The GST composition scheme: explained
To help ease the implementation and the tax compliance procedure for small taxpayers like Small and Medium-sized Enterprises (SME)s, Micro, Small and Medium Enterprises (MSME)s, and small traders, the central government has introduced this Goods and Services Tax (GST) scheme. The GST composition scheme already exists under many state Value Added Tax (VAT) laws; however, it is absent in the central laws like excise and central tax. For the uninitiated, the new scheme can be challenging to understand. This article aims to provide a clearer understanding of the new GST scheme and how it impacts you.
Who can opt for the Composition Scheme?
A taxpayer whose turnover is below Rs 1,500,000, can opt for this scheme. In case of North-Eastern states and Himachal Pradesh, the turnover limit is Rs 7,500,000. When calculating turnover, all businesses registered with the same PAN should be considered.
Eligibility of Registered Individual/s:
A registered business opting for the Composition Scheme should not be:
- Engaged in the supply of services other than the service specified in Clause (b) of Para 6 of Schedule. This implies that service providers cannot avail the benefits of the Composition Scheme. One example can be restaurant service
- Manufacturers of ice-cream, pan masala or tobacco are not eligible for the scheme
- Engaged in making any inter-state outward supplies of goods. This implies that the Composition Scheme can only be availed when making intrastate supplies, i.e. within the state supply of goods and services
- Engaged in making any supply of goods through an E-commerce operator who is required to collect tax at source under Section 52
- Should not be a manufacturer of such goods as may be notified by the Government on the recommendations of the Council.
Conditions for availing this scheme:
For an individual to avail this scheme the following conditions must be met. A taxpayer:
- Cannot claim Input Tax Credit (ITC)
- Cannot supply goods which are not taxable under GST, like alcohol
- Has to pay tax at normal rates for transactions under Reverse Charge (RC) mechanism
- Needs to register all segments of businesses under the same PAN collectively or will need to opt out from the scheme
- Has to mention “Composition Taxable Person” on all bills generated and also display the same at his place of business
- A manufacturer/trader can also supply services either to the extent of 10% of the turnover or Rs 500,000, whichever is higher.
How to opt-in for the Composition Scheme:
In order to opt for the scheme, the following process must be followed:
- A taxpayer has to file GST CMP-02 with the government
- The process can be done online by logging in to the GST portal
- A dealer needs to give this information at the beginning of every Financial Year (FY)
GST Composition Scheme Rate:
Under this scheme, GST rates are as follows:
- Manufacturers and traders have to pay 1% GST
- Restaurants that don’t serve alcohol have to pay 5% GST
- Other service providers will have to pay 6% GST.
What returns does the composition dealer have to file?
A dealer is required to pay tax in a quarterly statement (CMP-08) by the 18th of the month, after the end of every quarter. Also, return in form of GSTR-4 has to be filed on the GST composition scheme by the 30th of April for every financial year.
GST Composition Scheme Bill Format:
Businesses must supply a “Bill of Supply” for outward supply of goods. This bill also must feature the words ‘Composition Taxable Person, Not Eligible to Collect Tax on Supplies”. There are key elements of the bill that must be adhered to:
- Supplier name, GST Identification Number (GSTIN) and Address
- Unique serial number termed as bill of supply number
- Date of issue of bill of supply
- Recipient details such as name, address and GSTIN (if registered)
- HSN code of goods being supplied
- Description/quantity of goods/services (as applicable)
- Total value of supplies (adjusted for applicable discounts)
- Signature/digital signature of the supplier
Advantages of the GST Composition Scheme:
- Businesses get more time to focus on core business activities and enjoy less compliance related tasks like: filing returns, maintaining books and records, and more
- Small businesses stand to gain considerably with lower tax liabilities. Most small and medium sized businesses that have an annual turnover lower than Rs 1,500,000 are not burdened by taxes. This allows small and medium sized businesses to flourish in the marketplace
- Taxpayers get higher liquidity since the applicable tax rates are lower; and hence lower GST has to be paid to the government
Disadvantages of the GST Composition Scheme:
As with most things in life, there are downsides to the Composition scheme:
- In order for businesses to register under the scheme, they must operate within a state. This limits the territory of a business to expand its operations
- Goods that are exempted from GST cannot be supplied. For example, sugarcane traders cannot opt for the Composition Scheme as their commodity is exempt from GST
- No option to claim ITC.
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