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GST Composition Scheme……….to be or not to be

To be, or not to be, that is the question: Whether to get befitted as Composition dealer Or to become a regular taxpayer? To deal with RCM only, to deal with RCM, matching of ITC, tax on advance payment and transition & so on

CA Abhijit Dongaonkar

To be, or not to be, that is the question: Whether to get befitted as Composition dealer Or to become a regular taxpayer?

To deal with RCM only, to deal with RCM, matching of ITC, tax on advance payment and transition & so on;

When we have shuffled off this mortal coil, Must give us pause—there’s the respect That makes calamity…………

Like Hamlet musing, we tend to compare between options of becoming taxpayer under Composition Scheme or to become regular taxpayer with all jargons like transition, matching concept and Reverse Charge Mechanism, which in either case seems to be inevitable and the fear of the uncertainty of various provisions & section of GST and its impact on business…

 Let’s understand one side of the coin…. the Composition scheme

What is Composition Scheme?

Act has provided simplified methodology of levy for small taxpayer, the composition levy. The objective of composition scheme is to bring simplicity and to reduce the compliance cost for the small taxpayers.

How it Works?

Small taxpayer has an option to pay tax on gross turnover calculated at following percentage, in lieu of the regular tax rate payable by him:

Sr No Category of Registered Person Rate of Tax
1 Manufacturer except Ice-crème, Pan Masala, Tobacco 1% CGST+ 1 %SGST
2 Restaurants 2.5% CGST + 2.5% SGST
3 Traders or any other person (Except Services) 0.5%  CGST + 0.5% SGST

Taxpayer has to intimate option of Composition levy through Common Portal as follows:

Sr No Category of Registered Person How to Opt Time Limit Effective Date of scheme
1 Exiting VAT/Excise Registered person migrating to GST Form GSTCMP-01 &

Form GSTCMP-03

Prior to 22nd June 2017 or upto 16th Aug 2017 Within 60 days from date of exercising option 1st July 2017
2 Person getting first time registered under GST Law Part B of FORM GST REG-01 At the time of applying for new registration Date of starting of business
3 Any Registered person Form GSTCMP-02 and FORM GST ITC-03 Prior to commence of financial year Within 60 days from commencement of financial year.

 

Beginning of financial year

Composition dealer will not collect tax on his outward supply and accordingly  recipient goods of will not avail input tax credit on such purchases.

Eligibility Conditions for compositions levy

  • Aggregate Turnover in the preceding financial year did not exceeds Rs. 75 Lacs (Rs  50 lacs in few states)
  • He is not engaged into supply of Services (Except Restaurant)
  • He is not engaged into supply of exempt goods
  • He is not engaged into making of any inter-state outwards supplies of goods
  • He is not supplying goods through electronic Commerce operators who is require to deduct TDS.
  • He is not engaged into manufacturing of Ice-Cream or Pan Masala/ tobacco or such other goods as may be prescribed.

Aggregate turnover for this scheme will be calculated on all India bases and will includes value of all taxable supplies, exempt supplies and exports, but would exclude inward supplies under reverse charge.

What are Restrictions?

  • The registered person shall not collect any tax from recipient of supplies made by him and he will not be eligible for input tax credit from effective date of exercising the option.
  • If the registered person is having branches in other states, option exercised in 1 state shall be binding in all states.
  • Balance of Input Tax Credit in electronic credit ledger on date of exercising of option shall be reversed
  • He shall mentioned the word “Composition taxable person not eligible to collect tax “ on top of bill of supply and “Composition Taxable Person” on signboard.
  • He is not causal tax person or non-resident taxable person.

Transition to GST Composition Scheme

Exiting VAT/Excise & Service dealer intended to opt for composition scheme shall be required to comply with following:

  • On 22ndJune 2017, i.e. the appointed day, stock of dealer intended to opt for composition scheme does not contain purchases from inter-state dealer/branch or imported material
  • Tax has been paid on stock as on 22ndJune 2017 for goods purchases from unregistered dealer

What are the Benefits of the Scheme?

  • Filing single quarterly return in Form No GSTR-4 within 18 days from end of quarter, which shall contain invoice details of inward supplies from registered (Intra-state and inter-state) person, unregistered person and consolidated details of outward supply
  • Quarterly tax Payment within 18 days from end of quarter
  • Submission of Annual Return within 9 month from end of financial year

Intent of scheme is that dealer shall deal only in tax paid goods, thus no relief is provided to composition dealer towards compliance of Reserve Charge Mechanism on purchases from unregistered dealer.

No relaxation in maintenance of Accounts and Records to Composition dealer except for getting books of accounts audited from CA or Cost Accountants and submission of Reconciliation statement.

Withdrawal from the Scheme

Scheme also given exit route, which can be opted through application in FORM GST CMP-4 on common portal.

If dealer opts for exit route and become regular tax payer, he will be entitled to take credit of input tax in respect of following by filing statement in FORM GST ITC-01:

  • inputs held in stock,
  • inputs contained in semi-finished goods
  • finished goods held in stock and
  • on capital goods

Credit of capital goods shall be calculated on pro-rata basis and shall be reduced to the extent of use of asset considering useful life of asset as 5 years.

Withdrawal from scheme in one location shall be automatically applicable for all other place of business.

Validity of Scheme:

Option exercised for Composition scheme shall be valid if:

  • Dealer has stratified all conditions provided in Section and rules of scheme
  • This option shall automatically laps on crossing of aggregate turnover of Rs. 75 Lacs or Rs. 50 Lacs, as may be applicable

If dealer options become invalid due to breach of any of above conditions, he has to intimate through common portal in FORM GST CMP-4 within 7 days from date of becoming ineligible.

Conclusion:

Like Hamlet’s, dilemma in our mind will be continued mainly due to restriction imposed by the scheme:

  • To deal only with duty paid items and stock
  • Geographical restriction for doing business
  • Restriction on goods or services to be traded
  • Restriction  for  e-commerce platform, it is to be noted that in today’s era even restaurant are also supplying services through e-commerce operator like Foodpanda or Swiggy
  • No Stock of inter-state purchases during transition to GST from VAT/Service Tax

Moto of the GST is open market through-out the country; however, for composition dealer restriction like no inter-state sales, no supply of services and non-use of e-commerce platform will work as entry barrier.

It is said that “The grass is always greener on the other side of the fence” thus we can keep exploring other side of the fence till 16th Aug 2017 before deciding on composition scheme.

Applicable Sections, Rules and Notification:

Applicable Sections of CGST Act: Sec 10- Composition Scheme, 17(5)(e)-Blocked Credit, 18(1)( c)- ITC in case of exit, 18(4)- Reversal of ITC , 31(3) (c)-Invoicing , 35- Accounts  & Records 39( 2)-Furnishing of Returns

Rules: 3-7-Composition Scheme, 49- Rules for Bill of Supply, 56- Maintenance of Accounts, 62- Returns, 85- Payment of taxes

Forms: GSTR-4- Quarterly Return, GST CMP-01- Migration of Exiting Tax Payers, GST CMP-03, Part B of FORM GST REG-01, GSTCMP-02, GST ITC-03, GST CMP-4, FORM GST ITC-01

Notifications: 01/2017 (CGST)-  Appointed date, 03/2017 (CGST) –Composition Rules 08/2017(CGST)- Turnover limit

New GST Rate on Services

View Comments (8)

  • A good and informative article
    will it be able to publish elabarative transitional relief provisions which help to many professionals

  • Thanks sir, I really happy with your helpful tips and mail, not this time only its every time

  • Sir please give me explanation about stock as on 30/06/2017 whether composition dealer is liable to pay vat tax on closing stock some expert say that dealer is liable to pay vat tax on closing stock because he is taking the benifit of input tax

    • No such requirement, as you will be selling goods under GST era, GST will be paid on sales, thus VAT is not required to be paid

  • My dear
    all though this article is very good and having delivered a good tone of knowledge. Thanks for your efforts.
    Please let me know the fate of the closing stock as on 30-06-2017 which was purchased from the Registered dealers after paying vat but VAT paid on such purchases are fully used under VAT Act i.e. having NIL ITC on 30-06-2017. Whether I have to pay any sort of TAX including RCM on such stock in case if I opt for composition scheme.
    Hoping to have a sure response from side.
    Thanks in advance.

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