Understanding composition scheme under GST

GST registration enables small taxpayers to either pay the Goods & Service Tax under composition scheme or a regular scheme. Most of our CAs at LegalWiz.in are receiving some questions on how different it is to pay tax under the regular scheme via a composition scheme.

Let's understand it in detail.

GST Composition Scheme

Any registered person under the GST has an option to choose this tax-paying scheme. It allows the taxpayer to pay the tax on supplies at a fixed rate even if those supplies are taxed at a different rate. While this is a lucrative option for the traders, there is a time the person can apply for the GST composition scheme.

Applying for a GST Composition Scheme  

I. A business person can apply for the composition scheme while availing registration under the GST law. If done so, the GST composition scheme becomes effective at the same time with GST registration.

II. Applying for the GST composition scheme while migrating from the earlier laws where it gets effective from the registration date itself.

III. A business owner can also opt for a GST composition scheme before the commencement of a financial year for which one wants to leverage the scheme. In such a case the effective date of the scheme starts from the next financial year.

While the businesses want to get the most out of GST composition scheme registration it is often possible that one pays for the same while not being registered under it. In such a case when the GST is paid under the composition scheme without being eligible for the same, the following applies.

Additional tax payment (as per the regular scheme) + Penalty Payment (under sec.73 and 74, dealing with a demand under fraud and non-fraud cases).

Circumstances under which the opportunity for availing Composition scheme lapses or if the granted permission is called off.

I. The turnover threshold is exceeded, OR 

II. When the composition scheme conditions are not fulfilled by the registered person, OR

III. When the assigning officer believes that the applicant wanting to benefit from this scheme is not eligible.

Another fundamental question arises in case the registered person exits from the composition scheme and want to re-enter after withdrawal.

In such a case, the registered composition scheme taxpayer cannot revert to the composition scheme until the financial year expires.

Additional requirements in such cases include;

I. Filing a withdrawal scheme intimation within the seven days of non-compliance along with the specified conditions, OR 

II. Filing of a scheme withdrawal intimation anytime within the then-current financial year but before effective withdrawal date (if such withdrawal is wilful).

This composition scheme had a major update in April 2019

The composition scheme is available for all the service providers unlike before when the same was available only for restaurant service owners. Now, the small businesses with a turnover of over Rs. 50 lakhs can leverage composition scheme where the same conditions as other taxpayers apply to eligible taxpayers. It also includes availing benefits that the other taxpayers have under the composition scheme. For this, the tax rate is 6% (3% SGST + 3% CGST).

Composition Scheme Taxpayers - Major Compliance

Those businesses looking to benefit from the composition scheme will need to provide a statement for each quarter (of the financial year) in Form GST CMP-08. For each quarter, the tax has to be paid by the 18th of next month by the end of its relevant quarter. Such businesses must file Form GSTR-4 (for annual return) on or before 30th April post-financial year-end. This way, small taxpayers have the choice of whether to go for the regular GST or composition GST scheme.

Tax Rate under GST Composition Scheme

Category of Registered Person 

Rate of tax

Manufacturer (other than Pan/pan masala, Ice cream, and Tobacco)
0.5% CGST + 0.5% SGST = 1% of the turnover  

Restaurant (food) service providers
2.5% CGST + 2.5% SGST = 5% of the turnover

Service providers
3% CGST + 3% SGST = 6% of the turnover

Eligibility to Opt for GST Composition Scheme

A person looking to register under the GST composition scheme should have an aggregate turnover of up to Rs. 1.5 crores in a given financial year. Businesses operating from a special category states [Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Uttarakhand] have the limit of Rs. 75 lakhs.

Do note the following in the above case of calculating aggregate turnover:

Note I.
The exclusions while computing the aggregate turnover includes services rendered through deposit extensions, loans and advances with interest or discount consideration wherein the interest income is excluded.

Note II.
The recent GST law provisions include manufacturer or trader registered under Composition Scheme to supply their services. Such services should not value more than 10% of the turnover (in the preceding financial year) or Rs. 5 lakhs - the higher value is considered here.

Conclusion

Qualifying for the composition scheme will help you leverage the unmatched benefits. Few of these includes;

- Need to only deal with lesser compliance like maintaining books of records, issuing an invoice, return filing, etc.
- Higher tax liquidity at lower rates.
- The tax liability gets limited.

Also, the dealers who successfully register themselves under the composition scheme will not need to maintain the detailed records.