Is India is likely to bring the composition scheme under the reverse charge mechanism. It is learnt that the government will move an amendment to the GST law in the budget session to introduce an enabling provision to prescribe the mechanism where it deems necessary.
How it will be done – The law will be changed to introduce an enabling provision to bring in reverse charge mechanism wherever Govt. want. The thinking is that at least in the case of composition scheme the reverse charge should be there.
The reverse charge provision, which is suspended for now, was only meant for an unregistered entity supplying goods or services or both. In reverse charge, those taking the goods or services would levy and collect the tax on a reverse charge basis, ensuring that it’s paid. Under the composition scheme, those with turnover of up to Rs. 1 crore can pay one to five percent of that as tax. This is set to be raised to Rs. 1.5 crore. The rate of composition tax is 1% for traders and manufacturers and 5% for restaurants.
A dealer registered under composition scheme is not required to maintain detailed records. However, a dealer is required to file a quarterly return GSTR-4 by 18th of the month after the end of the quarter.
Also, an annual return GSTR-9A has to be filed by 31st December of next financial year.
The GST council has expressed concern for collections under the composition scheme were low. The tax paid under the composition scheme is just Rs. 300 crores so far by more than 1.6 million businesses that have registered for it hinting at suspicion of large-scale evasion because if businesses are claiming turnover less than Rs. 20 lakh than why have they sought registration at all. They would be exempt in any case.
The feeling perhaps with GST Council is that in the absence of the reverse charge and with the increase in composition limit, it is being used as a route to evade tax. The tax collected from composition dealers is very low with many of them are declaring less than Rs. 20 lakh annual turnover. Hence reverse charge may help the government to monitor the purchases of composition dealers and help plug the evasion/leakage.
The GST Council may feel that the law needs to be amended to allow for the imposition of reverse charges wherever there may be significant evasion. This reverse charge mechanism will create a disincentive for remaining in the composition scheme and dealers may move to the regular scheme.