Introduction:

Taxation system of any kind requires several compliances which need to be adhere by the taxpayers to ensure fulfillment of all statutory provisions. Provisions include timely payment of taxes, filing of returns and maintaining prescribed records are essential for complying under taxation system. However, for making compliance’s easier for small businesses, many state governments have provided in their VAT system for payment of a composition levy by small businesses. On the same Line, GST laws also provide a composition scheme for small businesses. The GST Composition Scheme will make compliance of new tax laws i.e. GST hassle free for eligible businesses opting for the scheme.

Section 10 of the GST law contains the provision with respect to the registration of a taxpayer under the composition scheme. The basic fundamental principle behind the composition scheme is to minimize the burden of compliances for small taxpayers. In our country there are number of small businessmen those are self dependent, these prospective taxpayers of new regime of indirect taxation have limited resources, Knowledge and expertise to comply with all the mandatory procedures mentioned under the GST law.

Hence the government has provided composition scheme wherein any taxpayer whose turnover is below Rs 75 lakhs (as amended by the 16th GST Council meeting held on 11th June, 2017 earlier it was 50 lakhs) may opt not to register as a normal taxpayer. Instead, he may choose to get registered as a taxpayer under composition scheme and pay taxes on his supplies at a very nominal rate. However, he shall not be eligible to issue a tax invoice and also would not be able to utilize the credit of input tax already paid by him on his purchases.

Registration under Composition Scheme

Any existing taxpayer not under Composition Scheme may choose to opt for it (subject to being qualified), only from the beginning of the next Financial Year. The application will have to be filed on or before 31st March of the Previous Year so that returns can be filed accordingly. Dealers under Composition Scheme may be allowed to switch over to normal scheme even during the year if they wish to do so. However, they cannot switch over to Composition Scheme again during the same Financial Year.

Who Can Opt Composition Scheme

  • Taxpayers whose aggregate turnover does not exceed Rs. 75 lakh threshold in a Financial Year.
  • Person dealing in good (Intra- State) only.
  • Restaurants

Who cannot opt for composition scheme even if there turnover is below 75 Lacs.

  • Any service provider except restaurant service
  • Person dealing in goods which are not covered under this act like Liquor
  • Person having interstate supply
  • Person supplying through e-Commerce operator
  • Person manufacturing goods as notified by government

Hence these persons will not be eligible to take registration under Composition scheme in GST.

The GST Council in its meeting held on 18th June, 2017, has recommended that the turnover limit for Composition Levy for CGST and SGST purposes shall be Rs.50 lakh in respect of the following Special Category States i.e Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, and Himachal Pradesh, However The Council has also recommended that in case of Uttarakhand, the turnover limit for Composition Levy for CGST and SGST purposes will be Rs.75 lakh.

Returns under Composition Scheme:

A registered taxable person paying tax under the provisions of Composite Scheme shall furnish a return for each quarter in prescribed form in prescribed manner within eighteen days after the end of relevant quarter. GSTR-4 has been prescribed by the government as a tax return form to be filed by a dealer under Composition Scheme. The registered person shall make payment of tax no later than the last date on which he is required to file the return. Composition dealers need to furnish the first return for the period starting from the date on which they become a registered taxable entity till the end of the quarter in which the registration has been granted.

Returns to be furnished for every tax period whether or not any supplies of goods or services or both have been made during such tax period. Proper officer may cancel the registration from such date, including any retrospective date if the person opting for composition scheme does not furnish return for three consecutive tax periods i.e. three quarters. (Sec 29(2) (b)). The registered person shall furnish one annual return in FORM GSTR-9A for every year

Tax Rate under Composition Scheme:

Applicable Tax Rate under scheme of Composition will be as follow:

SR. No. Particulars GST Rate
1 Manufacturer-other than manufacturer of goods notified by Government 2% (CGST+SGST)
2 Food/restaurant services- other than alcoholic liquor for human consumption 5% (CGST+SGST)
3 Any other eligible supplier like Trader/agent 1% (CGST+SGST)

Salient features of the Composition scheme under GST:

  • This Scheme is available for Taxpayers whose aggregate turnover does not exceed Rs. 75 lakh threshold in a Financial Year.
  • Those who supply of goods within a state can only take advantage of this scheme. Inter-state suppliers will come under regular GST laws.
  • Rate of tax as prescribed under this Scheme will be very nominal and less than regular GST hence in results overall less tax liability
  • No Input Tax Credit is available for persons those opting for this scheme (section 17(5) of GST Act, 2017.)
  • This Scheme is a Voluntary Scheme hence Taxpayers need to make voluntary registration for getting the benefits of GST Composition Scheme. However, if the taxpayer crosses the minimum turnover limit of Rs. 75 lakh then he will be transferred to regular scheme.
  • Taxpayers who are already a part of VAT Composition Scheme also need to voluntarily register for this scheme.
  • A registered person opting for composition scheme shall not issue a tax invoice. Instead he will issue a Bill of Supply (Sec.31 (3) (c))
  • Instead of filing 3-4 returns monthly, taxpayers registered under this scheme will be required to file returns once every quarter.
  • Any Tax payable under Reverse Charge Mechanism will not be covered under the scheme. These taxes will be liable to be paid as normal tax payer.
  • A Taxpayer registered under composition scheme is not required to maintain detailed records as in the case of a normal taxpayer.
  • A Taxpayer registered under composition scheme shall mention the words “composition taxable person” on every notice or signboard displayed at a prominent place at his principal placeof business and at every additional place or places of business
  • If a taxable person is found not eligible for this scheme then the tax authorities can impose a penalty equal to the amount of tax on such person along with his tax liability. So utmost care needs to be taken when opting for this scheme

Limitations of GST Composition Scheme

  • Any dealer registered under Composition Scheme will not be eligible to take benefit of Input Tax Credit on his purchases.
  • A Composition Dealer is not allowed to collect composition tax from the buyer; hence this is an additional tax liability, the burden of tax is on the taxpayer only thus he has to pay taxes from his own pocket.
  • Another biggest drawback of this scheme is that the assessee cannot deal in interstate transactions or import – export of goods and services. He is barred from performing such actions if he wish to take advantage of this scheme, which in results limit his territory for expansion and can only conduct local or intra state transactions.
  • A buyer of goods may not give preference to a dealer under this scheme, as the buyer of those goods will also not be entitled to get the benefit of Input tax Credit.
  • Strict penal provisions in case of Non- Compliances.

Conclusion:

Large Business entities usually have all the required resources and expertise that can facilitate the complex legal compliance procedures. On the other hand, small and medium size enterprises, and start-ups will have to face difficulty in complying with these provisions due to lack of resources and adequate mechanism.

Hence, to lower the burden of compliances for small businesses, this composition scheme will be very beneficial for these classes of taxpayers, where they just have to pay tax at a minimum nominal rate based on their aggregate turnover. Earlier also to make compliances better for small business Houses, respective states have provisions in their Local VAT law about the composition scheme. Similarly in GST, composition scheme is introduced to safeguard the interests of small businesses.

Hence we may conclude that, GST composition scheme is introduced to safeguard the interests of small businesses. Composition Scheme under new tax regime will be quite beneficial to small traders, Small Suppliers, intra state local suppliers and restaurant sector as it prevents them from various Lengthy procedural compliances and gives a hassle free working environment.

Author Bio

Qualification: CS
Company: Arjun Tyagi & Co.
Location: Chandigarh, Chandigarh, IN
Member Since: 14 Jul 2017 | Total Posts: 2

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10 responses to “Guiding Note on Composition Scheme under GST Law”

  1. Ramchand says:

    Hello Mr.CS Arjun Tyagi
    What is the Composition Scheme Threshold limit for Jammu and Kashmir. Is it 50 Lacs or 75 Lacs. there is no mention about this in your post.
    Can you please clarifiy?
    Thanks.

  2. Tarunkumar D Trivedi says:

    A person doing trading business as well as mfg business having total t/o in all of both the business is below Rs.75 lacs will have to pay composition levy @1% for trading t/o and 2% for mfg t/o or will have to pay 2% for both t/o?

  3. Tarunkumar D Trivedi says:

    Aperson doing trading business as well as manufacturing business having t/o below Rs.75 lacs in all. How he will have to pay composition tax ? 1% qua the trading t/o and 2% qua the mfg t/o or 2% for both.

  4. Rupesh Kumar Jain says:

    What will be the turnover on which tax is payable, only taxable turnover or it includes exempt turnover also.

    • CS Arjun Tyagi says:

      There is no exempted turnover in this scheme.you will be liable to pay tax as per given rate on your whole turnover.

  5. Naresh Puchakayala says:

    HI sir,
    is limit for composition scheme is 50 lakhs or 75 lakhs.

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