GST Returns

What is Composition Scheme Under GST Law

Composition Scheme Under GST

A taxpayer who has opted for GST Registration under the Composition Scheme is only required to file GST returns on a quarterly basis instead of monthly returns.

What is the Composition Scheme under GST?

Composition Scheme can be explained as under:

It is a convenient way for the small taxpayers to escape from too many GST Return filing formalities and pay the tax at a fixed rate based on their business turnover.

Under this scheme, the taxpayer has to pay tax as a percentage of his turnover during the financial year without getting the benefit of Input Tax Credit. Any taxpayer opting for composition scheme cannot collect any tax from his/her customer. Under the composition scheme, the floor rate of tax for CGST and SGST shall not be less than 1%.

Who Can opt for Composition Scheme under GST?

Any business person whose annual turnover does not exceed 1.5 crores can opt for composition scheme.

All the businesses with the same PAN have to be added for calculating the turnover of the business.

Manufacturers of Goods, Traders, and Restaurants those not serving alcohol can opt for composition scheme

What is the Tax Rate Applicable to a Composition Dealer?

Following is the tax rate to be followed by dealers opting for composition scheme:

 tax rate to be followed by dealers opting for composition scheme

Is liability to pay taxes under the Reverse Charge Mechanism covered under the Composition Scheme?

A Composition Dealer has to pay tax under the Reverse Charge Mechanism wherever applicable. But the rate applicable under the composition scheme will not be used for the reverse charge purpose.

Taxpayers registered under this scheme cannot avail ITC for any amount paid aa s reverse charge by them.

How Should the Tax Amount be Calculated?

A composition dealer is required to pay tax at a specific rate on total sales. Also, the dealer shall be liable to pay tax under the reverse charge on purchases from unregistered dealers and import of services.

So, the total GST Payable will be =

Tax on supplies

  • Tax on Business to Business transactions (where Reverse Charge is applicable)
  • Tax on Business to Business purchases from unregistered suppliers
  • Tax paid on Import of Services

Should a Composition Dealer Maintain Detailed Records?

Dealers registered under the composition scheme are not required to maintain any detailed records as required to be maintained by the normal taxpayer.

Can a Composition Dealer Issue Tax Invoices?

Dealers registered under the composition scheme cannot issue tax invoices, but they have to issue Bill of Supply. The reason behind the same is that the tax has to be paid out of pocket, it is not allowed to be recovered from the customers.

What are The Returns to be Filed by a Composition Dealer?

The dealers registered under the composition scheme is required to furnish only one return i.e. GSTR-4 on a quarterly basis and an annual return in FORM GSTR-9A.

Can a Dealer Involve in Interstate Supplies opt for Composition Scheme?

Dealers involved only in intra-state supply can opt for composition scheme. And if the dealer is involved in inter-state supplies then they cannot opt for the scheme.

Transition Provisions if a Business Transits from Composition Scheme Under Old Regime to Regular Taxation Under GST?

As per the transition provisions provided in Chapter XX of CGST Act, 2017[1] any taxpayer those are registered under the composition scheme under VAT shall be allowed to take credit for inputs that are in stock whether finished or semi-finished and are held till the date of opting for composition scheme.

What is the Treatment for Input Credit Availed when Transitioning from Normal Scheme to Composition Scheme?

When any taxpayer switching from normal scheme to composition scheme, the taxpayer shall become liable to pay an amount equal to the credit of input tax in respect of inputs held in stock on the day immediately preceding the date of such switchover. The balance of input tax credit after payment of such amount, if any lying in the credit ledger shall lapse.

Can a Person opt for Composition Scheme in One Year and opt out in Next Year?

Yes, this is possible. You can opt to switch between the Composition Scheme and the normal scheme based on your turnover. However, you will have to keep in mind that this will affect the way you issue invoices and file your returns.

The declaration of change can be submitted to the GST Portal.

Can a Person opt-in for Composition Scheme Anytime During the Year?

No. Before the beginning of every financial year, a registered taxpayer is required to provide a declaration on the GST Portal. This cannot be done anytime during the year.

What will Happen if a Person opts out of Composition Scheme mid-year?

When a dealer opts out of composition scheme all the normal rules are applicable from the day of opting out.

For example, a composition dealer opts out of composition scheme on 15th October 2017. This means that the dealer will have to file two GSTR-4 for the quarters of July – September, and October (15 days). The dealer will also have to file GSTR-1, GSTR-2, and GSTR-3 for the period of October 2017 (sales from 15th October until end of the month)

Read our article:ITC Transition Provisions: How Existing ITC can be transitioned Under GST?

Narendra Kumar

Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.

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