Composition Scheme would be available only to certain eligible taxable persons. This scheme is specifically introduced by government to give relief to the small businessman.  The best part of Composition Scheme is that this Scheme will be applicable for all goods however not applicable on Services except restaurant service provider.

Following Persons are not eligible to take benefit of composition scheme:

  1. Person making supply of goods which are not liable to GST
  2. Person making inter-State outward supplies
  3. Person making supplies through an e-commerce operator
  4. Manufacture of notified goods
  5. Person collecting GST
  6. Person taking input tax credit

Composition scheme is not available for services:

Suppliers of services i.e. service providers are excluded from opting to pay tax under composition scheme, except composite supply, by way of or as a part of any service, (i.e. food/restaurant services) for which specifically 5% rate has been prescribed.

Eligibility to pay tax under composition scheme:

Only those taxable persons whose ‘aggregate turnover does not exceed Rs. 75 lacs in the last financial year will be eligible to opt for the composition scheme.

The Government, by notification and with recommendation of Council, is empowered to increase this threshold limit up to Rs.1 crore.

Rate of tax:

The rate of tax would be as under:

  1. 2% of the turnover in case of MANUFACTURER.
  2. 5% of the turnover in case of Food/Restaurant Services.
  3. 1% of the turnover in case of other suppliers (like traders / agents).

Benefits of Registering under GST Composition Scheme:

  • Limited Compliance: Under the composition scheme, the taxpayer is required to furnish quarterly return only, and thus he need not worry on record keeping and can focus on his business.
  • Limited Tax Liability: Another benefit of getting registered under the composition scheme is that the tax rate for such taxpayer is nominal under the GST Law.

Drawback of Composition Scheme:

  • Limited Territory for Business:A taxpayer registered under the composition scheme is barred from carrying out inter-state transactions and cannot offer import-export of goods and services. Thus, he is compelled to carry out only intra-state transactions and this limits the territory of his business.
  • No Credit of Input Tax: There has been no provision of input credit on B2B transactions. Thus, if any taxable person is carrying out business on B2B model, such person will not be allowed the credit of input tax paid from the output liability. Also, the buyer of such goods will not get any credit on tax paid, resulting in price distortion and cascading. This will further result in a loss of business as a buyer registered as a normal taxpayer will not get any credit when buying from a person registered under composition scheme. Eventually, such buyers might avoid purchases from a taxpayer under composition scheme.
  • No Collection of Tax: Though the rate of composition tax is kept very nominal at  0.5%, 1% or 2.5%, a taxpayer under composition scheme is not allowed to recover such tax from his buyer, as he is not allowed to raise a tax invoice. Consequently, the burden of such tax is kept on the taxpayer himself and this has to be paid out of his own pocket.
  • Penal Provision: Another provision which is heavily debated is the penal provision for a taxpayer under composition scheme. As per the GST Law, if the taxpayer who has previously been given registration under composition scheme is found to be not eligible for the composition scheme or if the permission granted earlier was incorrectly granted, then such taxpayer will be liable to pay the differential tax along with a penalty which can extend up to the amount of total tax liability i.e 100%.
  • Not applicable to the supplier supplying goods through E-commerce

Some Other Points:

  1. 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
  2. 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.

Author Bio

Qualification: CA in Practice
Company: GGS and Co
Location: Delhi, New Delhi, IN
Member Since: 28 Jun 2017 | Total Posts: 1

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23 responses to “GST: Composition Scheme for Small Manufacturers, Traders and Food / Restaurant Services”

  1. prakash kamalnayan kalani says:

    sir mai ice-cream trader hu mera turnover 40lac sai kum hai compostion schme mai tax lagegaa

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