GST has been structured in a way that essential services and food items are placed in the lower tax brackets, while luxury services and products have been placed in the higher tax bracket.
The GST council has fitted over 1300 goods and 500 services under four tax slabs of 5%, 12%, 18% and 28% under GST. This is aside the tax on gold that is kept at 3% and rough precious and semi-precious stones that are placed at a special rate of 0.25% under GST.
Under GST Regime, traders can opt as normal tax payer or composition dealer. Here we are discussing about composition scheme which has been made for the convenience of small traders. Any trader having annual turnover upto Rs. 1.50 crore of taxable supplies can opt for composition scheme. Manufacturers and traders who have opted composition scheme are required to pay total 1% as composition fee of turnover amount.
The objective of composition scheme was to enable the traders to do business in easy way. But composition scheme is beneficial for the traders who are dealing in products covered by higher GST slab rates. On the other hand, composition scheme is not beneficial for the traders who are dealing in products covered by GST slab rate of 5%.
Composition dealers also opt income tax presumptive taxation scheme under section 44AD of Income Tax Act and they declare minimum 8% net profit of turnover for income tax purpose. Thus, the gross profit comes to approximately 10% of turnover. The net tax liability of normal tax payer comes to tax amount payable on the amount of gross profit as he get input tax credit on the purchase amount. On the basis of gross profit, we can easily find that where GST composition scheme is beneficial and where GST composition scheme is not beneficial.
Here we assume turnover of Rs. 1 crore on which gross profit comes to Rs. 10 lakhs. Normal tax payer is required to pay net tax after adjusting input tax credit as detailed below :
Rs. 50,000 if GST tax slab rate is 5%
Rs. 1,20,000 if GST tax slab rate is 12%
Rs. 1,80,000 if GST tax slab rate is 18%
Rs. 2,80,000 if GST tax slab rate is 28%
The composition dealer is required to pay tax at the rate of 1% of 1 crore turnover = Rs. 1,00,000.
The above details clearly show that :
Composition scheme must give equal effect for all composition dealers dealing in different products. This is possible only when composition fee is made chargeable at the rate of GST slab rate on the amount of 10% gross profit of turnover of products covered by GST slab rates.