Composition Scheme under GST

Updated till 16/10/2017

The composition scheme has been a playground for research under GST. Perhaps it has been amended maximum of time. The composition scheme has been designed to simplify and reduce the burden of compliance for smaller taxpayers. Businesses opting for the scheme will see a lesser compliance burden as they will have to file returns only once in a quarter and relaxation. In this article, we’ve explained composition scheme under GST, who can apply, eligibility criteria how it can benefit small businesses.

What is Composition Scheme?

The section 10 of CGST Act, 2017 prescribe the provisions relating to composition levy which is meant for small businesses. The objective of composition scheme is to bring simplicity and to reduce the compliance cost for the small taxpayers.

Thus, an option has been provided where they can opt to pay a fixed percentage of turnover as fees in lieu of tax and be relieved from the detailed compliance of the provisions of law. Composition levy is generally opted by persons who are supplying goods & services or both to the end consumer.

Key Features

Eligibility: Turnover must be below Rs. 1 crore (Rs. 75 Lakhs for the North-Eastern States)
Tax rate: Fixed tax rate on the total sales turnover
Input Tax Credit: Not eligible for Input Tax Credit
Place of supply: Applies only to the Intra-State supplies
Return: No monthly filing, only Quarterly returns
Billing: Issues Bill of Supply & not tax invoice only those persons who fulfil all the following are eligible to apply for composition scheme:
Eligibility for Composition Scheme
Dealers dealing only in the intra-state supply of goods.
Dealers having an annual turnover below Rs. 1 crore (Rs. 75 Lakhs for north-eastern states) in preceding financial year.
He shall pay tax at normal rates in case he is liable under reverse charge mechanism.
Dealer not supplying through e-commerce operator.
Dealer not a manufacturer of – ice cream, pan masala or tobacco (and its substitutes).

Registration under Composition Scheme

There can be two cases under the process of getting registered as composite taxpayer:

Registration process under composition scheme for a person who is already registered under current tax regime

A person who is registered under the current regime and applying for the Registration under GST will be given Provisional Certificate first.
If that person want to get registered as a composite taxpayer under GST, he shall file an intimation in FORM GST CMP-01, duly signed or verified through electronic verification code (EVC).It may be noted that it has to be filed prior or within 30 days after the appointed day(July 1, 2017).
Further, he has to give the details of stock, whether purchased from registered or non-registered person, held by him before he has opted to get registered under the composition scheme in FORM GST CMP-03 within 60 days in the electronic form.
The registered person shall not collect any tax from the appointed day but shall issue bill of supply for supplies made after the said day.

2. Registration process under composition scheme for a person who is applying for fresh registration.

A person who is applying for the fresh Registration under GST has to file FORM REG-01 and under Part B of the form he has to select the option of Section 10 (Registration as a composite taxpayer).

Returns under Composition Scheme

The taxable person is required to furnish only one return i.e. GSTR-4 on a quarterly basis and an annual return in FORM GSTR-9A.

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.

Rate of Tax

The rate of tax prescribed for different categories of registered persons have been described below:

S.No	Category of Registered Person	Rate of Tax
1	Manufacturers, other than manufacturers of such goods as may be notified by the Government.	1%
2	Suppliers (Food and other articles for human consumption or any drink (other than alcoholic liquor for human consumption)	2.5%
3	Any other supplier eligible for composition levy under section 10 and these rules	0.5%

Benefits under GST Composition Scheme

Less Compliance

Under the normal scenario, a taxpayer under GST has to file minimum 3 returns monthly and one annual return. To be precise, he is compelled to file 37 returns in a year or penalty will be levied for non-compliance. For small suppliers and manufacturers, it is quite difficult to maintain so detailed books of accounts on a daily basis and record every transaction with supporting documents.

Reduced Tax Liability Another advantage of being registered with composition scheme is the rate structure. The rate is 1% for manufacturers, 2.5% for restaurant service providers, 0.5% for other suppliers of turnover.
High Liquidity In composition levy, dealer need not worry about his supplier filing return as he cannot take credit and will pay tax at a nominal rate.

Drawbacks of GST composition scheme

No inter-state business

A taxpayer registered under the composition scheme is barred from carrying out inter-state transactions and cannot offer import-export of goods and services.

No Credit of Input Tax:

Compounding scheme has no provision of input credit on B2B transactions. Therefore, if any taxable person is carrying out business on B2B model, such person will not be allowed the credit of input tax paid from the output liability. Also, the buyer of such goods will not get any credit of tax paid, resulting in price distortion and cascading effect.

Penal provisions:

While taking advantage of GST Composition scheme, one needs to take utmost care as the penalty is severe. If taxpayer is found wrongly registered under this scheme while not fulfilling eligibility criteria and therefore avoiding normal taxes. Then the person will have to pay taxes along with penalty equal to 100% of taxes levied upon him.

The composition scheme is quite beneficial to small suppliers, intra-state local suppliers and restaurant sector as it prevents them from various procedural compliances and gives a hassle free working environment. Under GST, composition scheme is introduced to safeguard the interests of small businesses.

Note – Please note that the above article is for education purpose only. This is based on our interpretation of laws which may differ person to person. Readers are expected to verify the facts and laws.