Composition Scheme under GST

A composition scheme is one where the taxpayer has shows his intention to the authorities on being registered under this scheme. In case any such taxpayer fails to comply with the regulations of above mentioned registration, the treatment will be done like normal taxpayer and administration will be the same as of normal person. It is applicable for both, goods as well as services.

Composition Scheme under GST: Turnover and Rate of Tax

A person whose previous year aggregate turnover is less than Rs 50 lakh pays tax at 2.5% and more for manufacture and 1% and more for other.

Taxable Person excluded from GST Composition Scheme

Some persons are not eligible to apply for this scheme which includes persons who:

  • Supply services
  • Manufacture notified goods
  • Make supplies through e commerce and are liable to collect tax
  • Supply goods on inter-state basis or import/ export
  • Supply goods which cannot be levied tax under the act

Further, if any person has various business segments with the same PAN held by him, he needs to register for all the related businesses under the scheme. For example if a person has different business segments like groceries, electronics and textile, he should register all the segments listed above under the same composition scheme or should simply opt out from the scheme.

No tax, No credit

  • No credit of Input Tax: for B2B transactions, there is any provision of input credit. This means any business running on B2B model will not be getting credit of input tax paid from the output liability. Along with this, there will be no credit of tax for the buyer of goods which will result in cascading and price distortion. As a consequence the buyers may avoid purchases from a person registered under composition scheme which will result in loss of business. Input tax credit cannot be claimed by any scheme holding person even if taxable purchases are made by him from a regular taxable dealer.
  • No collection of Tax: Although, the tax slab for this scheme is as low as 2.5% and 1%; recovery of such tax is not allowed to be made by the registered scheme holder from the buyer, as the business is not allowed to issue a tax invoice. The tax amount is to be paid by the taxpayer himself and hence the burden of such tax is kept on the taxpayer.

Lesser Compliances

For a normal taxpayer, it is mandated to submit the monthly returns and one yearly return which totals up to 37 returns a year which is a high compliance based task and non performing of which may attract penalty. But, under this scheme the taxpayer needs to file only a quarterly return along with having less compliance of keeping records which makes him focus on the business more.

As there is not liability of issuing tax invoice and only bill of supply can be issued which makes it a convenient and easy option where lesser details are required.

Strict Penal Provisions

If an officer finds that a person is not eligible for this scheme and has still opted for it, he shall be made liable of paying differential taxes along with the specified penalty. Further, provisions of recovery and demand will be applied on him. This means that before application for registration under such scheme, a person needs to be sure about the eligibility in order to avoid penal provisions.

For small taxpayer doing such mistake (of registration being ineligible) the liability is only up to payment of tax at standard rate along with the penalty of same amount as that of tax.

Merits of the Scheme GST India

  • Limited Compliance: The business needs to comply less as far as returns, maintenance of records/ books and issuance of invoices, is concerned and the prime focus can be shifted towards the business only.
  • Limited Tax Liability: The rate of tax to be charged (2.5% and 1%) under this scheme is subsequently lower than that charged in normal cases (18%). This makes it lucrative for the taxpayers to register under this scheme.
  • High Liquidity: Taxes being paid at lower rates result in lowering the burden on working capital which may result in maintenance of a higher liquidity.
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