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Introduction
Indirect taxes are a major portion of the government revenue. It is paid by every consumer on every goods or service that is purchased by the consumer. Indian taxation system had many types of indirect taxes levied on the goods and services available in India. These taxes ranged from the point of manufacture of goods to the point of sale and the rate of taxation varied from state to state at their discretion. This type of indirect taxation had many loopholes and was cumbersome at the same time. Also the consumer was charged or penalized due to the multiple taxes levied on a product and service which lead to the final price of such product increasing.
To curb all such disadvantages and streamline the indirect taxation system, the Government of India introduced GST. GST introduced registrations under the scheme from the year 2017. Under this type of indirect taxation, there is a single tax structure and single rate of taxation unlike multiple indirect taxes at each point of sale or different for each state or union territory. GST also offers a composition scheme that is mostly availed by small businesses or service providers. The details of the GST Composition Scheme are mentioned below.
GST Composition Meaning
GST composition Scheme is an optional scheme under the GST module. It is a convenient and faster mode of compliance to the GST scheme of taxation. It is available for the benefit of the small scale and medium scale enterprises. It helps the customers escape the tedious process of GST filing and other compliances. GST Composition Scheme allows the customer to pay GST at minimum rates applicable under the Act.
GST Composition Scheme Eligibility
The scheme has laid down certain conditions to be eligible under the GST Composition Scheme. The primary condition to be eligible for the scheme is the annual turnover of not more than Rs. 1,50,00,000. This condition is further relaxed in case of certain states to Rs. 75,00,000. The composition scheme allows the eligible customers to avoid the tedious process of GST compliances (like maintaining books of accounts, filing lesser tax returns, no issuance of tax invoices, etc.)
The eligible persons that are allowed to pay GST under the composition scheme and the applicable rates in each case are tabled below.
Category/ Eligible Entities | Applicable Rates | ||
CGST | SGST | Total | |
Manufacturer and Trader of Goods | 0.5% | 0.5% | 1% |
Restaurants not serving alcohol | 2.5% | 2.5% | 5% |
Other service Providers | 3% | 3% | 6% |
States that have the relaxation in the turnover condition under GST Composition Scheme are mentioned hereunder.
- Arunachal Pradesh
- Assam
- Manipur
- Meghalaya
- Mizoram
- Nagaland
- Sikkim
- Tripura
- Himachal Pradesh
Persons not eligible for Composition Scheme
The scheme also specifically provides for persons who are not eligible for the Composition Scheme. Such persons are mentioned below.
- A casual taxable person
- An NRI taxable person
- Manufacturer of Ice-cream, tobacco or pan masala
- Businesses which supply goods through e-commerce operator
However, the traders of ice-cream, tobacco or pan masala are allowed to avail the benefits of the composition scheme.
Benefits of GST Composition Scheme
The GST Composition Scheme has been initiated under the GST Taxation Scheme for the benefit of the small taxpayers who can escape the tedious proceedings of the GST tax regime. This enables the small businesses and medium taxpayers to pay GST at reduced rates of taxation and also helps them meet the limited compliance requirements.
The benefits of GST Composition Scheme are detailed below.
Reduced Compliance
GST Composition Scheme allows the taxpayers to meet reduced compliance with respect to tax returns. The GST scheme requires the taxpayers to file monthly returns along with the annual returns. The GST composition scheme, however, requires the taxpayers to submit only quarterly returns. This reduces the burden of maintaining the detailed books of accounts as well as the tedious procedure to file multiple returns. The businesses can thus focus better on the operations part of the business and generating more profits rather than wasting precious time and manpower on compliance procedures.
Reduced Tax Liability
The tax liability for the taxpayers under the composition scheme is one of the main advantages of the composition scheme. Tax payers under the composition scheme are not allowed to take or collect tax separately from the buyers in an invoice. But the tax rate under the composition scheme is competitive enough that the taxpayers end up paying less tax than what they would have paid had they been under the normal tax structure.
Increased Liquidity
One of the biggest challenges faced by the small businesses is that of liquidity. The reduced tax liability of the taxpayer under the composition scheme ensures that the tax outflow of taxpayers is less which results in higher liquidity. Also, the taxpayers can collect input tax credit only after the supplier duly files the tax returns. In the composition scheme, the taxpayers are not allowed to take the tax credit hence they do have to worry about the supplier filing their tax returns on time so they can avail the credit. They only have to pay GST at reduced rates and file their returns duly for compliance under the GST Composition Scheme.
The above limitations make it difficult for the smooth acceptance and proceedings of the GST composition scheme. These limitations have been addressed to the GST Council and due suggestions for the same are sought.
Limitations under GST Composition Scheme
The GST Composition Scheme had been introduced with the idea to reduce the burden of GST tax and compliance for the small and medium businesses. The intention was to make GST simpler so they can adopt the scheme without any hassles and thus benefit from the scheme. However, the GST composition scheme does have some limitations and concerns that are faced by such small taxpayers. These limitations are discussed below.
Inter-State Business disallowed
GST Composition Scheme prohibits the taxpayer under the scheme to take part in inter-state sale or business. This limits the horizons of the small businesses and in turn hampers their chances of growth and expansion. Tax payers under this scheme cannot execute any import or export of goods and services beyond their state. They are allowed to carry on their business only within the state limits.
Input Tax credit Disallowed
The taxpayers are not allowed to take credit of the input tax under the composition scheme of the GST Act. This rule is applicable on all the dealers and the buyers under the composition scheme.
Stringent Penal Provisions
GST Composition Scheme since being launched as a benefit for the small businesses comes with many stringent provisions in case it is violated or misused. Taxpayers who are wrongly registered under the GST Compositions Scheme if found guilty are liable to pay the entire tax evaded retrospectively along with interest and penalty up to 100% of such amount.
Payment of taxes from one’s own pockets
Taxpayers under the GST Composition Scheme are not allowed to issue tax invoices. They are also not eligible to take input tax credit from the suppliers. This results in the taxpayers paying the GST from their own pockets. Even if the rate of taxation is reduced, this still results in funds outflow from the pocket of the registered taxpayer.
Limited scope of trade
Registered taxpayers are not allowed to supply non-taxable or exempted goods. These further limits the scope of trade of the taxpayers registered under the GST Composition Scheme.
Process to Opt for the Composition Scheme
The process to opt for the composition scheme is very simple and requires the eligible taxpayers to file GST CMP-02 with the government. Tax payers have to login to the GST portal of the Government for this purpose.
The eligible taxpayer has to intimate about the intention to register for the GST composition scheme at the beginning of the financial year.
FAQs – GST Composition Scheme
1. What are the conditions that eligible taxpayers have to comply with to avail the GST Composition Scheme?
The eligible taxpayers have to comply with certain terms and conditions in order to avail the benefits under the GST Composition Scheme. These conditions are mentioned hereunder.
- GST Registration as per the rules and regulations of the Act are mandatory for a person availing the GST Composition Scheme.
- The Act specifically excludes an NRI taxable individual or a casual taxable individual from being eligible for the composition scheme
- Such person cannot claim the input tax credit
- Such taxpayer will not be allowed to undertake any interstate business
- Such taxpayer will have to mention the words ‘composition taxable person’ on every notice or signboard (and bill of supply issued) that is displayed prominently at the place of business
- Those supplying goods can then provide services of up to Rs.5,00,000
- Such taxpayers cannot supply GST exempted goods.
- The scheme is also a composite scheme which means that if the taxpayer has multiple businesses under a single PAN, all such businesses have to be registered under the GST Composition Scheme otherwise, such taxpayer will have to opt out of the scheme
- The scheme also states that such taxpayer will have to pay tax at normal rates for transactions under the Reverse Charge Mechanism
2. Is a taxpayer under the GST Composition Scheme allowed to collect tax from customers?
No. GST Composition Scheme does not permit the eligible and registered taxpayers to collect tax from the customers.
3. Can a taxpayer under the GST Composition Scheme issue a tax invoice?
No. A registered taxpayer under the GST Composition Scheme cannot issue a tax invoice. Such a person has to issue a bill of supply with the words ‘composition taxable person’ on the document.
4. What is the treatment of the input credit that is availed by the taxpayer while transitioning from the normal scheme to the composition scheme?
The scheme requires the taxpayer to pay an amount equal to the input tax credit in relation to the inputs held in stock on the day immediately before the date of transition. The balance input tax credit if available in the ledger shall lapse after the above payment.
5. What is the maximum rate of GST under the Composition Scheme?
The maximum rate of GST under the composition scheme is 6% (3% CGST + 3% SGST) levied on the eligible on the service providers.