Integrating GST Composition Scheme & Presumptive basis of Income Tax

Composition scheme is an option available to SME taxpayers with minimal compliance/filing requirement. The intent is to ease the process of doing business for SME taxpayers and reduce their undue harassment. The idea of this article is to provide the reader with complete insight of these schemes. The article is drafted primarily with GST point of view and wherever there is any inconsistency with Income Tax perspective, the same is mentioned therein.

Eligibility

Any taxpayer whose turnover from supply of goods in the previous year does not exceed Rs. 1.5 crores (Rs. 75.0 lakhs in Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Sikkim, Tripura & Uttarakhand) can opt for composition scheme under GST regime. Service providers can opt for this scheme, if their turnover does not exceed Rs. 50.0 lakhs in previous year. The turnover should be reckoned for the entity as a whole (on PAN basis) and not only with respect to turnover in standalone registration basis.

However, under Income Tax Act, the taxpayer whose turnover of goods does not exceed Rs. 2.0 crore or whose turnover of services does not exceed Rs. 50.0 lakhs can opt to pay tax on presumptive basis.

* The supplier of goods can supply services to the tune of 10% of the turnover of Rs. 5.0 lakhs, whichever is higher.

Eligibility chart for different business

(Note: This eligibility is subject to fulfillment of eligibility of turnover criteria for supply of goods and services)

Registration

The taxpayer can apply for registration in Form GST REG – 01 and may opt for paying tax under composition scheme. If the taxpayer opts for composition scheme in any one state, then he must opt for composition scheme in all other registrations and states.

No separate registration is required under Income Tax Act. The taxpayer may file his annual return in Form ITR-4 (earlier ITR-4S) at the end of the year to declare his income and tax thereon.

Conversion of normal taxpayer into composition taxpayer

Any normal taxpayer can convert into composition taxpayer by filing Form GST CMP-02 before the commencement of the financial year. He shall also file Form GST ITC-03 within 60 days providing details of stock and capital goods as at the date of conversion from normal to composition taxpayer, as ITC available to the taxpayer shall lapse and any shortfall from the tax calculated on such stock an capital goods should be paid by the taxpayer.

Once the taxpayer opts for composition scheme, he will continue to pay tax under this scheme unless he crosses the threshold limit or opts out of this scheme.

As no separate registration is required under Income Tax Act, the taxpayer can opt for paying tax on presumptive basis for any year.

Update: Due to COVID-19 outbreak, the taxpayer can file Form GST CMP-02 till 30^th June, 2020 and shall furnish the statement in Form GST ITC-03 within 31^st July, 2020.

Conversion of composition taxpayer into normal taxpayer

Any composite taxpayer can apply in Form GST CMP-04 to convert into normal taxpayer within 7 days of crossing the threshold limit or from the date when he wants to opts out of the scheme. He shall also file Form GST ITC-01 containing details of the stock within 30 days to claim the input tax credit on such stock, as he is eligible for input on such stock.

As per Income Tax Act, an assessee can opt out of presumptive taxation scheme in any year. However, if a person opts for presumptive taxation scheme, then he will not be allowed to re-opt this scheme for next 5 years.

For instance, where an assessee opts for taxation on presumptive basis for the year 2019-20 and continues the same for 2020-21 and 2021-22 but opts out for the year 2022-23, then he cannot opt again for presumptive taxation scheme for next five years, i.e. from 2023-24 to 2027-28​.

Operation of business by composition taxpayers

Inwards supplies and input tax credit:

• Supplies from both taxpayers within the state and outside the state can be received
• Input tax credit cannot be availed
• Liable to pay tax on reverse charge basis and cannot claim input of the same

Outwards supplies and output tax liability:

• Sale can be made only within the state in which registration is taken. No sale outside the state is permissible
• Taxpayer shall issue bill of supply instead of tax invoice and mention “Composition taxable person, not eligible to collect tax on supplies” at the top of each bill of supply
• Incidence of tax is upon the taxpayer and not passed upon the consumer
• Entire output tax liability shall be paid in cash only through electronic cash ledger
• Cannot sell goods through e-commerce platform

Accounts, records and audit:

• Required to maintain details of all stock, purchase and sale, production, input tax credit for 72 months from the due date of annual return
• Not required to get the books audited
• Shall mention the words – “Composition taxable person” on every notice or signboard at every place of business

Returns:

• Shall file quarterly returns in Form GST CMP-08 within 18^th of the month succeeding the quarter and pay tax along with filing such return
• Annual return in Form GSTR-4 shall be filed within 30^th April of the succeeding year
• Shall file annual income tax return in Form ITR-4 within 31^st July of the succeeding year. Entire tax shall be paid in advance in a single instalment within 15^th March of the year

Update: Due to COVID-19 outbreak, the taxpayer can file Form GST CMP-08 till 7^th July, 2020 and Form GSTR-4 within 15^th July, 2020.

Rates of taxation: 

Note: Income is determined @ 8% (6%, if the proceeds are received in any mode other than cash or bearer cheque) or more of the turnover under Income Tax Act. While determining such income it is assumed that all expenses relating to business have been allowed and no other expenses is allowed as deduction. WDV of assets will be derived after applying relevant depreciation rates however no deduction shall be available for the same.

Conclusion

The taxpayer may opt for composition scheme analysing the nature of his business and complexities involved in it. It is possible for a taxpayer to opt for composition scheme under GST Act and not opt for presumptive taxation under Income Tax Act, and vice versa. Further, though the taxpayer is not mandated under Income Tax Act, it is advisable to maintain the books of accounts to ascertain turnover and income of the business. It also enables the taxpayer to furnish the financials to any external agency like banks which is in consonance with all applicable laws.