to fulfill the provisions, then he has to file the intimidation within seven days from the occurrence of that event.
After the composition dealer has withdrawn from the composition scheme, he must pay taxes as a normal taxpayer and issue the tax invoice for every supply made thereafter.
He is also required to furnish details of the semi-finished, and finished goods helped in stock on withdrawal.
All of this needs to be submitted on the GST portal 30 days from the date of withdrawal.
Opting for the scheme incorrectly
If a registered individual has opted for the composition scheme and not complied with the provisions stated therein, then a ‘show cause’ notice will be issued in FORM GST CMP-05.
The dealer is expected to respond within 15 days of the receipt of such a notice.
Thereafter, your response can be accepted, or you may be denied to pay tax under the composition scheme.
This decision is made by the office in charge. The decision will be sent across within 30 days of the response.
It is also important to note that the registered individual not compiling to the rules will be liable to penalties.
Filing GST returns for composition scheme taxpayers.
Taxpayers registered as composition dealers are required to file FORM GST CMP-08 on a quarterly basis.
This form declares the summary of the self-assessed tax that is payable for a given quarter under the composition scheme.
In addition to this form, the dealer also needs to fill in the annual return FORM GSTR-4.
All the taxpayers who have an aggregate turnover, as stated under the GST composition scheme, can opt to become a composition dealer.
The due date for filing GST return
The FORM GST CMP-08 is to be filed quarterly, as we discussed above.
Therefore, the due date to file the form is 18th of the month following the quarter for which the payment needs to be made by the composition dealer.
Advantages of the composition scheme
The composition scheme offers the following benefits.
Under the typical scenario, a taxpayer under GST has to file a minimum of 3 returns monthly and one annual return.
In other words, he is forced to file 37 returns in a year.
The failure to do so would result in penalty fees for non-compliance.
Since it is quite difficult for small suppliers and manufacturers to maintain detailed books of accounts, the composition scheme has lesser provisions.
Reduced tax liability
The composition scheme charges at lesser rates, and therefore, is an excellent benefit, especially for small businesses.
Here are a few calculations to give you a better understanding.
- The tax liability for a manufacturer is 1% of its turnover of state or union territory and is calculated as a sum of 0.50% of CGST and 0.50% of SGST.
- The tax liability for a supplier of food other than that of alcoholic liquor is 5% of the turnover of state or union territory. This is calculated as the sum of 2.5% CGST and 2.5% of SGST.
- The liability for other suppliers is zero.
In the case of the normal taxpayers, most of the working capital is blocked under the Input Tax Credit.
This is because he can avail the input only if his supplier has filed the GST returns.
The supplier is required to pay the tax at standard rates.
However, in a composite scheme, the composite dealer does not need to worry whether his supplier is filing the returns.
This is because he cannot take credit and will anyway pay tax at a nominal rate.
Disadvantages of the composition scheme
Listed below are some of the disadvantages of registering under the GST composition scheme.
The credit of Input Tax is not applicable
Composition dealers registered under the composition scheme are not eligible to take the credit of input tax towards purchases.
Additionally, the buyer of the goods will not get the credit of these paid taxes.
No Inter-state business
Another shortcoming of the composition scheme is that the assessee cannot engage in any inter-state supplies or import-export of goods and services.
In other words, he can only engage in supplies with the locals.
This hinders the expansion of his businesses.
Paying tax from own pocket
The composition deals are not permitted to charge taxes from their customers.
Even though the rates under the composition scheme are low, he needs to make the payments from his pocket.
As we have also discussed before, he cannot even issue a tax invoice.
Strict Penal provisions
The composite dealer needs to be very careful while making payments under the composite scheme.
This is because the penal provision is quite severe. In the event that an individual registers wrongly and fails to satisfy any required criteria, he would be required to pay taxes along with the penalty.
In some cases, the penalty may even be 100% of the taxes to be paid.
Liability of payments under the reverse charge mechanism
A composition dealer is required to make tax payment under the Reverse Charge Mechanism whenever applicable.
The rates under the composition scheme are the same at which the GST has to be paid.
This loosely translates to that the rate under the composition scheme should not be used for the reverse charge.
Additionally, no ITC is applicable for tax paid under the reverse charge for a composition dealer.
Considerations to avail the input credit on stock
A taxpayer needs to address certain conditions to avail credit on the input at the time of moving from a composition scheme to a normal scheme.
These considerations are listed below.
- The inputs or goods will be used for making taxable supplies.
- The ITC is available under the GST law.
- The taxpayer can issue bills of input tax on such goods.
The composition scheme is considerably beneficial to small suppliers.
This mainly includes the intra-state local suppliers and the restaurant sector.
The composition scheme prevents them from several procedural compliances and gives a hassle-free functioning environment.
To make compliances better for small businesses, states have provisions in their VAT law about the composition scheme.
Similarly, even in GST, a composition scheme is introduced to safeguard the interests of small businesses.
To know more about the Sections stated in this article under the GST Act, you can visit the official website.
And to know more about the forms stated in the article you can also visit the GST portal.
Do you have any concerns or queries? Comment below.