Composition scheme under GST

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The composition scheme allows qualifying taxpayers — those whose turnover in the preceding financial year was less than 50 lakhs — to pay a percentage of their yearly turnover in a state as tax. This relieves the taxpayers from collecting tax from their customers directly and provides other benefits as well. The composition scheme enables small taxpayers to:

  • File a single quarterly return in place of multiple monthly returns
  • Report turnover pertaining to outward supplies in a single line item on the return
  • Pay a lower rate of tax, thus offering a competitive advantage
  • Follow relaxed rules around maintaining books of accounts and records under GST

Eligibility

  • Must be a registered taxpayer
  • Goods held in stock must not have been purchased from outside the state or from outside India
  • Goods held in stock must not have been purchased from an unregistered dealer; if so, the taxpayer shall pay tax on the goods
  • Aggregate turnover in the preceding financial year must have been less than 50 lakhs. Aggregate turnover includes the value of taxable and non-taxable supplies, and exempted and exported supplies. It does not include taxes levied under GST or the value of inward supplies
  • If more than one registered persons have the same PAN, then a registered person shall not be eligible for the composition scheme unless all registered persons under the same PAN opt in for the composition scheme

Those not Eligible

  • Service providers
  • Suppliers of non-taxable goods
  • Taxpayers engaged in the interstate supply of goods
  • Those engaged in supply of goods through an e-commerce operator
  • Manufacturers of notified goods
  • Casual taxable persons or non-resident persons

If it turns out that an ineligible taxpayer enters into the composition scheme, he will later be liable to pay the differential tax along with a penalty.

Taking advantage of the composition scheme

To opt in for the composition scheme, qualifying taxpayers must make their intention known to the government.

  • (a) If the migration takes place from the existing laws to GST, the registered person needs to electronically submit Form GST CMP-01 within 30 days of the appointed day.
    (b) File Form GST CMP-03 containing details of stock, including purchases from unregistered persons, within 60 days of opting for the composition levy.
  • (a) Any other supplier who opts for the composition scheme must file Form GST CMP-02 prior to commencement of the financial year.
    (b) File Form GST ITC-3 containing details of inputs lying in stock and capital goods on which ITC has been availed.

There is no need for taxpayers to file their intent every year. They do, however, need to notify the government if they become ineligible for the composition scheme, i.e., they no longer satisfy all the conditions for eligibility. To do so, they must file Form GST CMP-04 within seven days of becoming ineligible. This lets the government know of the taxpayer’s change in status. They must also start issuing tax invoices for all outward supplies. Taxpayers can voluntarily withdrawal from the composition scheme by filing Form GST CMP-04 before the date of withdrawal.

Composition scheme rates

Registered person Rate CGST Rate SGST Total Rate of Tax
Manufacturers other than manufacturers of notified goods 1% 1% 2%
Suppliers (Food or any article for human consumption or any drink(other than alcoholic liquor for human consumption) 2.5% 2.5% 5%
Any other suppliers 0.5% 0.5% 1%

Composition scheme returns

Return form Frequency Due date Details
Form GSTR-4A Quarterly Auto-populated details of inward supplies on the basis of Form GSTR-1 filed by a taxpayer’s suppliers
Form GSTR-4 Quarterly 18th of succeeding month
  • Consolidated details of outward supplies
  • Interstate and intrastate inward supplies from registered as well as unregistered dealers
  • Any modifications required in inward supplies as per Form GSTR-4A
Form GSTR-9A Annually 31 December of next year Consolidated details of quarterly returns

Restrictions and limitations under the composition scheme

As part of India’s composition scheme, taxpayers must:

  • Not collect GST. GST is to be borne by the out-of-sale proceeds
  • Not claim input tax credit of GST on goods purchased or services availed
  • Issue a bill of supply instead of a tax invoice that declares “composition taxable person, not eligible to collect tax on supplies”
  • Display “composition taxable person” in a prominent place at his principal place of business and at every additional place of business
  • Let purchasers of goods know they are not entitled to a credit of GST paid by the composition taxable person
  • Pay GST on a reverse charge basis on the goods purchased and services availed from an unregistered person

The government has introduced the composition scheme to provide relief for small taxpayers. However, given that the turnover threshold is 50 lakhs and that there’s a reverse charge on the purchase of goods from unregistered dealers, taxpayers may be hindered in reaping the true benefits of the scheme.

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