Composition Scheme under GST – limit, rate, return form and due date

Overview

In recent years, there has been a tremendous increase in the number of small and medium business enterprises in India. As per the data provided on Nov 26, 2021, by the Ministry of Micro, Small & Medium enterprises, there are as many as 6.3 crores of MSMEs registered in India. They have utmost importance for various reasons such as generating employment and providing economic support in the form of exports and further regulating the demand and supply market. Despite all this, they work in small capacities with higher costs of operation and lower revenues. Therefore, for the convenience of the small-scale businesses, the Govt. of India introduced the Composition Levy scheme under GST in July 2017. The concept of the Composition scheme is similar to the composition scheme in the previous VAT regime.

The GST Composition scheme is a tax-payment mechanism that allows eligible assesses to pay taxes at lower rates with lesser compliances but does not have the benefit of availing any tax credits paid on inputs and input services. There is a separate fixed rate of interest rates specified for assessing those who have opted for a composition scheme. In the beginning, the annual turnover limit for the availing composition scheme was Rs.75 lakh per year for other states and (Rs.50 lakh for specified states). However, the Central Board of Indirect Taxes & Customs (CBIC) in April 2019 announced an increase in the eligibility limit of annual aggregate turnover (for the previous financial year) to opt into the composition scheme from Rs 1 crore to Rs 1.5 crores and Rs.75 Lakh in case of specified states (i.e. North-Eastern States & Uttarakhand. Additionally, the Govt. of India has allowed relaxation in various tax-related compliances and payments for individuals to enhance liquidity in the business which has afforded a lot of benefits for not only B2B businesses but also B2C businesses in India.

There may be advantages as well as disadvantages of availing the Composite Levy scheme, and it is upon the Assessee to make a decision regarding the same after carefully observing features of the same. Let’s read further to find out further about the composite levy.

Who is eligible for availing composition scheme under GST?

A taxpayer whose aggregate annual turnover in the previous financial year is up to Rs.1.5crores (Rs.75 Lakh in the case of North-East States, Himachal Pradesh, and Uttarakhand) may opt for the Composite Levy. According to the amendment under CGST (Amendment) Act, 2018, a composition dealer could supply also make the supply services to the extent of ten percent of turnover, or Rs. Five 5 lakhs, whichever is higher. Further, for the purpose of calculation of the Aggregate Annual Turnover in the previous year, each business registered with the same PAN in the whole of India must be taken into consideration.

But, following shall be disqualified from availing Composition levy irrespective of the Annual Aggregate Turnover in the previous year-

• Any Manufacturer of ice cream, pan masala, or tobacco
• A person making/wishes to make inter-state supplies
• A casual taxable person or
• A non-resident taxable person
• Dealers making supply goods through an e-commerce operator
• A supplier who supply exempted goods under GST

What are the conditions applicable for availing Composition scheme?

Following conditions must be satisfied after availing of the Composition Scheme-

i. A business dealer having opted for Composition Scheme cannot avail of Input Tax Credit concerning its inward supplies.

ii. Such Composition dealer cannot make the supply of Goods out of the purview of GST i.e. alcohol.

iii. A Composite Dealer shall be required to pay taxes at normal rates in case of transactions under the Reverse Charge Mechanism.

iv. A business dealer should disclose all the business verticals (such as textile, electronic accessories, groceries, etc. with branch addresses registered under the same PAN all over the country If a taxable person has different segments of businesses and then opt for one scheme for all such businesses collectively altogether or opt-out of the scheme.

v. The composite dealer shall be required to display in prominent words ‘composite taxable person’ on every visible signboard at their place of business.

vi. The composite dealer has to mention the words ‘composition taxable person’ on every bill of supply issued and cannot issue an invoice.

vii. After the CGST(Amendment) Act, 2018 a manufacturer or trader under the composition scheme in addition to goods can also make the supply of services to the extent of either ten percent of the annual turnover of Rs. Five lakhs, whichever is higher.

viii. He is not a manufacturer of such goods as may be notified by the Government during the preceding financial year.

Benefits of Composition Scheme

i. Lesser Compliances

Business compliances do involve higher costs, especially in the case of a small & medium business with low revenues. Therefore, the composition scheme offers the benefit of lesser GST compliances such as less number of returns (5 returns in total out of which four quarterly returns in form GSTR 4 and one annual return in form GSTR 9A).  ) and no detailed records and no GST audits as compared to the case of normal GST scheme under which there are more than 13 returns are to be filed as monthly, quarterly, and annually.

Thus, lower compliances are one of the biggest and the most attractive advantages under the Composition levy which is beneficial for small businesses as they have to spend lesser time and incur lesser costs in maintaining compliances and give more focus to the business.

ii.  Lower Tax Rates & Tax Liability

The composition scheme offers the lowest tax rates for the businesses who avail of the composite scheme which is advantageous for them. While, the tax rates under the normal GST are (5%, 12%, and 18%), GST rates under the composition scheme are low as (1%, 2%, and 3%) respectively which is a huge difference under both schemes.

iii.  Less Tax And High Liquidity

The two greatest benefits offered by the composition scheme –lower tax rates & lesser compliances give two immediate benefits- higher liquidity and better working capital management for the business which could be diverted towards business operations and business expansion causing a lesser portion of working capital blocked into tax payments.

Disadvantages of Composition Scheme

i. Inability to make inter-state sales

Every business dealer wishes to expand his business for generating better revenues and earning more income. However, a person who has opted composition scheme cannot make inter-state sales, and the sales have to be restricted to intra-states for his business which is one of the biggest disadvantages of the GST Composition levy. Not only this, a composite dealer cannot even export his goods or services due to the same reason as export of goods is considered an inter-state sales for GST.

ii. Non-availability of Input Tax Credit

One of the reasons behind the introduction of GST was to reduce production costs for the businesses on inward supplies by providing tax credits and removal of the cascading effect created due to double taxation. However, a composite dealer is ineligible to get any input tax credit in case of inward supplies that defeats the purpose of  GST ultimately leading to an increase in costs of production for businesses.

iii. Disallowed to issue tax invoices or Tax collection

Composite Dealers are debarred from collecting taxes from the buyers & customers of their goods & services and has to pay taxes out of their own pockets. Further, the composite dealer cannot issue a tax invoice to its customers and has to issue a bill of supply under GST.

iv. Supply of Services Not Covered

Though after amendment in the CGST (Amendment) Act 2018, a composite dealer may also undertake supply of services up to 10% of its annual turnover of Rs. 5lakh in a year. But, beyond this, composite dealers cannot undertake supply of services (excluding restaurant services) which is discouraging for small businesses.

v. Prohibition to Supply Exempt Goods

Businesses dealing in goods & services that have been expressly exempted under the provisions of GST and thus, business dealers cannot avail of composition scheme.

vi. Prohibition against supply through E-commerce Portal

At a time when more and more businesses are opting for online presence and selling goods through e-commerce portals like Amazon, Flipkart, Myntra, etc. composite dealers have been prohibited from the supply of their goods through e-commerce portals which restricts their business prospects.

How to avail GST Composition Scheme?

The process of registration of a business dealer as a “Composite Dealer” is a simple process that is facilitated through the GST online platform by logging website (https://cbic-gst.gov.in/) and such choice must be made at the beginning of the financial year. Provided below is the step-by-step process of availing Composition scheme under the GST portal-

Step 1. After logging in to the portal go to the main page and click ‘Services’ and select Registration and further Application to Opt for Composition Levy.

Step 2. Next, you will be able to see the ‘Composition Declaration’ go through it carefully, and place a tick on the checkbox.

Step 3. Select the “Authorized Signatory” from the drop-down menu and put other details like ‘Place’ and click on ‘Save’.

Step 4. In case the applicant is a Company/LLP, it needs to apply with DSC. In all other cases, the applicant entity may use any of the three methods to submit the application.

Step 5. The next click proceeds after a pop-up come up with a warning.

Step 6. After successfully submitting the application, a message will be received along with an acknowledgment in the registered mobile number and email id. Later, the applicant dealer shall be required to file and submit GST CMP-03 providing a list of inward supplies received from registered and unregistered dealers within 90 days.

GST Composition- Payments & Returns

As provided above, a GST Composite dealer has to make GST payments out of his pockets and not to be collected from customers. GST composition tax payments to be made by a composite dealer shall comprise of the following-

• GST is applicable on the supplies.
• GST is applicable on a reverse charge basis.
• GST on the purchases made from an unregistered dealer.

A composite dealer shall be required to file GSTR-4 is a quarterly return for a compounding taxable person and is to be filed on the 18th of the month succeeding quarter for each quarter in the financial year. For instance, where a business dealer is filling the quarterly return for July-September, it must be filed on or before the 18th of October of the financial year. Further, a composite dealer shall be required to file a consolidated annual return in the form GSTR-9A as part of the compliance process and is filed on 31st December of next financial year.

Moreover, business dealers shall also be required to file a new form prescribing details about payment of self-assessed tax in a simplified form by the 18th of the month after the end of a quarter in the form CMP-08. For instance, a business dealer shall be required to file CMP-08 for the April-June quarter either on or before the 18^th of July.

It is to be noted that all the forms must be duly signed by the business dealer or his authorized electronically on the GST portal directly or through a Facilitation Centre notified by the Commissioner.

Documents required for Composition scheme

Provided below are the documents required for the purpose of GST registration-

• PAN Card of the business
• Proof of identification of business dealer i.e. Aadhaar card
• Scanned photograph of the business dealer;
• Proof of Address
• Bank Account details of business/business dealer

What are the GST rates under Composition Scheme?

Provided below are the applicable rates of GST for composition dealers-

Conclusion

Therefore, a composition scheme is a tax scheme that has been specially curated for small businesses having limited business operations. Composition Scheme Rules under GST have been aimed to ensure strict compliance to the rules and notifications as notified from time to time apart from taking advantage of the benefits provided under the composition scheme. For example, if the business dealer fails to make timely submission of the composite tax returns, such business dealer shall be fined with a penalty of Rs. 100 per day to a maximum limit of Rs. 5,000/-. Also, failure to submit tax returns for three consecutive periods may lead to cancellation of registration by the GST authorities.

It is also to be noted that wrongfully obtaining registration under the compositions scheme is an offense under the GST Act and the Composition rules. If the GST Department finds or believes that a business dealer has wrongfully obtained registration under composition scheme or is ineligible to obtain registration under GST composition, they may take appropriate action that includes disqualification from opting composition scheme and levy of penalty up to the maximum limit of the actual tax liability.

However, if the composite dealer wishes to expand his business operations, say making exports of his goods or making inter-state supplies later, he can opt for a regular GST scheme in the next financial year and take benefits of normal tax scheme with ITC for which the input tax credits will be calculated based on input, semi-finished and finished goods held in stock.