Goods and Services Tax has brought in a new regime of business compliance in India. Large organizations have the requisite resources and expertise to address these requirements. On the flip side, many startups and Small and Medium Enterprises (SMEs) may struggle to comply with these provisions. To resolve such scenarios, the government has introduced Composition Scheme under GST, which is merely an extension of the scheme under VAT law.
When opting for the Composition Scheme under GST, a taxpayer will be required to file summarized returns on a quarterly basis, instead of three monthly returns (as applicable for normal businesses). Let’s look at some of the common questions around Composition Scheme that businesses should know.
Who can opt for Composition Scheme?
Businesses dealing only in goods can only opt for composition scheme. Services providers have been kept outside the scope of this scheme. However, restaurant sector taxpayers may also opt for the scheme.
This holds true if your annual turnover is below Rs 1 crore*.
What is the tax rate applicable on a Composition Dealer?
Please use the chart below to understand the tax rate applicable:
Must a Composition Dealer maintain detailed records?
No, a dealer registered under composition scheme is not required to maintain detailed records as in the case of a normal taxpayer.
Do Composition Dealers have the option to avail Input Tax Credit?
No, a Composition Dealer is not allowed to avail input tax credit of GST paid to their supplier.
Can a Composition Dealer issue Tax Invoices?
No. Since a Composition Dealer is not allowed to avail input tax credit, such a dealer cannot issue a tax invoice as well. A buyer from composition dealer will not be able to claim input tax on such goods.
Which returns are required to be filed by a taxable person registered under Composition Scheme?
The taxable person is required to furnish only one return i.e. GSTR-4 on a quarterly basis and an annual return in FORM GSTR-9A.
Is liability to pay taxes under Reverse Charge Mechanism covered under the Composition Scheme?
A Composition Dealer has to pay tax under Reverse Charge Mechanism wherever applicable. There is no exemption to a composition dealer here.
Can a Composition Dealer collect composition tax separately?
No, a Composition Dealer is not allowed to collect composition tax from the buyer.
What is the threshold limit to be eligible for Composition Scheme?
Any dealer whose aggregate turnover in a financial year does not exceed Rs. 1 crore* can opt for composition scheme
Can a dealer involved in interstate supplies opt for Composition Scheme?
No, Composition Scheme is available only for intra-state supplies. If a dealer is involved in inter-State supplies, then he cannot opt for the scheme.
What are the penalties applicable on Composition Dealer in case of any default in tax payment?
If the tax administration has reason to believe that a composition dealer has wrongly availed the benefit under the composition scheme, then such a person shall be liable to pay all the taxes which he would have paid under the normal scheme. Also, he will be liable to pay a penalty equivalent to an amount of tax payable.This penalty will not be levied without giving a show cause notice to the dealer.
What are the transition provisions if a business transits from Composition Scheme under current regime to Regular Taxation under GST?
Taxpayers registered under composition scheme under the current regime will be allowed to take credit of input held in stock, or in semi-finished goods or in finished goods on the day immediately preceding the date from which they opt to be taxed as a regular taxpayer.
What are the conditions for availing input credit on stock lying at the time of transition?
Following are the conditions which must be addressed by the taxpayer to avail credit on input at the time of transition from composition scheme to the normal scheme:
- Such inputs or goods are intended to be used for making taxable supplies under GST law.
- Taxpayer was eligible for CENVAT Credit on such goods under the previous regime, however, couldn’t claim it being under composition scheme.
- Such goods are eligible for input tax credit under GST regime.
- The taxpayer has legal evidence of input tax paid on such goods.
- Such invoices were issued within a period of 12 months from GST applicable date.
What is the treatment for input credit availed when transitioning from normal scheme to Composition Scheme?
When switching from normal scheme to composition scheme, the taxpayer shall be liable to pay an amount equal to the credit of input tax in respect of inputs held in stock on the day immediately preceding the date of such switchover. The balance of input tax credit after payment of such amount, if any lying in the credit ledger shall lapse.
Can I opt for Composition Scheme in one year and regular in another?
Yes, this is possible. You can opt to switch between the Composition Scheme and the normal scheme based on your turnover. However, you will have to keep in mind that this will affect the way you issue invoices and file your returns.
The declaration of change can be done using Form GST-CMP 02. For the current financial year, the window for change has been extended until March 31st, 2018. Let’s assume a taxpayer who was registered under the normal scheme from July onwards decides to opt for the Composition Scheme from November. For the period of July-October 2017, the taxpayer will have to file returns as per the rules for normal taxpayers. In this example composition Scheme will apply from November 1st; and the taxpayer will have to follow all the rules of the Composition Scheme like issuing a Bill of Supply instead of a normal invoice, putting up a sign outside their premises saying that they are part of the Composition Scheme and are not eligible for charging GST on sales etc.
Can I break up my businesses and opt for Composition Scheme for all of them separately?
Under GST, each business is given a specific identification number called the GSTIN. The GSTIN is associated with the PAN of the business or the business owner. As long as all your businesses are associated with a single PAN, you can choose only one of the schemes for all your businesses – regular or composition scheme. However, if you have businesses with different PANs, then you can opt for different schemes for all of them depending on the turnover of each business.
Is it true that Composition Dealers can offer the same product at a lower price?
Yes, since composition dealers cannot charge GST on their sales, so the end consumer pays less money than usual. Composition dealers can also buy from unregistered dealers in order to keep their costs low.
Read our guide on “Benefits of Registering under GST Composition Scheme” for more details.
Below is the format (in a PDF format) prescribed by the government for registering as a composition dealer.