Composition Scheme under GST: Everyone’s point of view

Customer View

The GST is the most recent and biggest tax reform in the history of our country. There was lot of resistance in general people to this revolutionary change. Several strikes and protests were done all over the country against the same. Despite of all, the GST was finally came into force from the midnight of 30 June 2017. Since then, almost every person is busy gaining knowledge about GST.  All around people are asking several queries on GST and understanding the impact of the same on their businesses.

Likewise, when the whole country is talking about GST, Apurva (a normal citizen of india) also thought to gain some knowledge about it. When he was reading about it, he come in front of a extremely new word i.e ”Composition Scheme”. Out of his curiosity, he started his research on the same under GST.  When he searched about it, he came through with many FAQs and articles on the scheme. He read all of them.

However as a normal individual and not a tax expert, the major point which he takes from all his reading was that the persons opting under composition scheme cannot collect tax from you and have to bear it from themselves. Thus he make up his mind that if he have to buy any product then he will purchase it from composite scheme dealer as he have to pay no GST on it.

Was he correct ?

He was not. You all were wondering that where he went wrong. Let me clear you that if you are purchasing anything from composite scheme dealer, it does not mean that you are paying 0% GST on it. Purchasing from the composition scheme dealer may saved you from the part of the tax, but you have to pay the most of it. Let’s take an example to understand it.

Apurva purchases R(goods)  from Rohit, who is a composite scheme dealer. Assume that GST applicable on R is 18%. (It is to be noted that GST is a tax on value addition).

Particulars	Value Addition	GST
Manufacturer	100	18
Wholesaler	50	9
Retailer (Rohit)	100	–
Total	250	27

Total price to be charged=287.

It is clear from the above example that an individual must pay GST if he buys taxable product. One cannot expect from the composite scheme dealer that he will cut the price by 18% and sell it to you.

In the above example, there are many persons in the chain and only the retailer is covered under composition scheme. As composition scheme dealer is not eligible for input tax credit, when the product will comes to him (composition dealer), all the GST paid till date on that product becomes his cost unlike other non-composition dealers. He will add his margin to it and sell his product. Thus in the above example, the only point in which tax are not collected is in the last stage. By purchasing the goods from composition dealer, GST is paid by Apurva in a invisible form.

The above example is on the assumption that composition dealer cannot collect tax and have to bear it themselves. However if the dealer includes the tax in his price itself and charged from the customer, then there will not be any difference between the price of regular and composition dealer. There is no clarity on the same till date. Thus, the major question which remain unanswered is that whether composition dealer can sell his goods at MRP.(MRP is a price inclusive of all taxes).

The law says that the composition dealer will not be permitted to collect GST. Further, there is a anti-profiteering clause under GST which states that the benefit of reduction in tax rates under GST should pass on to the customer. In composition scheme, the dealer is not allowed to collect tax and therefore the benefit should pass to the customer.

Government’s View

Now coming to the government revenue loss because of this scheme for small manufacturers, traders, and restaurants.

What do you think?

Only 1% GST in the case of traders, 2% in the case of manufacturers and 5% in the case of restaurants while the maximum slab under GST is 28%.

This seems to be a huge loss?

Do you actually think that the government can sacrifice so much of its revenue for small traders.

Definitely yes, but not this time. Lets see how the composition scheme has been sensibly designed by experts so as to give extra edge to small traders and manufacturers without compromising on the revenue of government.

(GST rate is assumed as 18% in the given below examples)

(Amount in lakhs)

	CASE A		CASE B^
Particulars	Value Addition	GST paid to government after taking credit	Value Addition	GST paid to government after taking credit
Manufacturer	50	9	50	9
Wholesaler	5	0.9	5	0.9
Retailer	8	1.44	8
Total	63	11.34	63	9.9

^ In case B retailer has opted for composition scheme.

	CASE A	CASE B
Total Price charged from customers(A)	74.34	72.9
Total GST to be received by government(B)	11.34	10.629*
Net(C=A-B)	63	62.271
Rate (B/C)	18%	17.06%

*9.9+(63+9.9)*1% (The composition scheme traders are required to pay 1% GST on the total turnover)

Given below is an another example in which manufacturer is supplying goods under composition scheme , whereas wholesaler and retailer has not opted for it; Let’s check what will happen in this type of scenario:

(Amount in lakhs)

Particulars	Value Addition	GST paid to government after taking credit
Manufacturer	50	1 a
Wholesaler	5	9.9  b
Retailer	8	1.44
Total	63	12.34

a. GST for Composition scheme manufacturers is 2% of the total turnover.

b. Wholesaler will not be eligible to take the input tax credit as no tax is paid by him while purchasing from the manufacturer.

(Amount in lakhs)

Total Price charged from customers(A)	74.34 (75.34-1) c
Total GST to be received by Government(B)	12.34
Net(C=A-B)	62
Rate (B/C)	19.90%

c. Total price charged from customers will not include Rs.1 lakh paid by the manufacturer to the government as he has not collected the same from the wholesaler.

In all the above examples, it can be clearly seen that there is no loss to the government and the revenue is almost the same under composition scheme.

Moreover, government will be getting the tax even on exempt goods under composition scheme.

Businessmen view

The very urgent need to understand the composition scheme is of businessmen as the last date to decide whether to opt for the composition or not is 16^th August. So let’s understand the composition scheme from the businessmen view:

Composition scheme under GST is the most arguable topic at present among the small businessmen whose turnover not exceeds Rs.75 lakhs or less during the preceeding financial year.

Who can opt for Composition Scheme?

Only those persons who fulfill all the following are eligible to apply for composition scheme:

• Who deals only in the intra state supply of goods (or service of only restaurant sector).
• Who does not supply goods not liable to tax under GST.
• Who have an annual turnover below Rs. 75 Lakhs (Rs. 50 Lakhs for north-eastern states) in preceding financial year.
• He shall pay tax at normal rates in case he is liable under reverse charge mechanism.
• Who is not supplying through e-commerce operator.
• Who is not a manufacturer of – ice cream, pan masala or tobacco (and its substitutes).

If you fulfills all the criteria to apply for the composition scheme, then you must analyse all the pros and cons of the scheme very carefully and then after taking into consideration all the aspects along with the suitability of the business, take a right decision.

Merits:

• Quarterly Returns instead of Monthly Returns– Filing monthly returns is a costly and cumbersome process that may just be asking too much from a small dealer trying to grow a business.

• Not required to maintain detailed records-Normal records are to be maintained.

• Lower Tax to be paid– Hassle free payments of tax at single rate

Traders-1%

Munufacturers-2%

Restaurants-5%

Though, there are several benefits of composite scheme, there is also the other side of the same.

Demerits:

• No Input Tax Credit
• No collection of tax from the customers-have to bear from his own pocket
• If the dealer is dealing in taxable as well as exempt goods , he has to pay tax on total turnover – even exempted goods will be taxed under the composition scheme.

Analyses:

• This scheme is a boon for the businesses who would not be able to keep detailed records and want lesser compliance. The scheme is a godsend for them as they might not be able to survive in the more compliance market. However, businesses who can do little more compliance and maintain some additional records can go for regular scheme instead of composition. This is because of the fact that composition dealer has to bear tax amount from their own pocket. To add to the misery, no input tax credit will be available for them even if they pay tax under reverse charge mechanism.
• Further, it is also to be noted that composition dealer is not exempted from maintaining records. Normal sales and purchases related records are still needs to be maintained by them.
• Quarterly return instead of monthly return can be a extra benefit for the composition dealers.
• Under composition scheme, lumpsum tax (1%,2%,5%) is to be paid on total turnover. A dealer may be dealing in various goods with different tax rates. There are 4 tax rates under GST i.e 5%, 12%, 18%, 28%. Some of the goods are also exempted under GST. Total turnover will not distinguish between these different rated and exempted goods. GST is to be paid on all of them at a single rate. So the decision to opt under composition scheme should be carefully taken so that you do not end up paying more tax under GST. For ex: If you are dealing more in exempt or lower tax rate goods, then regular scheme will be the best option.
• The conditions to opt under composition scheme state that a composition dealer must be dealing in intra-state supply of goods and not supplying the goods through a e-commerce operator. Thus the composition scheme will definitely be a hindrance to the growth of business and if you want to expand your business in future, then composition scheme is not your cup of tea. But if you do not have much ambitions, then composition scheme can be a good option.

Do not try to deceive Government

When the composition dealer sells to another dealer, then inward supplies of that dealer become the outward supplies of the composition dealer. Even if the composition dealer sells directly to the customer, his inward supplies cannot be concealed as he must be purchasing goods from registered dealer and the outward supplies of that registered dealer in the return will be the inward supplies for the composition dealer. In other words, the books of the composition dealer can be reconstructed with the details of inward and outward supplies on GSTN system.

Thus, you should never try to pull the wool over government,s eyes. If the tax administration has reason to believe that a composition dealer has wrongly availed the benefit under the composition scheme, then such a person shall be liable to pay all the taxes which he would have paid under the normal scheme. Also, he will be liable to pay a penalty equivalent to an amount of tax payable. This penalty will not be levied without giving a show cause notice to the dealer.

Conclusion

Overall it seems that the government has done a very good job by coming up with a composition scheme because it may become troublesome for some businesses to run if the government would not have done so. The decision will have a greater impact on the business and therefore need to be taken urgently and carefully.

Parag Rathi is the Author of this article. He is a CA Final student and 10th All India Ranker in CPT. The Author can be reached at paragrathi28@gmail.com and 8962159905.

Disclaimer: The views expressed in this article are personal and doesn’t constitute professional advice or a formal recommendation. The author doesn’t accept liability for any errors or omissions. You are kindly requested to verify & confirm the updates from the genuine sources before acting on any of the information’s provided herein above.