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Composition Tax Scheme under GST

Composition scheme under the law is for small businesses. This is to bring relief to small businesses so that they need not be burdened with the compliance provisions under the law. 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 would be generally opted by persons who are supplying goods & services or both to the end consumer.

FAQs about Composition Scheme:

1.Who is Eligible ?

Not everyone is eligible to enrol under this scheme. It is meant for taxpayers whose aggregate turnover does not exceed Rs 1.5 crore threshold in a Financial Year.

Turnover of all businesses with same PAN has to be added up to calculate turnover for the purpose of composition scheme.

2.What is the Tax Rate ?

Rate of tax as prescribed will be less than regular GST but not less than 1% of the turnover during the Financial Year. Tax rates under the scheme are expected to be between 1% and 5%.

3.Eligibility for Input Tax Credit

As per section 16, those goods and services on which Composition Tax has been paid (under section 8) do not qualify for Input Tax Credit.

4.Applicability of this Scheme

Intra-state businesses - those who supply within a state can only take advantage of this scheme. Inter-state suppliers will come under regular GST laws, hence can only be normal tax payer.

5.Reverse Charge under Composition Scheme -

A Composition Dealer has to pay tax under Reverse Charge Mechanism wherever applicable. The rate applicable to the supplies is the rate at which GST has to be paid. This means that rate under composition scheme should not be used for reverse charge purposes.

6.Process of Application

Taxpayers need to make voluntary registration every year for getting the benefits of GST Composition Scheme. However, if the taxpayer crosses the minimum turnover limit of Rs. 75 lakh then he will be transferred to regular scheme. Note- Taxpayers who are already a part of VAT Composition Scheme also need to voluntarily register for this scheme.

7.Type of Returns

Quarterly returns – Instead of filing 3-4 returns monthly, taxpayers registered under this scheme will be required to file returns once every quarter.

8.Type of Invoice Record

Bill of supply not tax invoice – Unlike regular scheme where a taxpayer needs to present tax invoice to the tax authorities, taxpayers registered under this scheme need to present bill of supply.

9.What is the Penalty?

If a taxable person is found not eligible for this scheme then the tax authorities can impose a penalty equal to the amount of tax on such person along with his tax liability. So utmost care needs to be taken when opting for this scheme and paying taxes.

10.Who cannot opt for Composition Scheme?

The following individuals cannot opt for Composition Scheme:

  • Suppliers who provide services
  • Supplier who supply exempt goods
  • Suppliers involved in inter-state transactions
  • E-commerce operators/aggregators
  • Casual taxable person or a non-resident taxable person
  • Manufacturers of ice-cream, pan masala and tobacco & tobacco substitute

11.Returns under Composition Scheme

A registered taxable person paying tax under the provisions of Composite Scheme shall furnish a return for each quarter in the prescribed form in the prescribed manner within eighteen days after the end of relevant quarter.

FORM GSTR-4 has been prescribed by the government as a tax return form to be filed by a dealer under Composition Scheme.

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.

12.What happens when a business opts out of the composition scheme?

A business owner availing composition scheme can opt out of the scheme, and instead choose the normal tax scheme with benefit of ITC. The credit will be calculated based on input, semi-finished and finished goods held in stock.

Note: You can switch between a normal vendor or compounding vendor only once during a particular financial year.

12a.Transition from Composition Dealer to Normal Dealer

Section 16(3) of Model GST Law states that when a taxpayer ceases to pay composition tax and becomes liable to pay tax as a regular taxpayer under GST then he is eligible to take Input Tax Credit in respect of inputs held in stock and inputs contained in semi-finished and finished goods held in stock as on the day immediately preceding the day from which he becomes liable to pay tax under regular scheme.

12b.Transition from Normal Dealer to Composition Dealer

As per section 16(12) of Model GST Law, when a taxpayer liable to pay tax as a regular taxable person switches over as a taxable person for paying tax under section 8 (GST Composition Scheme), then he needs to pay an amount by way of debiting in the electronic credit /cash ledger equivalent to Input Tax Credit in respect of inputs held in stock and inputs contained in semi- finished and finished goods held in stock as on the day immediately preceding the day of such switch over.

13.Disqualification and Penalty

If tax authorities believe that a business is wrongfully enrolled or not eligible, they may disqualify the business from the composition scheme or demand a penalty equal to the tax amount owed. In case of late filing of GSTR-4, the business owner will be fined Rs. 100 per day to a maximum amount of Rs. 5,000/-. Also, not furnishing returns for 3 consecutive tax periods may result in cancellation of registration by the tax authorities.