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In this article, we shall discuss the benefits of registering under the GST Composition Scheme even if you are not liable for GST Registration according to turnover.

Benefits of Composition Scheme

Attention GST registered taxpayers! 31st March 2019 is deadline to opt into Composition for FY 2019-20

For: Any GST registered taxpayer who want to opt for the Composition scheme for FY 2019-20;

31st March 2019 is the deadline to file the intimation in Form GST CMP-02 to opt into composition scheme for the FY 2019-20.

Follow our Step-by-step Guide to file CMP-02

Also, furnish statement in form ITC-03 within 60 days of commencement of the FY 2019-20 to declare the ITC claim that has to be reversed on inputs/capital goods in stock, in semi-finished or in finished goods.

 

What is the Composition Scheme Under GST?


Section 10 of the GST law contains the provision with respect to the registration of a taxpayer under composition scheme. The basic principle underlying the composition scheme is to minimize the burden of compliance for small taxpayers. There are around 8 million taxpayers that are expected to be migrated from the current laws into the GST regime. However, many of these taxpayers will have limited turnover and may not have requisite resources and expertise to comply with all the procedures mentioned under the GST.

Accordingly, the government came up with composition scheme wherein any taxpayer whose turnover is below Rs 1.0 crore* can choose not to register as a normal taxpayer. Instead, he may choose to get registered as a taxpayer under composition scheme and pay taxes on his supplies at a nominal rate. However, he shall not be eligible to issue a tax invoice and cannot utilize the credit of input tax paid as a result thereof.

As per the CGST (Amendment) Act, 2018, a composition dealer can also supply services to an extent of ten percent of turnover, or Rs.5 lakhs, whichever is higher. This amendment will be applicable from the 1st of Feb, 2019. Further, GST Council in its 32nd meeting proposed an increase to this limit for service providers on 10th Jan 2019**.

 

*Update as on 1st Feb 2019

*CBIC has notified the increase to the threshold limit from Rs 1.0 Crore to Rs. 1.5 Crores.

**Update as on 10th Jan 2019

As per 32nd GST Council Meeting held on 10th Jan 2019, Service Providers can opt into the Composition Tax Scheme, and the Government has set the threshold turnover for service providers at Rs. 50 lakhs to be eligible for this scheme.

Benefits of Registering under GST Composition Scheme

Below are some of the prominent reasons why you should choose to get registered as a supplier under the composition scheme:

  • Limited Compliance:  Under the composition scheme, the taxpayer is required to furnish quarterly return only, and thus he need not worry on record keeping and can focus on his business more rather than being occupied in compliance procedures.
  • Limited Tax Liability: Another benefit of getting registered under the composition scheme is that the tax rate for such taxpayer is nominal under the GST Law. 

Tax rates are calculated as % on turnover:

Composition-Scheme---Applicable-GST-Rates

As per notification 01/2018 dated 01.01.2018, turnover for traders has been defined as ‘ Turnover of taxable supplies of goods’.

Refer the table below to understand the benefit for small taxpayers:

Particulars Description Registered as a Normal Taxpayer Description Registered as a Taxpayer under Composition Scheme
A Total Sale Value(MRP) 118000 Total Sale Value(MRP) 118000
B Sales Value exclusive of taxes 100000 Sales value exclusive of taxes 118000
C GST @ 18% on sales value 18000 GST @ 1% on sales value 1180*
D Input Purchases 70000 Input Purchases 70000
E GST @ 18% 12600 GST @ 18% 12600
F Total Purchase Value (D+E) 82600 Total Purchase Value (D+E) 82600
G Net GST Liability (C-E) 5400 Net GST Liability (only C) 1180
H Net Profit {A-(F+G)} 30000 Net Profit {A-(F+G)} 34220

*Under composition scheme, a supplier cannot collect tax separately in an invoice. Here breakup is given only for reference and understanding purpose.

Thus if you see in above example, a supplier registered under the composition scheme and supplying such goods to the consumer at similar rates is earning more profit and his tax liability is also lower.

  • High Liquidity: One of the major benefits of registering as a composition supplier is high fund availability in the business. A normal taxpayer will be required to pay output tax on his supplies at a standard rate and any credit of input is available only when his own supplier files a return online which shall reconcile with his own return. Thus a large chunk of his working capital will always remain blocked in the form of input credit. However, for a supplier registered under the composition scheme, output liability will be nominal and he does not need to bother about return filing by his supplier. Thus if we refer to the above-mentioned case, for a normal taxpayer, apart from a higher tax liability of Rs. 4220 (5400-1180), a sum of Rs. 12,600 will remain blocked as input credit until his supplier file the required return. On the other hand, a supplier under the composition scheme is required to pay only Rs. 1180.
  • Level Playing Field: Just because a taxpayer has chosen to get registered under the composition scheme, it doesn’t necessarily mean he is losing the competitive edge. Since the profit margin of a supplier in composition scheme is more than a large taxpayer, such supplier can outplay the economies of scale of large enterprises by offering competitive prices and have a better hold on the local market of supply. Thus composition scheme ensures the interest of small suppliers carrying out intrastate transactions and provides with a sustainable and competitive supply market.

Hence, it can be said that composition scheme will be a growth driver for small taxpayers who are carrying out intrastate transaction and not import-export of goods. If any taxpayer carries out interstate transactions or gets into import-export transaction then the benefit of composition scheme is not available to such taxpayer and such suppliers are required to get registered as a normal taxpayer.

Further reading: Drawbacks of the GST Composition Scheme.

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