Composition Scheme : GST


1.0 What is Composition Scheme under GST?

 The composition Scheme is an alternative method of levy of tax designed for small taxpayers whose turnover is up to Rs. 01 Crore ( Rs. 75 lakhs in case of few States*). The objective of composition scheme is to bring simplicity and to reduce the compliance cost for the small taxpayers. Moreover, it is optional and the eligible person opting to pay tax under this scheme can pay tax at a prescribed percentage of his turnover every quarter, instead of paying tax at normal rate.

 Key-Notes : The turnover threshold for Jammu & Kashmir and Uttarakhand has been fixed at Rs. 01 Crore.

 *. Few States : Assam, Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Tripura, Sikkim and Himachal Pradesh.

1.1 Why GST Composition Scheme is introduced?

Normally, an assessee under GST has to maintain proper records of Output and Input and pay "Three Monthly Returns every month" plus "One Annual Return"

This is not possible for small business.

For such business, Government has introduced composition scheme under GST.

As per this Scheme, No Input is available to Composition Dealer. However, he has to pay Output at "Less-Rate".

Also Instead of monthly 3 returns, he can file "Quarterly One Return" plus "One Annual Return"

Hence, this scheme is for easy compliance of GST Law for small business.

Also, a taxpayer opting for composition scheme has to pay tax at a nominal rate.

2.0 Comparative Analysis Between Normal Dealer and Composition Dealer














3.0 Which Business Can Opt for the Composition Scheme in GST?
If the Person is doing Supply of Goods (Services Not Covered except Restaurant)
+
Doing only Intrastate-Sales (If Making Out of the State-Sales i.e. Interstate-Sales, then Not Covered)
+
Turnover is upto Rs. 01 Crore in Previous Financial Year.

"An alternate upper limit of Rs. 75 lakh is applicable in a few states - Assam, Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Tripura, Sikkim and Himachal Pradesh"

To opt in for composition scheme a taxpayer has to file Form GST CMP-01 or GST CMP-02 with the government. This can be done online after logging into the GST Portal.

This intimation should be given at the beginning of every Financial Year by a dealer wanting to opt for Composition Scheme.
4.0 What are the Rate of Tax under Composition Scheme in GST?

5.0 Who can not opt for Composition Scheme in GST?

  • Service Provider cannot opt for Composition Scheme (However Restaurant can opt for Composition Scheme).
  • Dealers/Manufacturers doing Interstate Sales can not opt for Composition Scheme (However Interstate Purchases are permitted) .
  • If having Turnover >Rs. 01 Crore (or, Rs. 75 lakh for few states) then this Scheme can not be availed.
  • If paying GST under Reverse Charge, then also Composition Scheme can not be availed.
  • For paying TDS under GST, Composition Scheme is not available.

In other words, we conclude that in the service sector, Composition Scheme is available only for one sector - restaurants. The Composition Scheme is not available for manufacturers of tobacco and manufactured tobacco substitutes, pan-masala and ice-cream and other edible ice, whether or not containing cocoa as notified.



    In different context we can say following condition must be satisfied in order to opt for Composition Scheme :

  • No Input Tax Credit can be claimed by a dealer opting for composition scheme.
  • The taxpayer can only make intra-state supply (sell in the same state) i.e. no inter-state supply of goods.
  • The dealer cannot supply GST exempted goods. However, if such Persons who are otherwise eligible for availing the Composition Scheme and are providing any Exempted Service, shall be eligibe for the Composition Scheme.
  • Taxpayer has to pay tax at normal rates for transactions under Reverse Charge Mechanism.
  • If a taxable person has different segments of businesses (such as textile, electronic accessories, groceries, etc.) under the same PAN, they must register all such businesses under the scheme collectively or opt out of the scheme.
  • The taxpayer has to mention the words ‘composition taxable person’ on every notice or signboard displayed prominently at their place of business.
  • The taxpayer has to mention the words ‘composition taxable person’ on every bill of supply issued by him.

6.0 What are the Returns to be filed by Composition Scheme under GST?

A dealer is required to file a quarterly return GSTR-4 by 18th of the month after the end of the quarter. Also, an annual return GSTR-9A has to be filed by 31st December of next financial year.

Also, note that a dealer registered under composition scheme is not required to maintain detailed records.


Key-Notes : However, the due date for filing GSTR 4 Return for July to September 2017 by taxpayers registered under composition scheme has been extended to 15.11.2017. Also entities opting for composition scheme will have to now file GSTR 4 Return only for that portion of the quarter from when the scheme becomes operational and can file returns as a normal taxpayer for the preceding tax period.


7.0 Penalty on Default by Composition Dealer in GST

As per the GST Law, if the taxpayer who has previously been given registration under composition scheme is found to be not eligible for the composition scheme or if the permission granted earlier was incorrectly granted, then such taxpayer will be liable to pay the differential tax along with a penalty which can extend up to the amount of total tax liability i.e 100%. On analysis of this provision, it can be fairly said that if a small taxpayer who has limited knowledge of tax laws and compliance makes any mistake under composition scheme, he shall be liable to pay tax at the standard rate on his total turnover along with a penalty which will be equal to the total tax liability.


8.0 Invoice to be Issued by Composition Dealer in GST?

Though the rate of composition tax is kept very nominal at 0.5%, 1% or 2.5%, a taxpayer under composition scheme is not allowed to recover such tax from his buyer, as he is not allowed to raise a tax invoice. Consequently, the burden of such tax is kept on the taxpayer himself and this has to be paid out of his own pocket. Thus the fundamental principle of limited compliance and tax burden on small taxpayer is defeated here.

Simply we can say that :

  • A Composition Dealer cannot charge CGST and SGST on Bill and cannot issue Tax Invoice.
  • He has to issue Bill of Supplies in GST.
  • Tax is not to be shown separately in Bill.
  • In Invoice it is to be mentioned "Composition Taxable Person, not eligible to collect Tax on Supplies".

8.1 Bill of Supply in GST


Bill of Supply is a document to be issued by a registered person supplying exempted goods or services or both or paying tax under the provisions of section 10 instead of a tax invoice.

8.2 What are the Contents of Bill of Supply?

The contents of a Bill of supply are as follows:
  • name, address and Goods and Services Tax Identification Number (GSTIN) of the supplier; 
  • a consecutive serial number not exceeding sixteen characters, in one or multiple series, containing alphabets or numerals or special characters - hyphen or dash and slash symbolised as “-” and “/” respectively, and any combination thereof, unique for a financial year; 
  • date of its issue;
  • name, address and Goods and Services Tax Identification Number or Unique Identity Number, if registered, of the recipient; 
  • Harmonised System of Nomenclature (HSN) Code for goods or services; 
  • description of goods or services or both; 
  • value of supply of goods or services or both taking into account discount or abatement, if any; and 
  • signature or digital signature of the supplier or his authorised representative.
Harmonised System of Nomenclature Code (i.e. HSN Code):
  • Turnover less than 1.5 crores- HSN code is not required to be mentioned.
  • Turnover between 1.5 -5 crores can use 2-digit HSN code.
  • Turnover above 5 crores must use 4-digit HSN code.


8.3 When is a Bill of Supply has to be issued?

a) A Bill of Supply is issued in case where a registered person is a supplier of exempted goods; or

b) If a registered person opts for composition scheme.

In these cases, as the registered person cannot issue Tax Invoice, so he has to issue a Bill of Supply.

Note: The registered person may not issue a bill of supply if the value of the goods or services or both supplied is less than two hundred rupees. In case of Stock Transfer Tax invoice will be issued as in stock transfer tax will be charged on the invoice.

9.0 Procedure for Registration under Composition Scheme in GST


Once you have met the prescribed condition discussed above, you need to file an intimation in the following forms:



1. Form GST CMP-1: A business who has registered under earlier regime and who wanted to opt for Composition Scheme on migrating to GST.



2. Form GST CMP -2: This is applicable for those businesses who have registered under GST regime as a regular dealer and wanted to opt for Composition Scheme. The intimation via this form needs to be done before the commencement of financial year.



Note : The businesses (whether migrated or new registrant), who could not opt for composition scheme by the deadline of 30th September, 2017, will be given the option to avail composition scheme till 31st March, 2018 and once a business has enrolled under the Composition Scheme, the scheme will become operational from the 1st date of the succeeding date.



Business applying for fresh registration in GST, and wanted to opt for Composition Scheme, can provide the intimation while the submitting registration Form GST REG -1.



10.0 Validity of Composition Scheme in GST

 The option to pay tax under composition levy would remain valid so long as conditions mentioned in section 10 of the CGST Act, 2017 and Rule 3 to 5 of the CGST Rules, 2017 remain satisfied.

11.0 Withdrawal of Composition Scheme in GST

Can a person paying tax under composition levy, withdraw voluntarily from the scheme?  Yes he can do. 



The registered person who intends to withdraw from the composition scheme can file a duly signed or verified application in FORM GST CMP-04.



Every person who has filed an application for withdrawal from the composition scheme, may electronically furnish, a statement in FORM GST ITC-01 containing details of the stock of inputs and inputs contained in semi-finished or finished goods held in stock by him on the date of withdrawal, within a period of thirty days of withdrawal, to avail  ITC on it.



12.0 Notice to Composition Dealer in GST

Where any contravention is observed by the Proper Officer wherein the Registered Person was not eligible to pay tax under the composition scheme or has contravened the provisions of the CGST Act, 2017 or provisions of Chapter II of the CGST Rules, 2017, the Proper Officer may issue a notice to such Registered Person in FORM GST CMP-05 to show cause within fifteen days of the receipt of such notice as to why the option to pay tax under the composition scheme shall not be denied.
Upon receipt of the reply to the said show cause notice in FORM GST CMP-06, the Proper Officer shall issue an order in FORM GST CMP-07 within a period of thirty days of the receipt of such reply, either accepting the reply, or denying the option to pay tax under the composition scheme from the date of the option or from the date of the event concerning such contravention, as the case may be.

Simply we can say that :

  1. When the Proper Officer has reason to believe that any Provisions by Composition Dealer has not been complied with, the Proper Officer can give Show Cause Notice in FORM GST CMP-05.
  2. Reply to Notice is to be Given in FORM GST CMP-06 within 15 Days by such Registered Person.
  3. The Proper Officer shall issue an order within 30 Days on receipt of Reply in FORM GST CMP-07.

12.1 What about the ITC on Stock after Denial to pay Tax under the Composition Scheme by the Proper Officer?

ITC can be availed by filing, a statement in FORM GST ITC-01 (containing details of the stock of inputs and inputs contained in semi-finished or finished goods held in stock) by such Registered Person on the date on which the option is denied as per order in FORM GST CMP-07, within a period of thirty days from the order.


13.0 Advantages of Availing Composition Scheme in GST

The following are the advantages of registering under composition scheme:
  1. Lesser Compliance (Returns, Maintaining Books of Record);
  2. Limited Tax Liability;
  3. High Liquidity as taxes are at a Lower Rate.

14.0 Disadvantages of Availing Composition Scheme in GST


    The following are the disadvantages of registering under composition scheme:

    1. A limited territory of business;
    2. The dealer is barred from carrying out inter-state transactions;
    3. No Input Tax Credit available to composition dealers;
    4. The taxpayer will not be eligible to supply goods through an e-commerce portal.


    15.0 Ultimate Conclusion
    The Composition Scheme, for sure will provide easier compliance for small businesses. But it is advisable to evaluate the implication of these conditions and restrictions on your business, and accordingly make decisions.
    Generally, small businesses such as B2C, would greatly benefit from this scheme. In case of B2B environment, your business customer would not want to buy from you as they will not get the benefit of input credit. You would be uncompetitive as your input credit would translate into cost of the product for a B2B entity.



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