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The Composition Scheme is a simplified tax system designed for small businesses in India. Its primary aim is to ease the compliance burden on small taxpayers and encourage more businesses to become tax compliant. However, small business owners may question the scheme and its rules. This section will explore some commonly asked questions and provide answers to help small business owners decide whether the Composition Scheme suits them.
A composition dealer is a small taxpayer registered under the Goods and Services Tax (GST) Composition Scheme. This scheme is designed for businesses with annual turnovers up to a specified limit, allowing them to pay tax at a lower, fixed rate instead of following regular GST rates and filing requirements.
A company with an annual turnover of up to Rs. 1.5 crore is eligible to apply for the Composition Scheme. To calculate the turnover for the Composition Scheme, all businesses with the same PAN must be considered. Section 10 of the GST Act permits only manufacturers, dealers, and restaurants (that do not serve alcohol) to opt for the Composition Scheme.
However, service providers can participate in a similar scheme for Composition Dealers, which was notified by CGST (Rate) notification no. 2/2019, dated March 7, 2019, with a total turnover limit of Rs. 50 lakh.
Moreover, 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. Those who have opted for this scheme are eligible for a 6% tax rate without input tax credit.
The following are not eligible for the Composition Scheme:
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Some of the advantages of the compositions scheme include the following:
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.:
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 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% |
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 registration date specified in sub-rule 2 or 3 of Rule 10 of the CGST Rules, 2017.
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.
For July and August 2017, regular 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 exceeding 80%, builders must pay tax at an 18% reverse charge rate. There is no ITC available for reverse charge taxes.
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.
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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.
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It is optional for a dealer authorised under the composition scheme to maintain thorough records, just like a regular taxpayer.
No, a composition dealer cannot claim GST input tax credit on purchases.
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.
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.
No, composition dealers are not permitted to collect composition tax from buyers.
The composition scheme is only available to dealers who make interstate supplies. A dealer must opt out of the scheme if they deal in interstate supplies.
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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.
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:
When switching from the regular 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 a such amount, if any, shall lapse.
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.
All businesses with a PAN are considered to have chosen the composition scheme.
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.
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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).
All regular rules are in effect starting when a dealer withdraws from the composition scheme. For example, suppose a composition dealer drew 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).
No, a composition dealer cannot charge GST on sales invoices issued to customers. Instead, they pay a fixed percentage of their turnover as GST to the government. This simplified approach means that composition dealers are not allowed to collect GST separately from their customers.
These were a few of the frequently asked queries about the composition scheme. Hope this will solve all your problems.
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