Composition Scheme under Goods & Services Tax (GST)

CA Sourabh Singhania

INDIA is on the edge of implementing the biggest Indirect Tax reform since Independence i.e. the present structure of indirect taxation for goods and services would be replaced by a comprehensive Goods and Services Tax (‘GST’). The swift approach of our Government has made it possible to introduce GST, which is likely to be rolled out from July 01, 2017.

In view of the paradigm shift in Indirect Tax levy, it is imperative for trade, especially small business, to prepare themselves for the change and experiment the likely options available under the new law to best suit their business models.

Every tax administration aims towards timely recovery of taxes, simplified filing of returns, easy generation and maintenance of records, invoices, etc. Such elements are often a challenge for small businesses. To overcome this shortcoming, the GST contains a Composition Scheme as an option for a registered taxable person having specified turnover limit to pay tax at a lower rate with minimal compliance burden. Let us discuss the features of GST Composition scheme in upcoming paras.

Persons eligible to opt for Composition Scheme

• A registered person whose aggregate turnover* in preceding FY did not exceed Rs. 50 Lacs
• The composition scheme is optional in nature
• Mandatory to opt for composition scheme in all states, all business verticals having same PAN
• Composition available only up to aggregate turnover* of Rs. 50 Lacs during current FY

*Computed on all India basis for same PAN excluding inward supplies on which tax is payable under RCM

Persons NOT eligible to opt for Composition Scheme

• Supplier making inter-state outward supply of goods
• Supplier of goods not chargeable to tax under GST (Eg. Alcoholic liquor for human consumption)
• Supplier of Services other than suppliers making composite supply of food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption) by way of or as a part of any service viz. Restaurants, Eating Joints, Mess, Canteens, Outdoor Caterer, etc.
• Supplier engaged in making supply of goods through Electronic Commerce Operator (it appears to be against the vision of Digital India)
• Manufacturer of such goods as may be notified by the Government
• Casual taxable person or a non-resident taxable person
• Work contractors and Developers

Composition Tax Rate

Category of registered persons	CGST  Rate	SGST Rate	Total Tax
Manufacturers, other than manufacturers of such goods as may be notified by the Government	1.00 %	1.00 %	2.00 %
Suppliers making composite supply of food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption) by way of or as a part of any service viz. Restaurants, Eating Joints, Mess, Canteens, Outdoor Caterer, etc.	2.50 %	2.50 %	5.00 %
Any other supplier (other than manufacturers of notified goods)	0.50 %	0.50 %	1.00 %

Other Salient features of Composition Scheme

• Intimation in Form GST CMP-02 for opting composition scheme to filed at beginning of FY
• Tax payer can opt out of the scheme at any point of time during a given FY
• Cannot issue tax invoice and collect tax separately from recipient
• Input Tax credit would not be admissible to composition tax payer
• Liable to pay tax under RCM and tax on purchases from Un-registered person
• Quarterly payment of tax (Challan GST-PMT 06) and filing of returns (Form GSTR-4)

Merits of Composition Scheme

• Limited Tax Liability at the rate of 1%, 2% or 5% as compared to the normal tax payer paying tax at 5%, 12%, 18% and 28%
• High Liquidity due to lower tax liability and quarterly payment of tax, resulting into lesser chunk on his working capital
• Minimal Compliance w.r.t. furnishing of returns (5 returns as compared to 37 in case of normal tax payer), matching of tax credits, maintenance of records, issuance of invoices, etc.
• More focus on business instead of tax compliance

Demerits of Composition Scheme

• No Credit of Input Tax paid on purchases of inputs from a normal tax payer
• No Collection of tax from buyer leading to burden of tax on composition supplier and No input tax credit to the buyer in respect of purchase made from composition supplier
• Limited Territory for Business as composition supplier is not allowed to make outward inter-state supplies including exports
• Penal Provisions if supplier is found not eligible for composition scheme
• Not available to Work contractors and Developers as compared to current regime wherein option for composition is allowed on works contract basis

Switch Over

• From Normal Tax Payer (GST regime) to Composition Scheme Holder (GST regime)

If taxpayer has availed input tax credit, he shall be liable to pay an amount equal to the credit of input tax (CGST, SGST, IGST) in respect of inputs, inputs contained in semi-finished or finished goods, held in stock and on capital goods, reduced by certain percentage point, on the day immediately preceding the date of such switch over. The balance of input tax credit after payment of such amount, if any lying in the credit ledger shall lapse.

• From Composite Scheme holder (GST regime) to Normal Tax Payer (GST Regime)

Tax payer shall be entitled to take credit of input tax (CGST, SGST, IGST) in respect of inputs, inputs contained in semi-finished or finished goods and on capital goods (reduced by certain percentage points) on the day immediately preceding the date of such switch over.

Transition

• From Composition Scheme Holder (current regime) to Normal Tax Payer (GST Regime)

Tax payer will be allowed to take credit of eligible duties (Excise, CVD, SAD, additional excise duty under central law and VAT under state laws, etc.) in respect of inputs, inputs contained in semi-finished or finished goods on the appointed date subject to the following conditions:

√ Such inputs or goods are used or to be used for making taxable supplies under GST v’ Tax payer does not opt for composite scheme under GST

√ Input tax credit on such inputs is admissible to tax payer under GST

√ Tax payer is in possession of invoice or document evidencing payment of duties under earlier laws for which credit to be availed

√  Such invoices and/or documents were not issued earlier than 12 months before the appointed date

• From Normal Tax Payer (current regime) to Composition Scheme holder (GST regime)

a) Input Tax Credit carried forward in the return – The said credit is not eligible to be carried forward in GST regime and would lapse.

b) Input Tax credit contained in stock – There is no specific provisions in GST law requiring the tax payer to pay/debit any tax credit (Excise, CVD, SAD, additional excise duty under central law and VAT under state laws, etc.) involved in inputs, inputs contained in semi-finished or finished goods as on the appointed date. However, a composition scheme holder is not allowed to take ITC and hence same may not be available.

c) Goods held in stock by taxpayer on the appointed date shall not include:

√ Goods purchased in the course of Inter- state trade or commerce

√ Imported Goods

√ Goods received from Branch situated outside the State

√ Goods received from Agents or Principal situated outside the State

d) Goods held in stock by tax payer, if purchased from Un-registered person, tax on such purchases is paid under reverse charge in GST regime.

Practical issues and difficulties

• Higher rate of tax for purchase of Flat by the buyers, flat 12% (including land value) as compared to present 1% (VAT) and 5.6% (Service Tax)
• No composition for Work contractors, Developers, etc. – Manifold increase in burden of tax compliance- Contractors and Developers to revisit tax positions to optimize tax cost
• Whether a restaurant serving alcoholic liquor would still be eligible for composition scheme?
• Turnover eligibility limit is less as compared to present turnover limit for composition – most of the small businesses would become normal tax payer– Need to explore various tax payment options available under GST regime to optimize tax & minimize compliance