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Recent Articles Of GST
Composition Scheme Under GST
Introduction
Composition Scheme is an alternative method of levying tax which is applicable to small assessees whose turnover is less than Rs. 1.5 Crore (Rs.75 lakhs in case of a few States), designed for them. This is a popular scheme among small businesses and helps in promoting business in India. The objective of the composition scheme is to bring simplicity and reduce compliance costs for small assesses.
Further, this scheme is optional. People who opt composition scheme pay tax at a conceational rate i.e. 1% 5% and 6% instead of paying tax at the normal rate.
Benefits of the Composition Scheme:
In the Composition scheme, 4 quarterly and 1 annual return have to be filed, whereas normal taxpayers have to file 25 returns {12 GSTR-1 + 12 GSTR-3B + 1 Annual return (if applicable)} in a year. In the Composition scheme, the compliance part is less as compared to the normal scheme.
- Less expensive compliance:
The person who does not have the resources to comply with complex rules & regulations of GST can opt composition scheme. In the composition scheme quarterly return file. This reduces the compliance burden on small taxpayers, this results in less time and low cost required to file the return in compared to a normal taxpayer. - Lower tax rates:
Registered taxpayers under the Composition Scheme pay tax at lower rates compared to normal taxpayers.
For example, manufacturers and traders pay only 1% of turnover, while restaurants pay 5% of turnover.
Drawbacks of opting for the Composition Scheme:
While there are several benefits of being registered under the GST Composition Scheme, there are also drawbacks that need to be addressed:
No pass on of Input Tax Credit (ITC): Persons opting for the Composition Scheme cannot pass on ITC to other persons.
No benefit of ITC: ITC is not available on goods, services, and capital goods purchased.
Limited business area: If a person has opted for the composition scheme, they cannot make inter-state supplies. This means you can only sell your goods within the state. Your business will be limited to your state only. If you want to expand your business outside the state or export, you will have to opt out of the composition scheme.
Tax payment from own pocket: Although the GST rates are quite low under the Composition scheme, the taxpayer cannot collect the GST amount from the buyer. The tax amount is considered as part of the total turnover. Taxpayers have to pay GST from their own pockets, and they also need to mention at the top of the bill of supply that they are a Composition Dealer and are not eligible to collect tax on supplies.
Low interest of purchase by registered persons under the normal scheme: In the Composition scheme, the benefit of Input Tax Credit (ITC) cannot be passed on, which is why individuals registered under the normal scheme prefer not to purchase goods/services from Composition dealers. This is because the amount of tax becomes part of the cost since ITC cannot be passed on.
Who is eligible for the Composition Scheme under GST?
The eligibility of a taxpayer to opt for the Composition Scheme depends on their business turnover.
Turnover limit in case of Composition Levy for Goods:
Small taxpayers with an aggregate turnover not exceeding Rs. 1.50 Crore in the previous financial year are eligible for the Composition Scheme. The turnover limit for restaurant service providers remains the same.
For the following States, the turnover limit is Rs. 75 lakhs:
- a) Arunachal Pradesh
- b) Assam
- c) Manipur
- d) Meghalaya
- e) Mizoram
- f) Nagaland
- g) Sikkim
- h) Tripura
- i) Himachal Pradesh
The turnover of all businesses under the same PAN must be added up to calculate turnover for the purpose of this scheme.
Example: If you have registered under GST in Madhya Pradesh and Rajasthan states, then you need to check the turnover limit for both states to determine eligibility.
Turnover limit in case of Composition Levy for Services:
According to Section 10(2A), in the case of a composition scheme for service providers, the limit of aggregate turnover is not more than Rs. 50 lakhs in the previous financial year, then such person can opt composition scheme.
Person who is not eligible for Composition Scheme:
A taxable person who wants to pay tax at concessional rates can opt for this scheme, where GST will be paid at the notified rate by the Government.
However, there are cases where this scheme cannot be opted for, such as:
- Supplies on which GST is not charged as per the GST Act (e.g., petrol, diesel, etc.).
- Inter-state outward supplies.
- Persons engaged in manufacturing of notified goods by the Government (e.g., ice cream, pan masala, tobacco, aerated water, etc.).
- However, if a person engaged in trading of these goods can opt Composition Scheme.
- Casual taxable person and non-resident taxable person.
Persons providing services (except for restaurant and outdoor caterers) with a turnover exceeding Rs. 50 lakhs in the preceding financial year.
If a registered person supplies both goods and services, then they can provide services up to Rs. 5 lakhs or 10% of the preceding year's turnover, whichever is higher, without opting out of the composition scheme. Note: When computing the value of services, interest received on loans, deposits, or advances should not be counted in turnover.
Example-1: Mr. XYZ & Company deals with in both goods and services.
Details of the Turnover of the preceding financial year:
Sales of Goods: Rs. 38 Lakhs
Sales of Service: Rs. 22 Lakhs
Interest received on deposit: Rs. 2 Lakhs
Total turnover: Rs. 60 Lakhs
Solution: In this case, the turnover would be:
Sales of goods Rs. 38 Lakhs + Sales of service Rs. 22 Lakhs = Rs. 60 Lakhs
If Rs. 6 lakhs (10% of 60 lakhs) or Rs. 5 lakhs, whichever is higher, i.e. Rs. 6 lakhs, is the value of services provided, then services up to Rs. 6 lakhs can be provided. If services above this amount are provided, the composition scheme cannot be opted for.
Example 2: If there is no turnover in the previous year or if it is the first year of business, then in the composition scheme, services can be provided up to a maximum of Rs. 5 lakhs.
How will the aggregate turnover be computed for the purpose of the Composition Scheme?
Aggregate Turnover:
As per Section 2(6) of the CGST Act, in Aggregate turnover includes - taxable supplies, exempt supplies, exports of goods or services, and inter-state supplies.
It excludes inward supplies on which tax is paid through the reverse charge mechanism and taxes like CGST, SGST, IGST, UTGST, and GST Compensation Cess.
The turnover of all businesses under the same PAN is considered, computed on an all-India basis.
Furthermore, as per Explanation-1 of Section-10, for the purpose of the Composition Scheme, the turnover includes supplies made from the 1st April of a financial year until the person becomes liable for GST registration, if applicable.
Tax Rates under Composition Scheme:
GST Rate on Composition Dealer- Manufacturer:
If you are a manufacturer and you have opted for the Composition Scheme, you have to pay 1% GST on the entire turnover. This means that even if your product is exempt, you will still have to pay 1% GST on it.
Example: If you are a manufacturer and you have sold taxable goods worth 10 lakhs and exempt goods worth 5 lakhs, then in this case, you will have to pay 1% on the total of 15 lakhs, i.e. you will have to pay 15,000 GST
GST Rate on Composition Dealer- Service Provider:
Service providers opting for the composition scheme pay 6% GST on their entire turnover.
GST Rate on Composition Dealer- Trader:
If you are a trader and you have opted for the Composition Scheme, you have to pay GST on taxable goods; no GST liability will arise on exempt goods.
Example: If you are a trader and you have sold taxable goods worth 10 lakhs and exempt goods worth 5 lakhs, then in this case, you only have to pay GST on taxable goods,
i.e. 1% on 10 lakhs, which amounts to 10,000 GST. No GST will be payable on the 5 lakhs worth of exempt goods.
GST Rate on Composition dealer- Restaurant & Outdoor catering services:
If you are engaged in Restaurant & Outdoor catering services and you have opted for the Composition Scheme, you have to pay 5% GST on the entire turnover. This means that even if your product is exempt, you will still have to pay 5% GST on it.
Example: If you are engaged in Restaurant & Outdoor catering services and you have sold taxable goods worth 10 lakhs and exempt goods worth 5 lakhs, then in this case, you will have to pay 5% on the total of 15 lakhs, i.e., you will have to pay 15,000.
Filing of Intimation / Statement / Return:
(a) Existing registered taxpayers can opt the Composition Levy scheme by filing FORM GST CMP 02 on the common portal.
(b) At the time of opting for the Composition Levy scheme, existing taxpayers must also file a statement in FORM GST ITC-03 to reverse the input tax credit availed on inward supplies.
(c) Composition Taxpayers need to file quarterly CMP-08, including a summary of supplies made and payment, up to 18th day of the month following the end of the quarter.
(d) Composition dealers also need to file a yearly return, CMP-08, up to the 30th April of the year following the financial year end.
(e) To opt out of the Composition Scheme, a Composition dealer can file FORM GST CMP 04.
Bill of supply, not tax invoice:
Composition scheme dealers are not allowed to collect tax from buyers. They must pay GST from their pocket and cannot charge GST on invoices. Therefore, a composition dealer issue a "Bill of Supply" instead of a tax invoice.
The composition dealer must mention the words "composition taxable person, not eligible to collect tax on supplies" at the top of the bill of supply.
What if the GST composition person turnover exceeds 1.5 crore/ 75 lakh?
If a Composition dealer's turnover exceeds Rs.1.50 Crore (Rs. 75 Lakhs for special category states), then they must provide intimation of withdrawal from the composition scheme through form CMP-04 within 7 days.
FAQs on Composition Scheme under GST
1. What is Composition Scheme?
Ans. Composition Scheme is an alternative method of levying tax which is applicable to small assessees whose turnover is less than Rs. 1.5 Crore and Rs.75 lakhs in case of a few States.
2. What are the GST rates applicable on Composition taxpayer?
Ans. Under the GST, tax rate for composition tax payer is 1 % 5% and 6%.
3. Who is eligible for Composition Scheme?
Ans. Taxpayer whose turnover in preceding financial year is less than Rs. 1.5 Crore or Rs.75 lakhs in specified state can opt composition scheme.
4. What are the benefits of the Composition Scheme?
Ans. In composition scheme taxpayer pay tax at lower rate i.e. 1% 5% and 6%. Less expensive compliances in compare to normal tax payer.
5. Can Composition Scheme taxpayer avail Input Tax Credit?
No, Person who opted composition scheme can not avail ITC on their purchases.
6. Person who opted Composition Scheme who to file their GST returns?
Ans. Composition Scheme taxpayer needs to file CMP-08 statement quarterly and file Form GSTR-4, annually.
7. If a taxpayer opt composition scheme. What are the restrictions for taxpayers?
Ans. Under the composition scheme taxpayer cannot make interstate supply. Issue bill of supply instead of tax invoice and cannot collect tax from buyers.
8. What happens if a person who opted Composition Scheme and turnover exceeds the prescribed limit Rs. 1.5 crore or Rs. 75 Lakh.
Ans. If a Composition dealer's turnover exceeds Rs.1.50 Crore or Rs. 75 Lakhs, then they are ineligible for composition scheme and within 7 days need to switch regular scheme.
