Composition Scheme under GST: Goods and Services Tax (GST) is the biggest indirect tax reform implemented in India with effect from 1st July 2017. GST has replaced most of the Indirect Taxes applicable on Goods and Services with a single unified tax structure, helping prevent double taxation, cascading effect and other various issues. Different businesses widely vary in various parameters starting from nature, size, volume etc. Accordingly, a common indirect tax structure design would have been a difficult task to be suitably complied by all sizes of businesses. The normal GST Compliance system entails certain difficulties for small scale enterprises and hence, a Composition Scheme is also introduced for specified categories of businesses. This article attempts to provide an insight on the various concepts, procedures and practices relating to the Composition Scheme under the Goods and Services Tax Regime.
The composition scheme is an alternative method of levy of Tax for small taxpayers. It is a convenient way for the small taxpayers in order to escape from too many GST formalities and pay the tax at a fixed rate based on their business turnover. Initially it was prescribed by the Goods and Services Tax Acts that a person could opt for the Composition Scheme if his aggregate turnover in the preceding financial year did not exceed fifty lakh rupees, however, this limit of fifty lakh rupees was raised to seventy five lakh rupees even before introduction of GST. This turnover limit was however, capped at rupees fifty lakhs for Nine specified States.
Now, with effect from 13th October, 2017, the preceding year aggregate turnover limit for opting the composition scheme has been raised to Rupees One Crore in general and Rupees Seventy Five Lakhs for specified States. The Nine States specified with the reduced eligible turnover limit are Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Himachal Pradesh.
The Composition Levy Feature
A question here pops out as to what exactly is the alternative method of levy being talked about and how is it different from the normal GST levy. A composition taxpayer is allowed to pay a consolidated amount computed at the prescribed rate on its aggregate turnover, inlieu of the tax payable by him under normal circumstances. The consolidated rate of tax prescribed for payment by a composition taxpayer is as under:
- 2% for Manufacturers
- 5% for persons supplying food and beverages for human consumption (i.e. Restaurant Operators in common), and
- 1% for Other Eligible Suppliers
(The taxes are to be paid 50% as Central Tax and 50% as State Tax)
Eligibility Conditions & Restrictions
A taxpayer is eligible to opt for the composition scheme if all the following conditions are satisfied:-
- he is not engaged in supply of services other than supply by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration;
- he is not engaged in making any supply of goods which are not leviable to tax under GST Act;
- he is not engaged in making inter-state outward supplies of goods;
- he is not engaged in making any supply of goods through an e-commerce operator who is required to collect tax at source as per applicable provisions;
- he is not a manufacturer of such goods as may be notified by the Government on the recommendations of the council, (Currently the notified Goods are
- Ice cream and other edible ice, whether or not containing cocoa,
- Pan masala,
- Tobacco and other manufactured tobacco substitutes
- he is neither a casual taxable person nor a nonresident taxable person;
- the goods held in stock by him on the appointed day (i.e. 1st July, 2017) have not been purchased in the course of inter-State trade or commerce or imported from a place outside India or received from his branch situated outside the State or from his agent or principal outside the State,
- the goods held in stock by him have not been purchased from an unregistered supplier and where purchased, he pays the tax under the Reverse Charge Mechanism
- he shall pay tax as per the Reverse Charge Mechanism on 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; and
- he shall mention the words “composition taxable person” on every notice or signboard displayed at a prominent place at his principal place of business and at every additional place or places of business.
Aggregate Turnover for Composition Scheme
The aggregate turnover here includes the value of all taxable supplies, exempt supplies and exports made by all persons under the same PAN. However, it would not include inward supplies under reverse charge as well as Central, State/Union Territory, Integrated Tax and Cess. Moreover, if a person holds more than one GST Registrations under the same PAN, such person shall not be eligible to opt for the composition scheme unless all its registrations are under composition scheme and the conditions prescribed are cumulatively fulfilled.
Time Limit for Opting of the Scheme
Any person desirous of opting the composition scheme had to do so within 30th July, 2017 if such person was holding an existing law registration and was migrated to GST by virtue of the provisional registration allotted. This time slot was re-opened with effect from 15th September, 2017 to opt for composition scheme to be effective from 1st October, 2017.
For a person seeking new registration, the option to opt for composition scheme shall have to be chosen which applying for the registration itself. Moreover, a GST Registered person can opt for composition scheme with the start of a new Financial Year under the prescribed intimation to be filed before the commencement of the financial year.
However, surpassing the aforesaid time limits, with effect from 13th October, 2017, it has been notified that any person may opt for the Composition Scheme at any day up to 31st March, 2018 by filing the prescribed intimation to do so under Form GST CMP – 02. The composition scheme shall be made effective for such person from the first day of the month succeeding the month in which the said intimation is filed.
Restriction on Collection of Tax
A person registered under the composition scheme shall not collect any tax from the recipient on supplies made by him nor shall he be entitled to any credit of input tax.
Payment of Tax & Return Filing
A person opting for this scheme will have to pay tax on Quarterly Basis before 18th of the month succeeding the quarter during which the supplies were made. Such person has to file a single Quarterly GST Return (i.e.GSTR – 4).
GSTR – 4 requires the following details to be declared by the composition taxpayer:
- details of turnover in the state or the union territory,
- inward supply of goods or services or both (including Reverse Charge details) and
- the tax payable on the aggregate turnover.
Compliance for Input Tax Credit (ITC) Reversal
A person opting to pay tax under composition scheme is required to pay an amount equal to the input tax credit in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date of exercise of option (rather the date immediately preceding the date of effectiveness of the scheme). The ITC on inputs shall be calculated proportionately on the basis of corresponding invoices on which credit had been availed by the registered taxable person on such inputs.
In respect of capital goods held in stock on the day immediately preceding the date of exercise of option, the input tax credit involved in the remaining useful life in months shall be computed on pro-rata basis, taking the useful life as 5 years. For instance, assuming capital goods have been in use for 4 years, 6 months and 15 days. The useful remaining life in months will be 5 months, ignoring any part of a month.
Seizure of Composition Scheme
The option availed by a registered person under Composition Scheme shall lapse with effect from the day on which his aggregate turnover during a Financial Year exceeds the limit of Rupees One Crore. The said person shall have to file an intimation for withdrawal from scheme in Form GST CMP-04 within seven days from the date on which the threshold limit is crossed.
Moreover, such person shall be allowed to avail the input tax credit in respect of the stock of inputs and inputs contained in semi-finished or finished goods held in stock by him and on capital goods held by him on the date of withdrawal on the condition that he furnishes a statement within 30 days of withdrawal, containing the details of such stock held by him in Form GST ITC-01.
Reverse Charge Mechanism
The person registered under this scheme will have to pay taxes on procurement of inputs or input services covered under the Reverse Charge Mechanism. The tax can be paid by the 18th day of the month succeeding the quarter in which such supplies were received. However, as announced after the 22nd GST Council meeting held on the 6th of October, 2017 and as notified thereafter vide Notification no. 38/2017 – Central Tax, Reverse Charge Mechanism under section 9(4) (i.e. on procurement of supplies from unregistered suppliers) has been suspended till 31st March, 2018 for all taxpayers.
Penal Liabilities on Violation of Scheme
A person who pays tax under the composition scheme without satisfying the prescribed conditions and without fulfilling the eligibility conditions and the proper officer has reasons to believe that such person has paid tax under Composition Scheme despite not being eligible, such person shall, in addition to any tax that may be payable by him under the normal provisions, be liable to penalty as specified in Sections 73 or 74.
The famous saying goes, ‘All good things come in small packages’, and the composition scheme makes ‘All things good for Small packages!’. Every scheme has merits and demerits of its own. The merits here include lesser compliance burden, simpler tax liability ascertainment and ease of doing business. However, the demerits of this scheme include the eligibility restriction on Service Industry, the One PAN One Scheme condition, restrictions on Inter-State Supplies, supply through e-commerce operators etc.
On a whole, it can be summed up to say that the Composition Scheme is a simple and easy scheme under GST for taxpayers under its purview and small taxpayers can get rid of tedious GST formalities and pay GST at a fixed rate of turnover.
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