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- Article Written by CS DIVYANSHU SAHNI
- Divyanshu Sahni & Associates
- Company Secretaries
- WHICH SECTION COVER COMPOSITION SCHEME UNDER GST?
Section 10 of Central Good and Service Tax Act, 2017 introduced the concept of Composition Scheme. This facility can be availed by any supplier of goods as well as services. One major point to be understood about this scheme is that it is an option provided to registered taxpayers already registered under the Act, i.e. such registration is not a mandatory legal requirement, it is only a right/option given to taxpayer which they can avail if their aggregate turnover is less than 50lakh rupees.
- Why is it Introduced
GST was introduced to with an objective to eliminate complexities of indirect tax regime and it requires regular filings and proper maintenance of records in a strict manner. However the same can become a burden and additional task for small scale businessman. To facilitate such small-scale traders and businessman and to reduce the complication of procedural compliances, Composition Scheme is introduced. Taxpayers registered under this scheme will be taxed at nominal rates of 1% or 2.5%.
3. Eligibility Criteria for opt this scheme
For any taxpayer to opt for registration under this scheme, they must satisfy both of these eligibility criteria:
- Must be a registered under the Act
- Aggregate turnover must be less than 75 lakh rupees
NOTE: If more than one taxable person is registered on the same PAN No, then the compensation scheme can be availed by one only if all of such taxable person will avail to the same
4. Who is not Eligible
Other than the taxpayers not covered under the above-mentioned criteria, Sub-section (2) of section 10 of the Act specifies a list of registered taxpayers not eligible to opt for it, they are:
- Suppliers of non-taxable goods
- One engaged in making any inter-State outward supplies of goods
- Supplier of services, other than restaurants (except which serve liquor)
- Supplier of goods through E-commerce operator who collects tax at source under Section 51
- Manufacturers such goods as notified by Government on the recommendations of the Council.
Other than these specified categories, another type of taxpayer who cannot opt for composition scheme are occasional traders i.e. ones who are not involved in regular business cannot avail this scheme’s benefits. Such occasional traders are a Casual Taxable person and Non-Resident Taxable Person.
4. Rate of Tax
The rate of tax prescribed for different categories of registered persons have been described below:
5.Compliances for such dealer ‘
A taxpayer who is opting composition scheme will be required to file one return on quarterly basis by 18th of following month.
- Such dealer cannot issue a tax invoice.
- A buyer from composition dealer will not be able to claim input tax on such goods, which leads to increase in cost of buyer from such dealer.
Benefits of Composition Scheme
Reduced Tax Liability: One of the major benefits under the scheme is the reduced tax rates, as the suppliers are only required to pay somewhere between 0.5to 2.5% of aggregate turnover. In general cases without registration taxpayers might have to pay as high as 28% depending upon their business.
Reduced Compliances: Along with reduced tax rates, another major benefit is reduced compliances. In general course of business, a normal taxable person is required to file a minimum of three tax returns monthly including a statement of outward and inward supplies. However, after registration, he will have to file only quarterly returns.
Increases Liquidity: As the scheme provides the lower tax rate benefits, it results in more funds left in the hands of the taxpayer which he can utilize into the furtherance of his business
Disadvantages/Limitation of Composition Scheme:
- No Input Tax Credit: It does not provide for Input tax credit i.e. taxes paid by the supplier on purchases cannot be claimed as ITC. It results in escalated cost of business.
- No Tax Invoices: Though the tax rates are reduced, scheme-holders will have to keep the burden of taxes to themselves. In general course of business supplier charges these taxes from their buyers, but under GST Composition Scheme they cannot charge the same from customers, hence the cost of sales will increase.
- High Penalty: If any discrepancies are found in the application of any subscriber after the registration has been granted to them, or if the subscriber is no longer eligible and fails to inform about the same, then such taxpayer will be liable to pay a penalty which can be equal to tax payable, along with the differential tax.
- Only Intra-state trading: This scheme can only be availed by traders operating in a single state. No taxpayer with inter-state trading is qualified to apply under this scheme which results in limited exposure of markets and inability to do imports/exports.
- Taxpayers registered under a single PAN No. cannot apply for composition scheme on individual basis. If any one of them plans to register then all of them will have to apply under it.
DIVYANSHU SAHNI & ASSOCIATES