7 Mistakes to avoid under GST Composition Scheme

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GST composition scheme

The composition scheme under the new GST regime extends an important benefit to all small traders. It will reduce tax liabilities as well as compliance work for traders with a supply turnover of under Rs. 50 lakh. However, there are plenty of errors that you should take care to avoid once you’ve applied or if you wish to apply for the GST Composition Scheme. Let’s find out what they are:

1. Making Any Interstate Sale

The composition scheme is only available to GST registrants operating within a single state. Therefore, let’s say you have a turnover of Rs. 40 lakh, and are currently paying taxes at a subsidised rate. You then move on to make an interstate sale of Rs. 1,000. As per law, as soon as you make the interstate sale, the composition benefits cease to exist and you are now liable to the standard tax rate.

Now, the total amount payable shall be in accordance with Section 66/67, which would require you to pay higher taxes and a penalty may also apply. All traders must, therefore, be wary before making such deals.

2. Not Seeking Permission

If you want to avail of the benefits of the GST composition scheme, which means a lower tax rate and lesser compliance, you must first apply for it. Say if you have applied, the process stands as such for the entire year. So, make your choices wisely since you can only do so at the start of the year and deal with the same for the next 365 days.

3. No Benefits for Service Firms

The GST composition scheme does not apply to anyone in the service industry. Anyone registered as a service provider is rendered ineligible for the composition scheme.

4. Composition Limit

The limit for the GST composition scheme is Rs. 50 lakh. Anything above that amount is liable to be taxed at the standard rate. For instance, suppose the total supply made during the year comes to around Rs. 48 lakh. You also happen to provide goods, at no cost, to your family to the tune of Rs. 4 lakh. While you may not take into the account the ‘free’ services you provided to your family, your total supply turnover, for the government, stands at Rs. 52 lakh. The amount, as we mentioned above, is liable to be taxed under the standard rate. This leaves you with a few consequences. One of them being that you would be in default for not filing returns properly and be levied with a maximum penalty of Rs. 5,000.

5. Reverse Charge Mechanism

Under Goods and Services Tax, there is a concept of reverse charge. The ‘reverse charge’ quashes the rules that existed till now wherein the recipient of goods and services paid a certain amount to the government in some cases, and brings in the new rule of the payment coming from the supplier of goods and services. This makes the person covered under GST composition scheme to be liable to pay taxes at the standard rate, rather than at the discounted composite rate. The standard rate would mean that it adds to the cost of the person paying it, since they cannot claim the same as input tax credit.

6. No Input Tax Credit

If you avail of GST composition benefits, there can be no availing of input credit.

7. Not filing returns on time

While this has been a rule, which many start-ups and other businesses floundered, the same is set to invite a heavy penalty under GST. The government, in a move marked to stamp the success of the GST scheme, would charge Rs.100 per day as late charges, which is subject to a maximum penalty of Rs. 5,000 per return.

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A lawyer with 14 years' experience, Vikram has worked with several well-known corporate law firms before joining Vakilsearch.

21 COMMENTS

  1. Can I change or add the commodities given at the time of enrollment, after a period
    The lesser tax rate 50 lakhs is valid for only the first year or each year.
    Who gets the benefits of the composite less Gst rates, both manufacturer and Trader?

  2. I have a sole proprietorship and provide digital marketing services. I got it registered for service tax. Recently, I got an email to switch to GST from service tax. My question is, will I be able to enjoy any exemption from tax upon switching to GST? Also, is it mandatory to switch to GST?

    • If your total revenue is less than Rs. 25 lakh, you will not qualify for GST. If it is, GST is mandatory for your business.

    • Every registered assessee under existing laws (Central Excise, Service Tax, VAt etc) has to migrate to GST irrespective of their turnover.

      The exemption limit under GST is 20 lakhs.

      you can take sou-moto GST registration and be a part of GSt chain even if your turn over is less than 20 Lakhs

  3. We are paying VAT as regular tax payer and already registered for GST (status as migrated). I came to know about composition scheme now only. Now, I want to apply for composition scheme? how can I do that?

  4. CAN I OPT FOR COMPOSITION SCHEME IF MY TRADING COMMODITY IS EXEMPT IN VAT LAW BUT NOW TAXABLE IN GST LAW.

    M I HAVE TO PAY GST ON MY EXITING STOCK.

    OR I CAN SALE IT BY PAYING COMPOSITION TAX.

  5. Under ST regime, I have crossed 10 lakh aggregate limit for last two years and so I paid 15% tax for the second year from rupee one.

    So with GST and 20 lakh limit, do I have pay tax from rupee one or above 20 lakh??

  6. Exempted goods like solar panel now its taxable can entered into composition scheme if turnover is 40 lakh annum.

  7. I had opted for Composition Scheme. But now i have interstate sales as well. How do i get back to normal scheme.

  8. i am having water purifier shop in mumbai but i purchase it from Delhi vendor and have newly registered for GST but now i want to migrate to composition scheme is it possible for now..

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