Every tax system recommends several actions which have to be taken by businesses to ensure the compliance with statutory provisions. Things such as filing of timely returns, periodic payment of taxes and maintaining the prescribed records are some of the necessary steps in a tax system for the corporate taxpayers. Nevertheless, small business owners find it very challenging to deal with such requirements of the law due lack of knowledge and the expertise. Key features of GST Composition Scheme are explained in this post.
To make the compliance easier for small businesses, many state governments have provisions in their VAT system for the payment of a composition levy by small businesses. This ensures a greater compliance without the need for maintaining the numerous records. Though such a system is missing in Service Tax laws.
The GST (One Nation One Tax Scheme) not only promises to club all the indirect taxes into one tax but also boasts a composition scheme for the small businesses. The GST Composition Scheme will make the compliance with the tax laws hassle free for the eligible businesses opting for the scheme.
Some of the key features of the scheme are given below:
- Eligibility – Everyone is not eligible to enrol under this scheme. It is only meant for the taxpayers whose aggregate turnover does not exceed Rs. 75 lakh threshold in a Financial Year.
- Tax rate – The rate of tax as prescribed will be less than the regular GST but not less than 1% of the turnover during the Financial Year. The tax rates under the scheme are expected to be between 1% and 3%.
- Not eligible for Input Tax Credit – As per section 16, the goods and services on which the Composition Tax has been paid (under section 8) do not qualify for the Input Tax Credit.
- Applies to Intra-state supplies – Local suppliers, i.e., all those who supply within a state can only take advantage of this scheme. The inter-state suppliers will come under the regular GST laws.
- Needs voluntary application – All taxpayers need to make a voluntary registration every year for getting the benefits of the GST Composition Scheme.
But, if the taxpayer crosses the minimum turnover limit of Rs. 75 lakh then he will be transferred to a regular scheme.
All taxpayers who are already a part of VAT Composition Scheme also have to voluntarily register for this scheme.
- Quarterly returns – Instead of filing 3-4 returns monthly, taxpayers who are registered under this scheme will be required to file returns once every quarter.
- Bill of supply not tax invoice – Unlike the regular scheme where a taxpayer has to present tax invoice to the tax authorities, taxpayers who are registered under this scheme need to present bill of the supply.
- Penalty – If a taxable person is found not eligible for this scheme then the tax authorities can impose a penalty which is equal to the amount of tax on such person along with his tax liability. So a lot care has to be taken when opting for this scheme and paying the taxes.
Registration under GST Composition Scheme
Any present taxpayer who is not under the Composition Scheme can choose to opt for it (subject to being qualified), only from the commencement of the next Financial Year. The application have to be filed on or before the 31st March of the Previous Year so that the returns can be filed accordingly.
The dealers under the Composition Scheme may be allowed to switch over to a normal scheme even during the year if they wish to. However, they can’t switch over to the Composition Scheme again during the same Financial Year.
Returns under the GST Composition Scheme:
Any registered taxable person who is paying the tax under the provisions of the Composite Scheme will furnish a return for each quarter in a prescribed form in the prescribed manner within eighteen days after the end of the relevant quarter.
The GSTR-4 has been prescribed by the government as a tax return form which is to be filed by a dealer under the Composition Scheme.
The composition dealers have to furnish the first return for the period starting from the date on which they become a registered taxable entity till the end of the quarter in which the registration has been granted.
The impact on Input Tax Credit during transition between the Regular Scheme and the Composition Scheme
Transition from a Composition Dealer to a Normal Dealer:
The section 16(3) of the Model GST Law states that when a taxpayer ceases to pay the composition tax and becomes liable to pay the tax as a regular taxpayer under the GST then he is eligible to take the Input Tax Credit in respect of inputs held in stock and the inputs contained in the semi-finished and finished goods held in the stock as on the day immediately preceding the day from which he becomes liable to pay tax under the regular scheme.
Transition from a Normal Dealer to a Composition Dealer:
As per section 16(12) of the Model GST Law, when a taxpayer liable to pay the tax as a regular taxable person switches over as a taxable person for paying the tax under section 8 (GST Composition Scheme), then he has to pay an amount by way of debiting in the electronic credit /cash ledger equivalent to the Input Tax Credit in respect of the inputs held in stock and inputs that are contained in a semi- finished and finished goods held in stock as on the day immediately preceding the day of such a switch over.