GST

What are the Key Features of Composition Scheme under GST?

The composition scheme under the GST Act has been introduced to benefit the start-ups. This will ensure hassle-free compliance for small business. Online GST Registration has been introduced with the mission of one nation, one tax payment.

Every revenue system aims towards the timely compliance with statutory provisions, tax recovery, filing of tax returns, hassle-free maintenance of records, automation in the tax collection system, and also need to ensure that every business has complied with the tax laws. 

However, small business owners/start-ups face challenges to deal with such compliance requirement, due to a lack of resource for start-ups and small companies. To overcome and support small and medium enterprise or start-up companies, the composition scheme was introduced by the respective states with conditions applied on eligibility for the scheme.

How can a taxpayer opt for the composition scheme?

In order to pot for the composition scheme, a taxpayer needs to file GST CMP-02 with the government. This can be completed online by logging into the GST portal.

The intimation must be given at the beginning of every financial year by a dealer wanting to opt for the Composition scheme.

Eligibility Criteria

The GST Composition scheme can be availed by a taxpayer whose aggregate turnover of supply of goods and services is less than 1.5 Crore in a financial year.  There is no compulsory registration for the scheme and the taxpayer, who has reason to believe that the annual turnover will be less than the limit prescribed by the law, can apply for the scheme. Unless registered under the composition scheme, the taxpayer will be treated as a normal taxpayer and administered accordingly. Only manufacturers of goods, dealers and restaurants can opt for this scheme.

Who all are not eligible for the Scheme?

• A supplier with the interstate sale of goods or export & import
• Supply of goods through e-commerce platforms or online aggregators of good
• Manufacturers of ice cream, pan masala, tobacco and aerated water.
• Non-resident Taxpayer or casual taxable person

Main features of Composition scheme under GST

• Tax rate

Manufacturers-1 %, Restaurant services- 5%, Composition levy eligible- 1%.

• No credit or input tax

Under the composition scheme, no input tax credits are allowed for any purchase of goods by the taxpayer registered under the scheme. He can set-off output tax liability from the tax paid on the purchase of goods. The buyer of such goods will not get any credit of taxes paid. This may lead to an increase in the price of goods. This refrains a B2B buyer from purchasing goods from a taxpayer registered under the composition scheme.

• Composition Schemes Limited to Intra-State Supplies

A taxpayer registered under the composition scheme can only supply the goods with the state. No interstate supply of goods is allowed under the composition scheme.

• Restriction on the collection of tax 

As per section 16 of the GST Act^[1], the goods and services (only restaurant) whose tax has been paid under section 8 does not qualify for the input tax credit, hence a supplier of goods registered under the composition scheme cannot collect the GST amount from the purchaser. The burden of tax has been imposed on the taxpayer himself.

As per section 16, those goods and services on which Composition Tax has been paid (under section 8) do not qualify for Input Tax Credit

• Minimum Compliance

A regular taxpayer has to file three returns in a month, whereas taxpayer registered under composition scheme are required to file quarterly returns and no such details of sale or purchase are required. He is also not required to pay taxes on invoices he can pay on a quarterly basis.

• Needs voluntary application 

In order to avail the benefits under the scheme, taxpayers require making voluntary registration. If taxpayer’s annual income exceeds 75 lakh then he shall be transferred to the regular scheme. A dealer who is registered under the VAT act will also be required to register under the GST Composition scheme.

• Cannot issue Tax Invoice

The taxpayers registered under the scheme cannot issue a tax invoice, unlike a regular taxpayer. He needs to present a tax invoice to the tax authorities whenever required. Registered taxpayers under the composition scheme will have to show the bill of supply instead of tax invoice.

• Quarterly returns 

The taxpayer registered under the composition scheme needs to file only one return on a quarterly basis. Unlike 3 returns every month in the case of a regular taxpayer under the GST. GSTR-4 is required to be filed by a composition dealer.

• Withdrawal from Composition Scheme

If the taxpayer does not wish to avail himself of the scheme, he shall mandatorily start issuing tax invoice and shall also file GST CMP-04 for the withdrawal of composition scheme within 7 days.

Conclusion 

If a taxable person is wrongly registered for the scheme and he was not eligible for the scheme, then the revenue authority can impose a penalty equal to tax amount applicable as per GST regular rate.

Do you wish to register for GST? Or are you looking for a GST Implementation Advisory? Would you like to know about the GST Impact on your industry under GST? Please feel free to contact Enterslice, India’s leading online legal and tax advisory firm.

Read our article:7 Mistakes to Avoid Under GST Composition Scheme