Frequently asked questions regarding the composition scheme

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Date: 28 Jan 2023


Frequently asked questions regarding the composition scheme

  

There are always some queries and questions about schemes and rules. This article addresses some common questions surrounding the composition scheme under GST. 

 

What is the eligibility for the composition scheme?

A company with an annual turnover of up to Rs 1.5 crore can apply to the composition scheme. To calculate the composition scheme's turnover, all businesses with the same PAN must be added. Section 10 allows only manufacturers, dealers, and restaurants (that do not serve alcohol) to choose the composition scheme. 

 

On the other hand, service providers can participate in a similar scheme for composition dealers notified by CGST (Rate) notification no. 2/2019, dated March 7 2019, where the total turnover limit is Rs.50 lakh.

 

Furthermore, on March 31, 2022, the government implemented a separate composition scheme for brick manufacturers, construction bricks, fossil metal or other siliceous earth bricks, earthen or roofing tiles, and bricks and blocks made from fly ash. A 6% tax rate without an input tax credit is available to those who have opted in.

 

The following do not meet the eligibility criteria for the composition scheme:

  • Manufacturers of tobacco, pan masala, and ice cream

  • Someone who manufactures interstate supplies

  • A casual taxable person

  • A non-resident taxable person

  • A person who, per the GST law, supplies non-taxable goods

  • A supplier who has exceeded the specified turnover threshold for participation in the composition scheme

  • Businesses that deliver products via an online retailer

 

What are the benefits of the composition scheme? 

Some of the advantages of the compositions scheme include the following:

  • Easier and fewer compliances to be observed (returns, maintaining books of record, issuing invoices, etc.)

  • tax payments which are made quarterly

  • a minimal tax obligation

  • High liquidity due to lower tax rates

 

What are some disadvantages of the composition scheme? 

  • A restricted business area where the dealer cannot carry out interstate business.

  • For composition dealers, there is no input tax credit available.

  • Under GST, the taxpayer is prohibited from selling non-taxable items like alcohol or products through an online store.

 

How to calculate the aggregate turnover?

The total turnover for a person with the same Permanent Account Number must be computed on an all-India basis (PAN).

 

It will represent the sum of all outward purchases in the following categories.:

  • Taxable supplies

  • Exempt supplies

  • Exports of goods or services or both

  • Inter-state supplies

 

However, it excludes taxes (including cess) paid per the GST law and the value of inward supplies for which Tax is payable on a reverse charge basis.

 

The tax rate applicable to a composition-taxable person 

The following table covers the tax rates:


 

Type of business 

CGST

SGST

Total 

Manufacturers and Traders (Goods)

0.5%

0.5%

1%

Restaurants not serving Alcohol

2.5%

2.5%

5%

Service Providers

3%

3%

6%

Manufacturers of bricks (including building bricks, bricks of fossil metals or similar siliceous earth, earthen or roofing tiles, and fly ash bricks and blocks )

3%

3%

6%

 

What is the effective date for the composition levy?

The beginning of the fiscal year will be the effective date for taxpayers who opt for it by submitting Form GST CMP-02.

The effective date for individuals who apply for new registration by completing Form GST REG-01 will be the date of registration specified in sub-rule 2 or 3 of Rule 10 of the CGST Rules, 2017.

 

Is RCM liability covered under the composition scheme?

Wherever applicable, a composition dealer must pay Tax using the reverse charge mechanism. The applicable supply rate is the rate at which GST must be paid. The composition scheme rate should be used for something other than reverse charge. Additionally, a composition dealer cannot claim an input tax credit for a tax paid through a reverse charge.

 

Is there a tax on goods purchased from an unregistered dealer?

For July and August 2017, normal tax rates must be paid on purchases from an unregistered dealer. Except if the taxpayer is a real estate investor, there is no need to pay Tax on these purchases beginning in September 2017. For any gap in purchases from GST-registered vendors that exceed 80%, builders are required to pay Tax at an 18% reverse charge rate. There is no ITC available for reverse charge taxes.

 

Should there be IGST on reverse charge levying interstate purchases?

A composition dealer should refrain from paying IGST. Only CGST and SGST must be paid by the dealer who must pay Tax because of a reverse charge, import of a service, or purchase from an unregistered dealer.

 

How should the tax amount be calculated?

A composition dealer must pay a specific rate of Tax on total sales. In addition, the dealer must pay reverse charge tax on specified purchases, purchases from unregistered dealers, and import of services.

 

Total GST payable is calculated as follows: Tax on supply (net of advance and returned items); Tax on business-to-business transactions where the reverse charge is applicable; Tax on business-to-business purchases from unregistered suppliers; and Tax on services imported.

 

Reverse charge transactions, purchases from unregistered dealers, and the import of services will all be subject to Tax at standard rates, i.e. rates that apply to suppliers. Rates under the composition scheme apply only to composition dealer sales.

 

Should a composition dealer maintain detailed records?

It is optional for a dealer authorised under the composition scheme to maintain thorough records, just like a regular taxpayer.

 

Can composition dealers avail of Input Tax Credits?

No, a composition dealer cannot claim GST input tax credit on purchases.

 

Can a composition dealer issue tax invoices?

A composition dealer must issue a Bill of Supply. They cannot produce a tax invoice. This is because the dealer must pay the Tax out of pocket. A composition dealer is not permitted to recover GST from customers.

 

What are the returns that a composition dealer is required to file?

A composition dealer must pay tax quarterly as a challan-cum-statement, i.e. Form CMP-08.

 

They must also file an annual return on Form GSTR-4.

 

Can a dealer in compositions recoup taxes from clients?

No, composition dealers are not permitted to collect composition tax from buyers.

 

Can a dealer who handles interstate supply choose the composition scheme?

The composition scheme is only available to dealers who make interstate supplies. If a dealer deals in interstate supplies, they must opt out of the scheme.

 

What would happen if a company transitioned from the composition mechanism of the former tax system to standard GST taxation?

Taxpayers registered under the VAT composition scheme were permitted to claim credit for inputs held in stock, semi-finished goods, or finished goods on the day before opting out of the scheme.

 

What are the requirements for obtaining input credit on the stock during the transition?

The following are the conditions that the taxpayer must meet to obtain credit on input during the transition from the composition scheme to the regular scheme:

  • Inputs or goods will be used in the production of taxable supplies.

  • In the previous regime, the CENVAT Credit could be claimed. However, the composition system did not allow for its claim.

  • The GST regime provides for the use of ITC.

  • On such goods, the taxpayer has invoices for input tax payments.

  • From July 1, 2017, invoices should be a year old at maximum.

 

What happens to input credit when you switch from the normal scheme to the composition scheme?

When switching from the normal scheme to the composition scheme, the taxpayer must pay an amount equal to the input tax credit for inputs held in stock on the day preceding the date of such switchover. The balance of input tax credit remaining in the credit ledger after payment of such amount, if any, shall lapse.

 

Can I choose the composition scheme one year and then change my mind the next?

Yes, this is a possibility. You can choose between the composition and standard schemes depending on your turnover. However, remember that this will impact your issuing invoices and filing returns. Through the GST Portal, the modification declaration can be submitted.

 

I have numerous branches. Will the composition scheme apply to them individually?

All businesses with a PAN are considered to have chosen the composition scheme.

 

Do composition dealers have the ability to offer products at a lower cost than conventional retailers do?

Yes. Composition dealers are not permitted to include GST in their bills of supply. As a result, the final consumer pays less money than usual.

 

Can I sign up for the composition scheme at any time of the year?

It is not a reasonable step because each taxpayer is expected to provide a declaration on the GST portal. It can only be done at the beginning of a fiscal year. Register for the composition scheme by completing Form CMP-02 (both supplier of goods and service provider).

 

What happens if I choose to leave the composition scheme during the year?

All regular rules are in effect starting the day a dealer chooses to withdraw from the composition scheme. For example, suppose a composition dealer draws from the composition scheme on October 15, 2020. For the quarter ending in July-September and October, the dealer must submit two CMP-08s (15 days). The merchant must furthermore submit GSTR-1 and GSTR-3B for October 2020. (Sales from October 15 until the month's conclusion).

 

These were a few of the frequently asked queries about the composition scheme.