Composition Scheme Under GST

An Overview Of Composition Scheme Under GST

Composition Scheme Under GST: Under the GST law, a taxpayer pays tax at 5%, 12%, 18%, 28% and avails of CENVAT credit. Credit concerning central excise spent on purchasing any input for manufacturing or duty paid for the final product manufacturing. After the CENVAT is claimed, the balance tax amount is paid in cash to the government. All the procedural compliances are adhered to by using this method.

Previous tax systems used to have a lot of burden over compliance and legal formalities. To decrease such burden, a provision was brought under GST called the Composition Scheme at the time of registration. It is very similar to the composition schemes recognised in the previous VAT system in all states. It makes procedural compliance very easy by providing the taxpayer with the benefit of paying tax at a flat rate without declaring input credit.

Eligibility Criteria To Register Under Composition Scheme

  • Dealers of goods can opt for a Composition scheme. Manufacturers are eligible for this scheme, except manufacturers of pan masala, tobacco and ice cream. Service providers do not qualify for this scheme, except restaurants that do not serve alcohol are eligible for the composition scheme.
  • Persons with aggregate turnover less than ₹1.5 crores in the prior financial year are eligible under the composition scheme. The aggregate turnover is capped at ₹75 lakhs for persons belonging to Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Himachal Pradesh.

Aggregate turnover means the aggregate value of sales of all taxable and non-taxable supplies, exempt products and services, and export or interstate sales of goods and services by the person having the same PAN (Permanent Account Number). If an individual starts two firms and the firm’s combined turnover is more than the limit mentioned above, the person is ineligible for the composition scheme.

  • If a person’s turnover in a financial year surpasses the limits mentioned above, then from such day, the composition scheme becomes void and the person from such day needs to pay tax under a standard system.
  • If a person opts for the composition scheme, it is mandatory to register all his firms under the composition scheme. It is not allowed to record some of his firms under the composition scheme and some not. If any one of the firms loses eligibility for the composition scheme, all other firms will be ineligible.
  • A person registered under the composition scheme is not allowed interstate sales of goods. Such a person is permitted for intra-state sales. It means the firm can sell goods only in the same state or union territory in which it is registered.
  • A person should not sell goods through e-commerce portals like Flipkart, Amazon, Snapdeal etc., as a business through e-commerce indicates the firm is performing business on a large scale.
  • Non-resident and casual taxable persons are not eligible to register under the composition scheme.

Different Rates Of GST Under Composition Scheme

Particulars CGST SGST Total
Manufacturers 0.5% 0.5% 1%
All other Traders 0.5% 0.5% 1%
Restaurants not serving alcohol 2.5% 2.5% 5%

Restrictions Of Registration Under Composition Scheme

  • Persons registered under the composition scheme are not eligible for interstate sales.
  • Sales of exempted goods cannot be made by such a person.
  • Net tax payable = Composition Rate multiplied by Turnover. Such persons are not entitled to the input tax credit.
  • Such a person also breaks the input credit chain, and input tax credit cannot be passed. In other words, for another dealer who purchases goods/services from a composition dealer, then such dealer also cannot take the input tax credit. Therefore composition scheme is not suitable for wholesalers and B2B businesses.
  • Such a person under the composition scheme cannot charge tax on the invoice issued separately.
  • Sales through e-commerce portal like Flipkart or Amazon is not eligible under the composition scheme.
  • Such person who purchases goods or services from un-registered persons and on import of services under reverse charge is liable to pay tax. Tax is being calculated using the standard GST rates. SGST and CGST will be applicable even if the purchase is made from outside the state.
  • At the top of the supply-issued bill, the words “composition taxable person, not eligible to collect tax on supplies” should be mentioned.
  • Notice or signboard displaying “composition taxable person” should be placed by the person at important places at his place of business and every other place or places of business.

Payment Of GST And GST Return

Persons registered under the composition scheme must file quarterly returns, and GST payment should also be made quarterly. Filing of monthly returns and monthly payments of GST is applicable for regular traders.

The due date of filing return and GST payment is 18 days from the end of the quarter. Quarterly return of such types is to be filed in Form GSTR-4. Form GSTR-4A should also be filled in with details of input supplies.

After the end of the financial year, an annual return is to be filed in Form GSTR-9A on or before 31st December.

Registration To GST Composition Scheme And Its Usefulness

  • Reduction In compliance: Dealers registered under the composite scheme have to file quarterly returns and make payments quarterly, whereas regular dealers need to file monthly returns and make monthly payments. The work of record keeping decreases substantially.
  • Reduction Of Cost To Customer: Under the composition scheme, the cost to the final customer decreases if the person has a high margin.

Example 

Basis Normal Dealer Composite Dealer
Purchase Price 50 50
GST @18% 9 9
Sale Price (excluding GST) 100 109
GST @18% 18
Composition fees (109*1%/0.99) 1.10
Cost to Customer 118 110.10

Here composition fees are assumed to be @1%. In the above example, both composite and regular dealers enjoy a margin of ₹50, but the composite dealer provides the final cost to the customer @9.33% less.

Registration Under Composition Scheme And Its Limitations

  • Restriction Of Sales Through E-Commerce Portal Under the composition scheme, a registered person cannot sell through an e-commerce operator like Amazon, Flipkart, etc. This scheme is not for people who are performing online sales or wish to sell shortly.
  • Interstate Sales Cannot Be Made: Interstate sales or sales to other union territories are not allowed, and only sales to the state or union territories his business is registered are permitted under the scheme. This, in turn, decreases the extent of the company.
  • Hefty Amount Of PenaltyThe officer in charge may ask the person to pay tax at standard rates or penalty equal to tax amount to persons who are not eligible to register under the composition scheme but continue to do so. If a person makes an error in following the eligibility criteria already set, then he may be liable to a hefty penalty amount.
  • Not Fit For Wholesaler: Persons who are wholesalers cannot pass the input tax credit, and therefore, no dealer would like to purchase from such a person. It would increase costs due to double taxation, and thus dealers refrain from purchasing from such persons.

Application Procedure for GST Composition Scheme

Procedure To Choose Option

Such a person who is registering directly under GST and wants to go for the composition scheme has to choose the option given in Part B of Form GST REG-01.

Such a person who has already registered and wants to choose a composition scheme has to file Form GST CMP-02 before the commencement of the financial year. The person also needs to file Form GST ITC-03 within sixty days from the start of the relevant financial year. Such intimations to be filed only once at the time of opting and not in all financial years.

The stock of goods held by him at the starting of the financial year should not be purchased from an unregistered person, and tax to be paid on such stock purchased from an unregistered person.

Effective Date for GST Composition Scheme Levy

The effective date is the commencement of the financial year for which due intimation is filed in Form GST CMP-02 for composition levy. In case such a person at the time of registration opts for the composition scheme, the effective date will be the date of registration. Such a person should note that if his registration under the composition scheme is not accepted, then for the sales he already made, he may be liable to pay tax at the total rate.

Wrongful Claim To Be Penalised

Suppose the GST officer detects that the person is ineligible for tax payment under the composition scheme but continues to pay tax under this scheme. In that case, the person will be charged tax at a standard GST rate and a penalty equivalent to such tax to be paid. The proper officer should issue A notice issued by the proper officer in Form GST CMP-05 to such defaulting person to show cause within fifteen days of the receipt of such intimation as to why the option for payment of tax under the composition scheme should not be denied. The reply from the person to be filed in Form GST CMP-06 and the order to be issued under Form GST CMP-07 within 30 days of such response by the proper officer.

Procedure Of Opting Out From The GST Composition Scheme

The person whose conditions do not satisfy eligibility criteria under this scheme has to pay tax at standard rates and issue tax invoices from the day such state ceases to be satisfied. He is also required to file a notice for withdrawal from the scheme in Form GST CMP-04 within seven days from the date the condition ceased.

The person who voluntarily wants to withdraw himself/herself from such scheme has to file Form GST CMP-04 before the withdrawal date.

Every person opting out and has filed GST CMP-04 or has been issued an order for withdrawal of scheme under GST CMP-07 needs to furnish GST ITC-01. The taxpayer needs to declare details of the stock of inputs and finished goods held in stock or semi-finished goods held by him on the date on which the scheme is denied or withdrawn. The declaration should be within 30 days, from the date from which the scheme is removed or from the date of order passed in FORM GST CMP-07, as the case may be.

A notice sent by the officer to any state or union territory for withdrawal of option shall be deemed a notice of withdrawal in respect of all other business places registered under the same PAN.

Withdrawal Of Composition Scheme By Proper Officer

When there are reasons for the GST officer to believe that the registered person is not eligible to pay tax under section 10 or he/she contravened the provisions of the CGST Act or the rules, a notice might be issued by him to the person through FORM GST CMP-05, within fifteen days to show cause as to why the option to pay tax under the composition scheme shall not be denied.

The person in return has to reply to the notice by filing Form GST CMP-06. The GST officer will issue an order in FORM GST CMP-07 within thirty days of receiving the reply from the person, either accepting or refusing the option of tax payable under section 10 from the date of choice the event concerning such violation, as the case may be.

Different GST Forms

Form Number Due Date Description
 GST CMP-01 Before the appointment date or within 30 days of the appointed date Notice to pay tax under section 10 to provisional GST registration holders
(Only for persons from VAT system)
 GST CMP-02 Before the commencement of the financial year Notice to pay tax under section 10 for the normal taxpayer (GST registered)
 GST CMP-03 Within 90 days of the application of the option Notice to declare details of stock and supplies from registered as well as
unregistered persons
GST CMP-04 Within 7days from the date of occurrence of an event Notice for withdrawal from composition scheme
 GST CMP-05 Any contravention Notice of show cause for violation of tax payment rules or Act by the proper officer
 GST CMP-06 Within 15 days from the receipt of notice Response to the notice of show cause
 GST CMP-07 Within 30 days from receiving the notice Rejection or Acceptance of response to the notice of show cause

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