GST Composition Scheme

GST Composition Scheme is an option available to a registered taxpayer who needs to inform the tax authorities of his intention to be registered under the scheme. In case the registered taxpayer fails to comply with the same he would be treated a normal tax payer and administered accordingly. Such option needs to be for all businesses of the tax payers ie both for goods as well as services. 

Turnover and Rate of Tax under GST Composition Scheme

A registered taxpayer, whose aggregate turnover does not exceed Rs 50 lakh in the preceding financial year pay tax at a rate not less than 2.5% for manufacturer & 1% for others. { Aggregate Turnover = Taxable supply+ Exempt supply+ Export of goods/services}

Taxable persons who cannot opt for Composition Scheme

  1. Supplies goods not leviable under the Act
  2. Service provider.
  3. interstate supply or import/ export.
  4. Electronic Commerce Operator
  5. Manufactures such goods as may be notified.

 

No Credit of Input Tax

if any taxable person is carrying out business on B2B model, such person will not be allowed the credit of input tax paid from the output liability & buyer of such goods will not get any credit of tax paid, Scheme holder cannot claim input tax credit even if he makes taxable purchases from a regular taxable dealer. the taxable amount would be added to the composite tax payer’s cost.

No Collection of Tax

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 borne by the taxpayer himself and this must be paid out of his own pocket.

Lower Compliances

Under this scheme a tax payer is required to file one return in each quarter &  need not worry on record keeping and would focus more on his business. Since a scheme holder is not required to pay taxes at regular rates, he is not liable to issue a Tax Invoice rather issue a Bill of Supply .

Strict Penal provisions

Under GST if in the opinion of proper officer, if a person not being eligible for the scheme have opted for the scheme, he shall be liable to pay differential taxes along with penalty and provisions of demand and recovery will apply to him. This means that before opting for the scheme a taxable person must be free from any or all doubts of his eligibility for the scheme to avoid such penal provisions.if a small taxpayer who has limited knowledge of tax laws and compliances makes any mistake under composition scheme shall be liable to pay tax at standard rate on his total turnover along with a penalty which will be equal to the total tax liability.

Merits of the scheme

Below are some of the prominent reasons why you should choose to get registered as a supplier under the composition scheme:

  1. Limited Compliance: Lesser compliance (furnishing of returns, maintenance of books of records, issuance of invoices )
  2. High Liquidity: Composite Scheme taxpayer will be liable to pay taxes at a lower rate resulting in lesser chunk on his working capital.
  3. Limited Tax Liability: Composite Scheme taxpayers will be liable to pay tax @ 2.5% (manufacturer) and 1% (any other cases) instead of a standard rate of 18%.

Demerits of the scheme

The demerits of registering under Composite Scheme by a taxable person are as follows:

  1. Limited Territory  :  Cannot make inter-state transactions & import-export of goods and services.
  2. No Credit of Input Tax: , the credit of input tax paid on the purchases of inputs from a normal tax payer will not be allowed. & The buyer from scheme holder supplier by will also not enjoy input tax credit resulting in price distortion, cascading,etc.
  3. No Collection of Tax: Though the rate of tax for a scheme holder is lower the burden of such tax is kept on the taxpayer himself, leading to higher cost of sales.
  4. Penal Provision:  As per the Model GST Law, if the taxpayer who has previously been given registration under composition scheme is found to be not eligible to 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