GST Composition Scheme

GST Composition Scheme

This provision deals with the composition scheme for payment of tax by eligible taxable persons , subject to certain conditions. The conditions, restrictions, procedures and the documentation would be contained in the rules, to be prescribed.

Composition scheme is an option

Tax payment under this scheme is an option available to the taxable persons. This scheme would be available only to certain eligible taxable persons. The taxable persons should make an application exercising his option to pay tax under This scheme. There are three possibilities in which such option can be exercised;

1. Taxable person migrating from existing registration to GST registration Exercising option in Form GST CMP 01 prior to appointed date or within 30 days after the appointed date. In this case, the option to pay tax under composition scheme shall be effective from the appointed date.

2. Taxable person obtaining new registration under GST laws: such option can be exercised at the time of obtaining registration under section 22 in part B of Form GST REG-1 in this case the option to pay tax under composition scheme shall be effective from the effective date of registration .

Benefits Under GST Composition Scheme

Less Compliance
Under the normal scenario, a taxpayer under GST has to file minimum 3 returns monthly and one annual return. To be precise, he is compelled to file 37 returns in a year or penalty will be levied for non-compliance. For small suppliers and manufacturers, it is quite difficult to maintain so detailed books of accounts on a daily basis and record every transaction with supporting documents.

Whereas, in composition scheme, only a quarterly return will be uploaded under GSTR-4 by:

18th July – 1st quarter

18th October – 2nd quarter

18th January – 3rd quarter

18th April – 4th quarter

This will ease the compliance burden for SMEs, and they can focus more on their business rather than getting occupied in compliance procedures.

Particulars	Description	Registered as Normal Tax Payer	Description	Registered as a Taxpayer under composition scheme
A	Total Sales Value	118000	Total Sales Value	118000
A	Total Sales Value	118000	Total Sales Value	118000
B	Sales Value exclusive of taxes	100000	Sales Value exclusive of taxes	115686
C	GST @ 18% on sales value	18000	GST @ 2% on sales value	2314*
D	Input Purchases	65000	Input Purchases	65000
E	GST @ 18%	11700	GST @ 18%	11700
F	Total Purchase Value (D+E)	76700	Total Purchase Value (D+E)	76700
G	Net GST Liability (C–E)	6300	Net GST Liability (C–E)	2314
H	Net Profit {A-(F+G)}	35000	Net Profit {A-(F+G)}	38986

In composition scheme, a supplier is ineligible to collect tax separately from the buyer in an invoice. The above illustration is for the basic understanding of the composite scheme.

High Liquidity
For normal taxpayers, most of his working capital will be blocked as Input Tax credit because he can avail the input only if his supplier has filed the return. The supplier has to pay tax at standard rate and credit of the input will only be availed when his supplier files the return. In composition levy, dealer need not worry about his supplier filing return as he cannot take credit and will pay tax at a nominal rate.

For Example: In the above case, a Normal taxpayer will have to pay a higher tax of Rs. 6300/- compared to Rs.2314/- and Input Tax credit of Rs. 11700/- will also be blocked till his supplier files the return. Whereas, the composition scheme tax payer, will only pay Rs. 2314.

Transitional Provisions

Any taxpayer who is in Composite Scheme under current regime and transits to Regular Taxation under GST will be allowed to take the credit of Input, semi-finished goods and finished goods on the day immediately preceding the date from which they opt to be taxed as a regular tax payer.

The inputs can only be availed subject to few conditions such as;

1. Those inputs or goods are meant for making taxable outward supplies under GST provisions

2. The dealer taking the Input Credit was eligible under the previous regime but could not claim due to registered under Composition Scheme

3. The taxpayer claiming Input credit on goods, those goods should be eligible for such credit under GST regime.

4. The taxpayer must have a valid legal document of input tax credit i.e. he must possess an invoice evidencing taxes or duties have been paid.

5. Those invoices or documents should not be older than 12 months before the appointed date.

When a taxpayer is shifting from a normal scheme to composition scheme, the taxpayer has to pay an amount which shall be equal to the credit of input tax in respect to those inputs which are held as stock on the immediately preceding date from the date of such switchover. Any balance which is left in Input Tax Credit account after such payment, then that balance will lapse and not usable.

Limitations of GST Composition Scheme

There are some of the limitations that every business owner must be aware of:

No Credit of Input Tax
Any dealer registered under Composition Scheme will not be eligible to take credit of Input Tax credit on purchases. Also, the buyer of those goods will not get the credit of taxes paid.

No Inter-state business
The major drawback of this scheme is that the assessee cannot deal in interstate transactions or affect import – export of goods and services. He is barred from performing such actions which limit his territory for expansion and can only conduct local or intra state transactions.

Pay tax from own pocket
Since the dealer is not allowed to charge tax from his buyer, despite the rate being very low, he has to pay out of his own pocket. He is not even allowed to issue a tax invoice, resulting the burden on the assessee to pay tax.