GST Advisory

7 Mistakes to Avoid Under GST Composition Scheme

Many of us have heard about the GST Composition Schemes, but very few of us have clarity about it. It is believed that small traders are going to enjoy several benefits from the GST Composition Scheme. The small traders with an annual turnover of less than Rs. 1.5 Crore will have to face reduced tax liabilities.

Moreover, their GST Compliance work will also be reduced. However, before enjoying any of these benefits, it is imperative to avoid certain mistakes.

Mistakes to avoid

When applying for the GST Composition Schemes, certain factors need to be considered. Some of them are:

• An Interstate Sale

It is important to note that the benefits under the GST Composition Schemes are available only to those who have registered under this scheme and those who operate only within a single state. Thus, if a trader is enjoying an annual turnover of more than Rs. 40 Lakh, while paying subsidized tax rate, and if he now makes an interstate sale, he will no longer be able to enjoy any benefit under the GST Composition Scheme. From this point on, the trader will have to pay tax as per standard rate.

The payment that would now have to be made by the trader would be as per Section 66/67, and he would have no choice but to pay tax at a higher rate along with the applicable penalty. Thus, traders must avoid making any interstate deals if they wish to continue enjoying GST Composition Schemes benefits.

Also Read: What are the Key Features of Composition Scheme under GST?

• Not Seeking Permission

The traders, who wish to enjoy GST Composition Schemes benefits that have lesser compliance and a lower rate of tax, must first apply for the same. After applying, the trader can enjoy the benefits for a year. Thus, it is significant for the trader to make wise choices and enjoy the benefits.

• No Benefits for Service Firms

Another aspect that needs to be considered is the fact that the GST Composition Scheme is not applicable to the service industry. If a trader is registered as a service provider, he will be not considered as eligible under the GST Composition Schemes.

• Composition Limit for GST Registration

The GST Composition Scheme limit is Rs. 1.5 Crore. If the amount is more than this limit, he will have to pay taxes as per standard rates. If a trader supplies products to the tune of Rs. 1.4 Crore in a year and also provides products of Rs 40 Lakh cost to their family, the limit of Rs. 1.5 Crore is crossed. The trader may consider Rs. 40 Lakh amount of goods to their family totally for free, but for the government, the limit allowed to the traders in Composition Scheme under GST registration has been crossed, and the traders will have to pay taxes under the standard rate. There may be other repercussions of this situation.

• Reverse Charge Mechanism

A concept of Reverse Charge also needs to be understood as a part of the Goods and Service Tax. In certain cases, the people receiving goods and services also had to pay a specific amount to the government, this is known as reverse charge mechanism.

Even a trader who is covered under the Goods and Service Composition Scheme is required to pay the reverse charge when applicable i.e. even composition scheme holder will have to pay standard tax rate instead of discounted composite rate. Paying a standard tax rate means that for the person making the payment, he has to pay additionally as he cannot claim an input tax credit for the same.

• No Input Tax Credit

Input credit cannot be availed by the traders who are already registered under the composition scheme of Goods and Service Tax.

• Not Filing Returns on Time

Filing Income tax returns on time have always been stressed by the Income Tax Department^[1]. Many businesses and start-ups that fail to file their returns on time have faced heavy penalties. The same is the case under GST. The government is going to charge late charges of Rs. 100 per day and the maximum penalty that can be levied in this case is Rs.5000.

Conclusion

In order to enjoy the benefits under the GST composition schemes, one must consider the above mentioned points and avoid making mistakes.

Read our article: Reverse Charge Mechanism under GST: Buying from Unregistered Dealers