GST Composition Scheme

GST Composition Scheme : The Essential Guide

Everything You Need to Know About GST Composition Scheme

To lower the burden of compliance for small business so that they don’t have to maintain copious records, registers, and returns, many state governments have provisions for payment of a composition levy in their VAT system. However, such a provision does not exist in the service tax laws.

Section 8 of the Model GST Law contains provisions for a composition scheme which gives permission to the taxpayer to opt for payment of GST as a fixed percent on turnover instead of paying regular provisions of the law. Under this scheme, an assessee has to pay tax as a percentage of his/her turnovers during the financial year and he will not collect any tax from the customers.

If the eligible taxpayer is opting for the composition scheme under GST, he has to inform the tax authorities of his intention to be registered under this scheme otherwise he will be treated as a normal taxpayer and administered accordingly. Instead of monthly returns, the taxpayer has to file summarized returns on a quarterly basis.

A business whose annual turnover is less than Rs. 75 lakhs & dealing only in goods can opt for composition scheme and not the service providers (except restaurant sector taxpayers). However, in case the turnover of the taxpayer exceeds Rs. 75 lakhs, he will be transferred to the regular scheme. It must also be noted that if a taxpayer has different businesses having the same PAN, he must register all these business under this scheme. This scheme is not applicable to the supplier supplying goods through E-commerce.

GST Composition Scheme

The tax rate applicable under this scheme is as follows:

Category CGST Rate SGST Rate Total Tax Rate
Manufacturers (other than manufacturers of notified goods) 1% 1% 2%
Suppliers (food or any other article for human consumption or any drink other than alcoholic liquor)/Restaurant 2.5% 2.5% 5%
Other suppliers/Traders 0.5% 0.5% 1%

Goods and services on which composition tax has been paid do not qualify for an input tax credit. Any tax payable under Reverse Charge Mechanism will not be covered in this scheme. Only intra-state suppliers can take benefit from this scheme and not inter-state suppliers. In case a taxpayer has wrongly availed the benefit under this scheme, the tax authorities can impose a penalty equivalent to the amount of tax along with the tax liability on such person.

A taxpayer can opt for this scheme only from the beginning of the next financial year. He can still switch over to a regular scheme during any time he wants, but he cannot switch over to this scheme again during the same financial year. If he opts for this scheme, he is not required to maintain detailed records as a normal taxpayer. He needs to furnish only one return (GSTR-4) on a quarterly basis within 18 days of the end of the relevant quarter and an annual return in Form GSTR-9A. He is not liable to issue a tax invoice rather issue a bill of supply, which is a more convenient option.

When switching from a regular scheme to a composition scheme, a taxpayer is liable to pay an amount equivalent to an input tax credit in respect of inputs held in stock and inputs contained in semi-finished and finished goods held in stock as on the day immediately preceding the day of such switch over. When switching from a composition scheme to a regular scheme, a taxpayer becomes eligible to take the input tax credit in respect of such inputs held in the stock as on the day immediately preceding the day from which he becomes liable to pay tax under the regular scheme.

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