What is Composition Scheme under GST?

Ashish M. Shaji

19 Oct, 2020

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%.

Optional and 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. In case of North Eastern States and Himachal Pradesh, the limit of turnover is set at 75 lakhs

Eligibility Criteria

For any taxpayer to opt for registration under this scheme, he or she must satisfy these eligibility criteria:

• Must be 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^[1] 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
• Manufacturer of ice cream, pan masala or tobacco;
• 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

The tax rates are as under:

Manufacturers- 1% (0.5 Central and 0.5 State)

Restaurant Services- 5% (2.5 Central and 2.5 State)

Composition levy eligible- 1%

Benefits of the Composition Scheme

The benefits of the GST composition scheme are as under:

• 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

This scheme has certain limitations like:

• 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.

• Limitation with respect to non-taxable goods

The taxpayer won’t be eligible to supply non-taxable goods like alcohol and goods through an e-commerce portal.

Conclusion

One can easily opt for the composition scheme online by logging into the GST portal. In case of any query related to GST laws, feel free to contact Enterslice.

Read our article: Compliance Deadlines for Composition Taxpayers Relaxed