GST Composition Scheme: Eligibility, Procedure and Benefits

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The GST composition scheme exists to ensure that small taxpayers can easily comply with the new tax regime. It is applicable to all taxpayers with a turnover less than Rs. 1 crore. Let’s understand a bit more about why it was introduced, how it is to be used and the benefits.

Why was the GST Composition Scheme introduced?

The GST regime has brought in a lot of changes. There has been an increase in the number of GST returns being filed, the amount of tax that the government stands to collect has increased dramatically (particularly at the centre). However, tax payments are on a monthly basis, which new and small taxpayers find difficult to comply with.

Moreover, the paperwork is substantial. Therefore, the government has introduced the concept of the composition scheme (which, of course, existed even during the VAT regime). A composition scheme brings an opportunity for the small and new taxpayer to opt for lesser compliance. Moreover, a taxpayer opting for the composition scheme has to pay tax at a nominal rate.

Who can opt for a Composition Scheme?

Any taxpayer whose turnover is below Rs 1 crore can opt in for the Composition Scheme. In case of the North-Eastern states and Himachal Pradesh, the limit is now Rs 75 lakh. This is according to the 22nd GST Council Meeting held on 6th October 2017. The threshold for the composition scheme has been increased to 1 crore (from Rs. 75 lakh earlier).

Who cannot opt for a composition scheme?

The following individual cannot opt for the scheme:
a. The supplier of services other than restaurant related services
b. The manufacturer of ice cream, tobacco or pan masala
c. The casual taxable person or a non-resident taxable person
d. The businesses which supply goods through an e-commerce operator

What are the conditions for availing a Composition Scheme?

The following conditions must be fulfilled in order to opt for a composition scheme:
a. No Input Tax Credit can be claimed by dealer opting for a composition scheme;
b. The taxpayer can only make an intra-state supply (sell in the same state) i.e. no inter-state supply of the goods.
c. The dealer cannot supply the GST exempted goods
d. The taxpayer has to pay the tax at normal rates for the transactions under the Reverse Charge Mechanism.
e. In case a taxable person has different segments of businesses (such as textile, electronic accessories, groceries, etc.) under the same PAN, they should register all such businesses under the scheme collectively or opt out of the scheme.
f. The taxpayer has to mention the words ‘composition taxable person’ on every notice or signboard that is displayed prominently at their place of business.
g. The taxpayer has to mention the words ‘composition taxable person’ on every bill of supply issued by him.

GST composition scheme process

To opt in for a composition scheme a taxpayer has to file the Form GST CMP-01 or GST CMP-02 with the government. This can be also done online after logging into the GST Portal. This intimation must be given at the beginning of every financial year by a dealer wanting to opt for the composition scheme.

What documents must a composition dealer issue while making supply?

A composition dealer can’t issue a tax invoice. This is because a composition dealer can’t charge tax from their customers. They are required to pay the tax out of their own pocket. Therefore, the dealer has to issue a Bill of Supply. The dealer must also mention “composition taxable person, not eligible to collect tax on supplies” at the top of the Bill of Supply.

Return filing for composition dealer

A dealer has to file a quarterly return GSTR-4 by the 18th of the month after the end of the quarter. Also, an annual return GSTR-9A has to be filed by the 31st December of the next financial year. Also, note that a dealer who is registered under a composition scheme is not required to maintain detailed records.

According to the 22nd GST Council Meeting held on the 6th Oct 2017, the due date of form GSTR-4 for the quarter July-September, 2017 has been extended to 15th November 2017.

Advantages of GST Composition Scheme

The following are the advantages of registering under a composition scheme:
a. A lesser compliance (returns, maintaining books of record, issuance of invoices)
b. Limited tax liability
c. High liquidity as the taxes are at a lower rate

What are the disadvantages of the composition scheme?

Let us now look into the disadvantages of registering under the GST composition scheme:
a. A limited region of business. The dealer is barred from carrying out an inter-state transactions
b. No Input Tax Credit available to a composition dealers
c. The taxpayer won’t be eligible to supply goods through an e-commerce portal

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

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