GST Composition Scheme
“GST Composition Scheme is an option which is available to a registered taxable person who is having turnover less than the prescribed limit to pay tax at a lower rate which is respect to certain specified conditions.
As in GST numbers of returns have been increased to 37 per year in normal due course and it require resources and expertise who can comply with compliances and file monthly return on regular basis, big companies have the comfort to deploy additional resources for GST however Small and Medium Enterprise (SME’s) don’t have luxury to incur more cost and time on compliances so to safeguard their interest both in terms of time and money , Government of India had introduced Composition Scheme, it was also there in VAT regime.”
Advantages Of Composition Scheme
- Limited Compliance: In normal registration assesse has to file 3 monthly return and one annual return, thus making total to 37 returns a year; however in composition scheme only a quarterly return would be uploaded under GSTR 4, thereby reducing their time to check on compliances and concentrate more on their business.
- Limited Tax Liability: As the persons who are under Composite Scheme will be liable to pay tax at a rate .5%, 1% and 2.5% instead of a standard rate of 18%.
- High Liquidity: Unlike normal tax payers, tax payers under Composite Scheme will be liable to pay taxes at a lower rate resulting in lesser chunk on his working capital, also he need not to worry about filing of return by supplier for claiming of input tax credit.
- Level Playing Field: Getting registered under composition scheme doesn’t means less business chances, as profit margin is high in composition scheme so Seller can offer competitive pricing and can have a good sales.
Disadvantages Of Composition Scheme
- Limited Scope for Business: This is one of the major drawback for the composition scheme, A taxpayer which is registered under the GST composition scheme cannot deal in inter-state transactions and cannot affect import-export of goods and services. He can expand his business only in his state and can only sale intrastate.
- Input Tax Credit Not Available: Under the composition scheme, credit of input tax paid on purchases of inputs from a normal GST tax payer will not be allowed and it would be treated as expense not as an asset. Also, the goods sold by composition supplier to any person than purchaser will also not enjoy input tax credit resulting in price distortion, cascading, loss of business to scheme holders.
- Tax To Be Paid From Pocket: Though the rate of tax for a scheme holder is lower the burden of such tax is kept on the taxpayer as he is not allowed to raise a GST invoice which results into paying tax from own pocket which indirectly increase cost of sales.
- Strict Penal Provision: As per the Model GST Law, if it is proved that assessee has taken wrong registration under composition or he is not fulfilling the criteria of scheme then such taxpayer will be liable to pay the differential tax along with a penalty which is equal to 100% of taxes put on him.
Transitional Provinces
There are two ways in which a person can transit his status:
- From Composite Scheme to GST Tax Payer.
- From Normal Tax Payer to composite scheme.
Now lets check implications in both cases:
- From Composite Scheme to GST Tax PayerAny taxpayer who is in Composite Scheme under current regime and transits to Regular Taxation under GST will be allowed to take the credit of Input, semi-finished goods and finished goods on the day immediately preceding the date from which they opt to be taxed as a regular tax payer.The inputs can only be availed subject to few conditions such as;1. Those inputs or goods are meant for making taxable outward supplies under GST provisions.
2. The dealer taking the Input Credit was eligible under the previous regime but could not claim due to registered under Composition Scheme.
3. The taxpayer claiming Input credit on goods, those goods should be eligible for such credit under GST regime.
4. The taxpayer must have a valid legal document of input tax credit i.e. he must possess an invoice evidencing taxes or duties have been paid.
5. Those invoices or documents should not be older than 12 months before the appointed date.
When a taxpayer is shifting from a normal scheme to composition scheme, the taxpayer has to pay an amount which shall be equal to the credit of input tax in respect to those inputs which are held as stock on the immediately preceding date from the date of such switch over. Any balance which is left in Input Tax Credit account after such payment, then that balance will lapse and not usable.
- From Normal Tax Payer to composite scheme.
Switching from normal scheme to composition scheme, taxpayer shall be liable to pay an amount which is equal to the credit of input tax in respect of inputs which is held in stock on the day immediately preceding the date of such switch over. The balance of input tax credit after payment of such amount, if any lying in the credit ledger shall lapse.
Withdrawing from GST Composition Scheme
Any taxpayer who is withdrawing from a GST Composition scheme must file FORM GST CMP-04 within seven days of occurrence of event mandating withdrawal from GST composition scheme. Further, after filing the application for withdrawal from GST composition scheme, the taxpayer must file GST returns till the due date of furnishing the return for the quarter ending September of the succeeding financial year or furnishing of annual return of the preceding financial year, whichever is earlier.
[su_button url=”https://www.complypartner.com/wp-content/uploads/2018/01/Form-GST-CMP-04.pdf” background=”#f37a08″ size=”4″]Form GST CMP-04[/su_button]
Eligibility
There are certain conditions that need to be fulfilled before opting for composition levy. They are as follows:
- Any assessee who only deals in supply of goods can opt for this scheme that means this provision is not applicable for service providers. However, restaurant service providers are excluded.
- There should not be any interstate supply of goods that means businesses having only intra state supply of goods are eligible.
- Composition scheme is levied for all business verticals with the same PAN. A taxable person will not have the option to select composition scheme for one, opt to pay taxes for other. For example, A taxable person has the following Business verticals separately registered – Sale of footwear, the sale of mobiles, Franchisee of McDonald’s. Here the composition scheme will be available to all 3 business verticals.
- Any dealer who is supplying goods through electronic commerce operator will be barred from being registered under composition scheme. For example: If M/s ABC sells its products through Flipkart or Amazon (Electronic Commerce Operator), then M/s. ABC cannot opt for composition scheme.
- Dealers are not allowed to collect composition tax from the recipient of supplies, and neither are they allowed to take Input Tax Credit.
- If the person is not eligible under composition scheme, tax liability shall be TAX + Interest and penalty which shall be equal to the amount of tax.
- Dealers who collect Tax at source u/s 56.
- Not a manufacturer of – ice cream, pan masala or tobacco (and its substitutes).
- Mandatory display of the words “Composition Taxable Person” on every notice and signboard displayed at a prominent place.
Composition Scheme Return
In composition scheme, only a quarterly return will be uploaded under GSTR-4 by:
18th July – 1st quarter 18th January – 3rd quarter
18th October – 2nd quarter 18th April – 4th quarter
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| S. No. | Download Form | Description |
| 1. | [su_button url=”https://www.complypartner.com/wp-content/uploads/2018/01/Form-GST-CMP-01.pdf” background=”#f37a08″ size=”4″]GST CMP-01[/su_button] | Intimation to pay tax under section 10 (composition levy) (Only for persons registered under the existing law migrating on the appointed day). |
| 2. | [su_button url=”https://www.complypartner.com/wp-content/uploads/2018/01/Form-GST-CMP-02.pdf” background=”#f37a08″ size=”4″]GST CMP-02[/su_button] | Intimation to pay tax under section 10 (composition levy) (For persons registered under the Act). |
| 3. | [su_button url=”https://www.complypartner.com/wp-content/uploads/2018/01/Form-GST-CMP-03.pdf” background=”#f37a08″ size=”4″]GST CMP-03[/su_button] | Intimation of details of stock on date of opting for composition levy (Only for persons registered under the existing law migrating on the appointed day). |
| 4. | [su_button url=”https://www.complypartner.com/wp-content/uploads/2018/01/Form-GST-CMP-04.pdf” background=”#f37a08″ size=”4″]GST CMP-04[/su_button] | Intimation/Application for withdrawal from composition Levy. |
| 5. | [su_button url=”https://www.complypartner.com/wp-content/uploads/2018/01/Form-GST-CMP-05.pdf” background=”#f37a08″ size=”4″]GST CMP-05[/su_button] | Notice for denial of option to pay tax under section 10. |
| 6. | [su_button url=”https://www.complypartner.com/wp-content/uploads/2018/01/Form-GST-CMP-06.pdf” background=”#f37a08″ size=”4″]GST CMP-06[/su_button] | Reply to the notice to show cause. |
| 7. | [su_button url=”https://www.complypartner.com/wp-content/uploads/2018/01/Form-GST-CMP-07.pdf” background=”#f37a08″ size=”4″]GST CMP-07[/su_button] | Order for acceptance / rejection of reply to show cause notice. |
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Example :-
[su_table]
| Particulars | Description | Registered As A Normal Tax Payer | Description | Registered As A Tax Payer Under Composition Scheme |
| 1. | Total Sales Value | 11,800 | Total Sales Value | 11,800 |
| 2. | Sales Value exclusive of taxes | 10,000 | Sales Value exclusive of taxes | 11,569 |
| 3. | GST @ 18% on sales value | 1,800 | GST @ 2% on sales value | 231 |
| 4. | Input Purchases | 5,000 | Input Purchases | 5,000 |
| 5. | GST @ 18% | 900 | GST @ 18% | 900 |
| 6. | Total Purchase Value (D+E) | 5,900 | Total Purchase Value (D+E) | 5,900 |
| 7. | Net GST Liability (C–E) | 900 | Net GST Liability (C–E) | 231 |
| 8. | Net Profit {A-(F+G)} | 4,100 | Net Profit {A-(F+G)} | 5,438 |
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Rates Of GST
Notwithstanding anything to the contrary contained in this Act but subject to the provisions of sub-sections (3) and (4) of section 9, a registered person, whose aggregate turnover in the preceding financial year did not exceed seventy five lakh rupees, may opt to pay, in lieu of the tax payable by him, an amount calculated at such rate as may be prescribed, but not exceeding,
- 1% of the turnover in State or turnover in Union territory in case of a manufacturer.
- 2.5% of the turnover in State or turnover in Union territory in case of persons engaged in making supplies referred to in clause (b) of paragraph 6 of Schedule II, and
- .5% of the turnover in State or turnover in Union territory in case of other suppliers.
The concept of Composition Levy is mentioned in Section 10 of the GST Act as follows:
Hence, any business registered in India with an aggregate sales turnover of less than Rs.75 lakhs in the preceding financial year can pay their GST liability in the form of a composition levy at prescribed rates. The aggregate sales turnover criteria for GST composition scheme was increased from Rs.50 lakhs to Rs.75 lakhs.
[su_table]
| Category Of Registered Person | CGST(Tax Rate) | SGST(Tax Rate) | Total |
| Manufacturers( Other than manufacturers of notified goods) | 1% | 1% | 2% |
| Suppliers( food or any other articles for human consumption) or any drink( other than alcoholic liquor for human consumption) | 2.5% | 2.5% | 5% |
| Other Supplies | 0.5% | 0.5% | 1% |
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Composition FAQ
Q 1. What is composition levy under GST?
Ans. The composition levy is an alternative method of levy of tax designed for small taxpayers whose turnover is up to ₹ 75 lakhs (₹ 50 lakhs in case of few States). The objective of composition scheme is to bring simplicity and to reduce the compliance cost for the small taxpayer ₹ Moreover, it is optional and the eligible person opting to pay tax under this scheme ca at normal rate.
Q.2 When will a person opting for composition levy pay tax?
Ans. A person opting for composition levy will have to pay tax on quarterly basis before 18th of the month succeeding the quarter during which the supplies were made.
[su_button url=”https://www.complypartner.com/wp-content/uploads/2018/01/FAQ_Composition_Blog-1.docx” background=”#f37a08″ size=”4″]See More FAQ[/su_button]