As the pan-India wave of GST is about to hit us this July, the entire nation is gearing up to embrace the colossal tide. Even as the corporate Tycoons and Moguls are restructuring and redefining their business processes in tune with the GST mould, the micro, small and medium organizations are putting on their best efforts to swim in the sea of rules and regulations of this new legislation. The buzz-worthy question – is there any relief to the small sectors of our economy from the morass of complicated compliances of GST.
“Composition Scheme” one might answer. Well, yes the word itself brings a surge of relief to many. Lesser compliances, few hassles would indeed help a lot. But delving deeper and reading between the lines, one might deduce the nuisances of the scheme. Let us analyze –
What is this scheme?
Under the Composition scheme of GST, a person has the option to pay GST calculated at a flat rate on aggregate turnover. This scheme would be available only to certain eligible taxable persons. The taxable person should make an application exercising his option to pay tax under this scheme. Once granted, the eligibility would be valid unless his permission is cancelled /stands withdrawn, or the person becomes ineligible for the scheme.
Type of supplies covered
Composition scheme under section 10 of the CGST Act, can be classified into the following 2 categories:
- Composition scheme for goods (and restaurant services) covered under section 10(1) and 10(2).
- Composition scheme for services (other than restaurant services) covered under section 10(2A).
Eligibility to pay tax under composition scheme:
Only taxable persons whose ‘aggregate turnover’ (aggregate of turnover in all States) does not exceed Rs 1.5 crore (75 lacs in Special Category States) in the preceding financial year will be eligible to opt for payment of tax under the composition scheme.
Aggregate turnover means ‘Value of all (Taxable supplies + Exempt supplies + Exports + Inter-State supplies) – (GST + Value of inward supplies + Value of inward supplies taxable under reverse charge) of all persons having the same PAN.
The permission granted for paying tax under this scheme would stand withdrawn from the day on which this threshold limit is exceeded.
The threshold of Rs 1.5 crore / Rs. 75 lacs would be applicable to a person having the same PAN and should be understood as follows:
— All taxable persons covered by the same PAN shall be under composition across India;
— Inward supplies chargeable to tax on reverse charge basis will not be includible in computing the aggregate turnover;
— Will include value of supplies of all business verticals of the same taxable person.
The catch point – The aggregate turnover will even include the “Exempt Supplies”. In the old laws of State VATs, only Taxable turnover was considered for determining the threshold limit. For example,
in the old law:
Taxable Goods = Rs 60 lacs
Exempt Goods = Rs 20 lacs
In the GST regime, since the aggregate turnover is Rs 80 lacs (taxable + exempt), the scheme cannot be availed.
Composition scheme would become applicable for all the business verticals having separate registrations within the State and all other registrations outside the State which are held by the person with same PAN.
To clarify further, if a taxable person has multiple business verticals and if he has opted for separate registrations for each such vertical, composition scheme would become applicable for all the business verticals and it cannot be applied for select verticals only.
Eg: If a taxable person has the following businesses separately registered:
— Sale of computers (Registered in Karnataka)
— Sale of mobiles (Registered in Karnataka)
— Franchisee of Pizza Hut (Registered in Delhi)
In the above scenario, the composition scheme would be applicable for all the 3 units.
Composition scheme not applicable for tax payable under RCM:
It is important to note that for any tax payable under reverse charge mechanism, the option of payment under this scheme will not be available. Rate of tax payable on supplies taxable under RCM will be regular rates and not the composition rates.
What is the rate applicable under composition levy?
- one per cent of the turnover in State or turnover in Union territory in case of a manufacturer,
- five per cent of the turnover in State or turnover in Union territory in case of persons engaged in making supplies referred to in clause (b) of paragraph 6 of Schedule II (restaurant services)
- one per cent of the taxable turnover in State or turnover in Union territory in case of other suppliers
Note: The rates given above are a total of CGST and SGST.
Conditions for opting to pay tax under composition scheme:
- Restricted from making supply of goods which are not liable to GST: Certain goods are not liable to GST, e.g. petroleum, alcohol for human consumption, etc. – a person opting for composition scheme shall not be entitled to make any supply of non-GST goods. A plain reading of the proviso to Section 9(1) would imply that the restriction on supplies would be applicable only to sales / dispatches (outwards supplies).
- Restricted from effecting inter-State outward supplies: The taxable person should not affect any inter-State outward supplies.
The catch point -This means that even stock transfers to branches outside the State would not be permitted. However, insofar as it relates to inter-State inward procurements / receipts, there is no restriction.
To explain further, where a taxable person effects inter-State barter transaction (supply)or inter-State warranty contract (supply), he will not be eligible to opt for composition scheme.
- Restricted from making supplies through an e-commerce operator: A person opting for composition scheme is not allowed to affect any supply of goods through an e-commerce portal, unless such portal is owned by the same person.
- Restriction on supply of notified goods: The person should not be a manufacturer of certain goods as are notified in this regard.
- Shall not collect tax: Taxable person opting to pay tax under the composition scheme is prohibited from collecting tax on the outward supplies.
- Not entitled to input tax credit: Taxable person under this scheme will not be eligible to claim any input tax credits. However, if the taxable person becomes ineligible to pay tax under composition scheme, that person will become entitled to take input tax in respect of inputs held in stock (as inputs, contained in semi-finished or finished goods) on the day immediately preceding the date from which he becomes liable to pay tax under the regular scheme.
- Additional conditions: There may be other conditions or restrictions which may be prescribed under the Rules. Fulfilling those conditions, if any, would also be necessary to opt for payment of taxes under this Scheme.
- Instead of filing numerous returns under GST every month, a simplified quarterly return has to be filed under this scheme.
- Bill of supply not tax invoice – Unlike regular scheme where a taxpayer needs to present tax invoice to the tax authorities, taxpayers registered under this scheme need to present bill of supply.
- Cancellation of permission:
Where the proper officer has reasons to believe that the taxable person was not eligible to the composition scheme, the proper officer may cancel the permission and demand the following:
— Differential tax and interest – viz., tax payable under the other provisions of the Act after deducting the tax paid under composition scheme
— Penalty determined based on the demand provisions under Section 66 or 67.
However, it is essential that a show cause notice is issued and the taxable person is afforded an opportunity of being heard before proceeding with the demand.
To conclude, this scheme has the effect of reducing the burden of tax on small and medium enterprises while also reducing the compliance burden in relation to GST return filing making it a very effective tax collection mechanism.