Why was Composition Scheme under GST introduced?
Section 10 of the Central Goods and Service Tax Act, 2017 introduced the concept of a composition scheme. GST was introduced with an objective to eliminate complexities of the indirect tax regime and it requires regular filings and proper maintenance of records in a strict manner. However the same can become a burden and an additional task for a small-scale businessman. To facilitate such small-scale traders and businessmen and to reduce the complication of procedural compliance, the composition scheme under GST was introduced. Taxpayers registered under this scheme will be taxed at nominal rates of 1% to 5%.
Option, Non-Mandatory in nature
One major point to be understood about this scheme is that it is an option provided to registered taxpayers already registered under the Act, i.e. such registration is not a mandatory legal requirement, it is only a right/option given to the taxpayer, which they can avail if their aggregate turnover is less than 1.5 Crore rupees.
For any taxpayer to opt for registration under this scheme, he or she must satisfy both of these eligibility criteria:
- Must be a registered under the Act
- Aggregate turnover must be less than 1.5 Crore rupees
NOTE: If more than one taxable person is registered on the same PAN number, then the compensation scheme can be availed by only one if all of such taxable persons will avail the same.
Who is Not Eligible?
Other than the taxpayers not covered under the above-mentioned criteria, sub-section (2) of section 10 of the Act specifies a list of registered taxpayers not eligible to opt for it. They are:
- Suppliers of non-taxable goods
- One engaged in making any inter-state outward supplies of goods
- Supplier of services, other than restaurants (except which serve liquor)
- Supplier of goods through an e-commerce operator who collects tax at a source under Section 51
- Manufacturers of such goods as notified by the government on the recommendations of the council.
Other than these specified categories, another type of taxpayer who cannot opt for the composition scheme is occasional traders i.e. ones who are not involved in regular business cannot avail this scheme’s benefits. Such occasional traders are a Casual Taxable person and Non-Resident Taxable Person.
Tax Rates Under the Composition Scheme
Tax rates applicable for suppliers registered under composition scheme enjoy the benefit of lower tax rates as compared to others. These applicable rates are:
2% of the turnover – for the manufacturer
5% of the turnover – for persons engaged in making supplies referred to in clause (b) of paragraph 6
1% of turnover – for other suppliers
Benefits of the Composition Scheme
Reduced Tax Liability: One of the major benefits under the scheme is the reduced tax rates, as the suppliers are only required to pay somewhere between 1 to 5% of aggregate turnover. In general cases without GST Registration, taxpayers might have to pay as high as 28% depending on their business.
Reduced Compliance: Along with reduced tax rates, another major benefit is reduced compliances. In the general course of business, a normal taxable person is required to file a minimum of three GST returns monthly including a statement of outward and inward supplies. However, after registration, he will have to file only quarterly return in Form GSTR-4 .
Increases Liquidity: As the scheme provides the lower tax rate benefits, it results in more funds left in the hands of the taxpayer, which he can utilize to further his business.
Limitations of the Composition Scheme
- No Input Tax Credit: It does not provide for input tax credit i.e. taxes paid by the supplier on purchases cannot be claimed as ITC. It results in an escalated cost of business.
- No Tax Invoices: Though the tax rates are reduced, scheme-holders will have to keep the burden of taxes to themselves. In the general course of business, the supplier charges these taxes on their buyers, but under the GST Composition Scheme, they cannot charge the same from customers, hence the cost of sales will increase.
- High Penalty: If any discrepancies are found in the application of any subscriber after the registration has been granted to them, or if the subscriber is no longer eligible and fails to inform about the same, then such taxpayer will be liable to pay a penalty, which can be equal to tax payable, along with the differential tax.
- Only Intra-state trading: This scheme can only be availed by traders operating in a single state. No taxpayer with inter-state trading is qualified to apply under this scheme which results in limited exposure of markets and inability to do imports/exports.
- Different business entities registered under a single PAN number cannot apply for the composition scheme on an individual basis. If anyone of them plans to register, then all of them will have to apply under it.