Composition Scheme under GST Act is a provision where a registered taxable person, whose aggregate turnover in the preceding financial year does not exceed Rs. 50 lakh, to pay, in lieu of the tax payable by him, an amount calculated at such rate as may be prescribed, but not more than 2.5% in the case of a manufacturer and 1% in any other case, of the turnover in a State during the year.
This provision of the Composition Scheme under GST was introduced keeping the best interests of small businesses in mind. These businesses often face challenges of maintaining a timely compliance with the statutory bodies of the country.
The compliance requirements such as payment of taxes, return filings, record maintenance etc. sometimes pose a major challenge for small businesses. At present, several State Governments have similar provisions for payments of a Composition levy of VAT for specific small businesses
At present, several State Governments have similar provisions for payments of a Composition levy of VAT for specific small businesses that makes compliance easier for them without burdening them with the maintenance of records, registers and returns in abundance.
Section 8 of the Model GST Law deals with the provisions for Composition Scheme that permit the taxpayer to choose for making GST payments as a fixed percent of the business turnover rather than paying those taxes under regular norms of the GST law.
Some Important Highlights of the Composition Scheme under GST
1) The composition scheme under GST is applicable for businesses dealing with goods only. This provision is not applicable to taxpayers in the service sector. However small restaurants get a reprieve under GST. The same conditions apply for the same i.e they need to have an annual turnover of less than Rs. 50 lakhs. These restaurants can avail the Composition Scheme under GST by paying a flat tax rate of 5% (2.5% central GST and 2.5% state GST), as decided by the GST Council.
2) Traders and Manufacturers availing the Composition Scheme under GST will be taxed at a rate of 1% and 2% respectively.
3) The Composition Scheme under GST is applicable for Intra-State supplies only.
4) Restrictions for the composition scheme under GST are imposed on a taxpayer if they are involved in the following:
(a) who is engaged in the supply of services
(b) who makes any supply of goods which are not leviable to tax under the GST Act
(c) who makes any inter-State outward supplies of goods
(d) who makes any supply of goods through an electronic commerce operator who is required to collect tax at source under section 56
(e) who is a manufacturer of such goods as may be notified on the recommendation of the GST Council
5) Furthermore, no such permission of the Composition Scheme shall be granted to a taxable person unless all the registered taxable persons, having the same PAN as held by the said taxable person, also opt to pay tax under the provisions of the Composition Scheme under GST.
6) If any individual taxpayer has various businesses under different segments such as Textiles, Electronics & Accessories and Groceries, in such conditions, the said individual needs to register all the above-mentioned segments collectively under the Composition Scheme or not opt at all for the aforementioned scheme.
7) The Reverse Charge Mechanism that is applicable for any normal taxpayer, the provisions of the same will not be covered under the Composition Scheme. The tax payable will have to be paid as a normal taxpayer only under the standard GST rates.
Note: “Reverse Charge’’ in the above context means the liability to pay tax by the recipient of the supply of goods or services instead of the supplier of such goods or services in respect of such categories of supplies as notified under sub-section (3) of section 8 of the Model GST.
8) Any taxpayer that has opted for the composition scheme under GST has to file only one return on a quarterly basis in Form GSTR- 4 and one return on an annual basis in Form GSTR-9A.
Advantages of the Composition Scheme under GST
1) Ease of doing business – One of the major advantages of the composition scheme under GST is the ease of doing business as a result of limited compliances with respect to the filing of returns, maintaining records and issuing the relevant invoices from time to time.
2) A decrease in tax liability – Under composition scheme, the liability on taxes is limited as compared to regular taxpayers because the former is liable to pay taxes at a rate not less than 2.5% for manufacturers and 1% for other cases whereas the latter shall be liable to pay taxes at around 18% rate.
Disadvantages of the Composition Scheme under GST
1) No Input Tax Credit – Unlike taxpayers under the regular scheme, Input credits under GST shall not be applicable to those individuals that have opted for the Composition Scheme under GST.
2) Limitations in Areas of Business – Any taxpayer under the scheme is barred from doing Inter-State supplies and hence cannot carry out import and export of goods and services. Thus limiting the territory for carrying out business.
3) Penal provisions – Adequate care needs to be taken while opting for the composition scheme under GST. If found ineligible at any point of time or if the permission being granted earlier was found to be incorrect then the taxpayer is liable to pay the differential tax along with the penalty equivalent to the tax.
4) No collection of GST Tax – The person under this scheme is not permitted to collect GST and the GST tax has to be borne by the person out of the sale proceeds.
Ideally, the Composition Scheme under GST is well suited to SMEs wherein the necessary support system does not exist with respect to bookkeeping, the compilation of details required for Input Tax Credits, maintenance of relevant documents etc. This scheme is highly recommended for those businesses wherein the incidence of GST on Inputs is negligible. For more details on the Composition Scheme under GST, you can talk to our experts at Integra Books.