Rationale(Objective)Behind Introducing Composition Scheme:-
It would be very difficult for every taxpayer to maintain the records of each invoice and pay tax as per the invoice value of the transactions as required to maintain as for complying the section 22 or 24, so they have an option to pay tax as a percentage of the turnover.
Registration Liability(section 10):
As per section 10 of the CGST Act, 2017, A registered person whose aggregate turnover** in the Last financial year is up to Rs. 150 lakhs (previously it was 100 lakhs), has the option to pay tax under a composition scheme in which the taxpayer can pay the tax at the concessional rate.
It shall include all kind of outward supplies like taxable supply, exempted supply, non-taxable supply or Zero rated supply.
Note: Exempted interest income shall not be considered while calculating the applicability of the composition scheme.
Note: if any person opted for composition Scheme, has received any supply which falls under RCM, then he shall be required to pay tax as applicable on such supply and not on the concessional rate under composition Scheme. In Simple words, the concessional rate is not applied in RCM Supplies.
However, for the following Special Category States, the limit is of Rs. 75 lakhs:
- Arunachal Pradesh
Note: Those registered persons who are engaged in the manufacturing of the following goods are not eligible to opt for composition scheme.
- Ice cream
- Pan Masala
There are so many amendments has been incorporated in the composition scheme from 01.04.2019 which results in more benefits to the registered persons.
Supply of Service:
Before the amendment, the registered persons engaged in supply of service (Other than restaurant services) are not eligible to opt for composition scheme. However, after the amendment, such persons are now eligible up to the higher of the following:
10% of the turnover in that state/UT in the previous financial year
Rs. 5 Lakhs
Note: these limit shall be applicable for the services other than restaurant services because for restaurant, the limit of Rs. 150 lakhs/Rs. 75 Lakhs (as the case may be) shall be applicable.
Rates of GST under Compositions Scheme :
The rates under composition scheme have been bifurcated in 3 categories, which are as follows:
|Eligible Registered Persons||IGST Rate|
|Restaurant Service Provider||5%*|
|Any other supplier||1%**|
The tax liability shall be calculated on the taxable supply of goods or services and not on the turnover. We checked turnover only to calculate the applicability of the composition scheme.
However, For any other suppliers, a rate of 1% shall be calculated on the Turnover in the State, not on the Taxable Supplies.
Invoices(Bill Of Supply):
A composition dealer is not eligible to charge tax on his outward supplies and since he cannot levy a tax on his invoice hence he cannot issue a Tax invoice. Instead, he shall issue “Bill of Supply”.
Input Tax Credit(ITC) Claiming:
Also, the registered person opt for the composition scheme shall not be able to claim ITC in GST because he is already paying the deposit at a concessional rate.
Tax Deposit under Composition Scheme:
Composition dealer has to deposit a tax on a quarterly basis within 18th of next month.
A composition dealer has to file a quarterly return within 18th of the next month from the end of the relevant quarter in form GSTR-4 in which he shall enter all the information related to inward supplies, tax payable and tax paid. The person shall be compulsorily required to file this return even as nil return.
If after the filing of the return, dealer notices any error or omission then it has the option to rectify such incorrect particulars in the subsequent returns up to the earlier of the following:
Due date of filing of 2nd quarter return of Next year
Date of furnishing the relevant Annual Return in form GSTR-9A
Recent Notification by Government:
Further, as per notification no.2/2019 issued on 07.03.2019, the government has given one more benefit for the small taxpayers. Those persons whose aggregate turnover is up to Rs. 50 lakhs but still they were not eligible for composition scheme, they have an option to pay central tax @ 3% each for CGST and SGST in intrastate supply and 6% for IGST in interstate supply.
In this scheme, only the name has changed from composition scheme to Central tax otherwise the other conditions are same i.e. depositing of tax or filing of the return, etc.
Following are the categories of persons who are not eligible to opt for composition scheme:
- A person making inter-state supply of goods. [eg. one state to another, the export of goods]
- Supplier of any service other than Restaurant services and Limited value services along with the main business. [Maximum value: 10 % of turnover within the state/UT or 5,00,000 whichever is higher ] ie if the value of these services exceeds the maximum limit then the person not eligible for the scheme.
- Supplier of non-taxable goods
- The person who supply goods through E-commerce operator.
- Manufacturer of specified goods. [Pan masala, tobacco, ice cream]
- Casual taxable person and NR.
Note: As we already discussed above, but it is very important to note that Interest received on extending deposit loan and advances shall be ignored completely.
Let’s understand the eligibility of composition scheme with an example for better understanding:
|Supplies||Turnover||To be taken for Comp. Sch.|
|1. value of intrastate supply under NCM||1,05,00,000||1,05,00,000|
|2. intrastate exempted supply||13,00,000||13,00,000|
|3. intrastate supply covered under 100% E/N||32,00,000||32,00,000|
|4. value of inward supplies covered under RCM||2,50,000||–|
|5. value of inward supplies covered under NCM||3,00,000||–|
Since the turnover is not exceeding Rs. 150 lakhs, hence, in this case, the dealer is eligible to opt for composition scheme.
Advantages of Composition Scheme
Those persons who have registered in the composition scheme shall have the following benefits:
- Availability of liquid Funds: When any person paid the GST amount to supplier then such GST would be shown in credit ledger of the buyer. This amount can be utilized by the buyer by adjusting it with his output liability but the whole process is blocking his working capital, which he can invest in the business.
However, under the composition scheme, the person shall have to pay tax at concessional rate hence he may have more fund which he can utilize for his business or other operating purposes.
- Rate of Tax: The tax rates are 0, 5, 12, 18 and 28 percent are defined in GST law and as we already discuss the tax rates applicable for a composition dealer which is certainly less than than the rate as to be paid by a normal taxpayer. Hence, the persons opted for composition dealer has to pay less tax as a comparison to the normal taxpayer.
- Records: As per section 35 of the CGST Act, 2017, a registered person shall have to maintain various kind of records which includes details of supply, ITC availed, computation, place of supply. As compared to the normal taxpayer, here registered person opted for composition scheme have to maintain less paperwork.
- Less compliance and Ease of doing business: This is biggest relief available to the small taxpayers. Under the composition scheme, the taxpayer has to file only quarterly return GSTR-4 as compare to the monthly return for normal taxpayers. That means there is no Requirement to file GSTR-1 and GSTR-3B. The objective of the composition scheme to give benefit to the small taxpayer. Now, by opting composition scheme, the calculation of GST become so easy that the registered person can own calculate its GST liability without appointing any outside party who calculates his GST amount.
Disadvantages of composition Scheme
There is nothing which gives you only benefits. If you are debiting something then you also have to credit something similarly there are disadvantages too under composition scheme which are as follows:
- Composition scheme not available for interstate supply: This is the biggest drawback in this scheme as if any person is doing business in 2 different states then he cannot be eligible for composition scheme. In simple words, an interstate supplier cannot go for this scheme.
Note: He can purchase from other states. There are no restrictions for purchases, the restriction is only on sale. Also, since the export of goods also called an interstate supply hence a registered person engaged in export of goods, cannot opt the composition scheme.
- ITC not available: A composition dealer is not able to avail the ITC. One of the objective to introduce the GST is to remove the cascading effect that means the tax on tax. However, if the person under the scheme is not able to utilize the ITC then the payment to be made under the scheme shall become a part of his cost which ultimately he will have to charge it from the customer and this will reduce the demand of his products.
- A tax invoice cannot be raised: Since the person cannot charge GST on his invoice hence he cannot raise the tax invoice. You may think, how will it make any difference, but if the person is not charging GST on his invoice then normally it increase the cost amount and charge in the bill of supply and due to increase in price, his demand reduced in market. Also, the buyer shall not be able to avail the ITC.
- Less understanding of Compliance: If the dealer fails to comply with the provisions of composition scheme then he shall have to pay interest and penalty and since the scheme is specifically made for the small taxpayer which does not have more knowledge about the law, the chance for error or omission increases.