CA S G Karwa
From 1/4/2019, turnover Limit for eligibility under Composition Scheme for Goods has been increased. The limit of annual turnover in the preceding financial year for composition option is increased from Rs. 1 crore to 1.5 crore. After this change, many medium sized businesses will become eligible for composition scheme. Further now composition dealers will have to file return on Annual Basis instead of quarterly.
Composition scheme is an alternative method of levy of tax on small dealers. Composition dealers are required to pay tax at a single fixed rate without ITC benefit. Composition rate applicable to traders and manufacturers is 1%. The basic objective of Composition scheme is to reduce compliance cost for small businesses. Composition dealer is neither permitted to collect any tax and nor can avail any credit of tax paid on his purchases.
In view of the increased limit, composition will become much more attractive now. But it is not suitable/ viable for all types of businesses. The question arises as to what type of businesses will be benefitted by opting for composition.
There are certain points to be kept in mind while deciding about suitability of composition.
- Dealers engaging in inter-state trade are not eligible for composition option. In other words, dealers opting for Composition cannot sell their goods in interstate transaction. But they can purchase goods from other states.
- Dealers supplying GST exempted goods are also not eligible for composition option.
- Composition option is not economically viable for Business to Business transactions. If a composition dealer is working on B2B model, his buyers (who are registered as regular dealers) will also not get any credit of tax paid by them which will increase their cost. Hence composition is more suitable for retailers supplying on B2C basis, where the customers are not bothered about ITC on their purchases.
- The best way to arrive at proper decision regarding benefit of composition to a business will be to do a cost benefit analysis by comparing the tax impact for the dealer under the two options (Regular vs Composition).
Tax liability of the dealer under regular registration can be worked out based on estimates of his turnover of different products or group of products and the gross margin on each product/ group falling under different tax rates. Here the gross margin means difference between the dealer’s purchase prices and sale prices of different goods. For example, if purchase price is 100 and sale price is 115, it means that the margin is 15%. Once the above computation is made, the tax amount under the two options can be compared to arrive at proper decision.
Let us examine the matter with some practical examples of retailers who are selling to individual consumers who are not interested in ITC on their purchases. Further, it is assumed that the seller’s gross selling price (including taxes) to the customer will be the same whether he is registered as a regular dealer or a composition dealer. The reason is that it doesn’t matter for the customer whether the dealer is registered as regular dealer or composition dealer. Hence the nature of registration will not affect the price paid by the customer.
The first example is that of a textile retailer selling different products such as suiting, shirting, sarees and readymade garments. His turnover and margin for different items are estimated as under:
Product |
GST rate |
Purchase price (Basic) |
GST on purchase |
Purchase price (incl. tax) |
Gross Margin % |
Total sale value Incl. tax |
Break-op of sale value |
Net GST (after ITC) |
|
Sale value (Basic) |
GST on sale |
||||||||
A |
B |
C= A x B |
D= B + C |
E |
F= D + E |
G |
H |
I= H – C |
|
Suiting, shirting, sarees |
5% |
2000000 |
100000 |
2100000 |
20% |
2520000 |
2400000 |
120000 |
20000 |
Garments (below 1000/-) |
5% |
1200000 |
60000 |
1260000 |
25% |
1575000 |
1500000 |
75000 |
15000 |
Garments (above 1000/-) |
12% |
7000000 |
840000 |
7840000 |
30% |
10192000 |
9100000 |
1092000 |
252000 |
10200000 |
1000000 |
11200000 |
14287000 |
13000000 |
1287000 |
287000 |
|||
As per above calculation, he will be paying net tax of Rs. 2,87,000 if he goes for registration as a regular dealer and his gross margin will be Rs. 2800000. If the dealer goes for composition option and sells the goods for the same price of Rs. 14287000, then he will be paying tax of only Rs. 142870 (1% on his turnover) and his margin will increase to Rs. 2944130. Thus, the dealer will be benefitted by going in for composition.
| Regular dealer | Composition dealer | |||
| Total sale value | 14287000 | Total sale value | 14287000 | |
| – Total purchase | -11200000 | – Total purchase | -11200000 | |
| – Net GST (after ITC) | -287000 | – Composition tax | -142870 | |
| Margin | 2800000 | Margin | 2944130 |
Now we take example of another person in a different type of business where regular registration may work out more beneficial over composition. For example, a dealer is having a general store where he sells various types of items falling under GST rates of 5% and 12%. His turnover and margin for different items are estimated as under:
Product |
GST rate |
Purchase price (Basic) |
GST on purchase |
Purchase price (incl. tax) |
Gross Margin % |
Total sale value Incl. tax |
Break-op of sale value |
Net GST (after ITC) |
|
Sale value (Basic) |
GST on sale |
||||||||
A |
B |
C= A x B |
D= B + C |
E |
F= D + E |
G |
H |
I= H – C |
|
Items with GST 5% |
5% |
4000000 |
200000 |
4200000 |
10% |
4620000 |
4400000 |
220000 |
20000 |
Items with GST 5% |
5% |
5500000 |
275000 |
5775000 |
15% |
6641250 |
6325000 |
316250 |
41250 |
Items with GST 12% |
12% |
600000 |
72000 |
672000 |
25% |
840000 |
750000 |
90000 |
18000 |
10100000 |
547000 |
10647000 |
12101250 |
11475000 |
626250 |
79250 |
|||
Here the dealer will be paying tax of Rs. 79250 under regular option. But under composition option, his tax outgo will be Rs. 121013 (1% on his turnover) and this increase in tax will impact his profit margin adversely. Hence in this case regular registration may be more beneficial than composition option as detailed below:
| Regular dealer | Composition dealer | |||
| Total sale value | 12101250 | Total sale value | 12101250 | |
| – Total purchase | -10647000 | – Total purchase | -10647000 | |
| – Net GST (after ITC) | -79250 | – Composition tax | -121013 | |
| Margin | 1375000 | Margin | 1333237 |
Thus it is clear that composition is not suitable for all businesses. Broadly, it can be concluded that a business earning higher margins or dealing in goods attracting higher GST rates will find composition option more beneficial.
How can a taxpayer opt for composition scheme under GST?
To opt for composition scheme, a taxpayer has to file intimation in form GST CMP-02. This can be done online by logging into the GST portal. This intimation should be given before the beginning of the Financial Year.
Here it may be noted that a Composition dealer can come out of the scheme at any time by making an application. Hence the dealer (who is otherwise eligible for composition option) should evaluate pros and cons of composition periodically and if the choice of composition turns out to be wrong, he can change his decision.
Disclaimer: Only the salient features of composition scheme have been discussed in this article. Businesses are advised to consult their tax consultants while deciding about the matter. The author may be contacted at sgkarwa@rediffmail.com.
Author Bio
Thank you Sir, well analysed and thought provoking.