GST COMPOSITION SCHEME

Introduction: GST was a landmark judgement for Indian economy. Big business houses gave a thumbs up to GST however small tax payers were not much happy with the introduction of GST as they lacked the required resources and expertise to comply with GST rules.

Considering that small tax payers may find it difficult to comply with GST rules, Composition Scheme was introduced for such small tax payers.

What is Composition Scheme: Composition scheme is an alternative to regular GST scheme, and is explicitly meant for small tax payers. If registered under composition scheme, small tax payers will have to take care of lesser GST related compliances such as quarterly filing of return instead of monthly, lower rates of taxes etc.

Who can opt for Composition Scheme: Small tax payers with turnover limits as under can apply for composition scheme:

STATE OF REGISTERATION	AGGREGATE TURNOVER IN PRECEDING FINANCIAL YEAR
Sikkim, Arunachal Pradesh, Tripura, Nagaland, Assam, Mizoram, Meghalaya, Manipur, Himachal Pradesh	75 Lacs.
Uttarakhand and Jammu & Kashmir	100 Lacs.
Other States	150 Lacs.

Aggregate Turnover: Aggregate Turnover is sum total of –

• All Taxable Supplies
• Exempt Supplies or Nil Rated Supplies
• Inter State Supplies
• Export of Goods/Services

Note:

• Aggregate turnover shall be exclusive of GST paid, Cess paid and Tax paid under RCM.
• Turnover of all tax payers with same PAN has to be added to calculate turnover for the purpose of composition scheme.

Who cannot opt for Composition Scheme:

• Person making inter-state supplies
• Person making nontaxable supplies (Alcohol, Petrol, Diesel etc.)
• Person supplying goods through e-commerce operator such as amazon and flipkart
• Manufacturer of notified goods*
• Service provider#

*Notified Goods

• Ice cream and other edible ice, whether or not containing cocoa
• Pan Masala
• Tobacco and tobacco products

#Service provider other than restaurant services cannot opt for composition scheme, however supplier of goods can provide services upto Rs. 5 lacs or 10% of turnover of preceding financial year whichever is higher.

Thus persons that can opt for composition scheme are:

Note: In case of supplier of goods and services both below mentioned conditions need to be satisfied to be eligible for composition scheme

Aggregate turnover in preceeding financial year to be under specified state wise limits ( 75 lakhs, 100 lakhs or 150 lakhs)

AND

Service portions shall not exceed 10% of turnover or Rs. 5 Lakhs whichever is higher.

Example on suppliers of goods and services:

XYZ Electronics is a venture operating in the states of Gujarat, Rajasthan and Maharashtra. It deals in electronic products and also provides services such as aftersales services and repairs of electronic products. The owner want to opt for composition scheme for FY 2018-19, advice whether XYZ Electronics can opt for composition scheme considering the below mentioned details for FY 2017-18.

	TURNOVER IN FY 2017-18
Particulars	Gujarat	Rajasthan	Maharashtra	Total
Sale of Goods	12,00,000	5,00,000	23,00,000	45,00,000
Supply of Services	4,00,000	50,000	75,00,000	79,00,000
Total	16,00,000	5,50,000	98,00,000	1,14,00,000

Solution:

To be eligible for composition scheme XYZ electronics need to satisfy both the conditions i.e. Aggregate turnover should not exceed the state wise turnover limit (In our case it is 150 Lacs) and the value of services provides should not exceed 10% of turnover or Rs. 5 Lakhs whichever is higher.

Condition 1.

Aggregate turnover of XYZ Electronics is Rs.1,14,00,000/- thus it is within the limits and thus condition no. 1 is satisfied.

Condition 2.

In case of Gujarat, 10% of turnover is Rs. 1,60,000/- but service portion in aggregate turnover is Rs. 4,00,000/- which is more than 10% of turnover, however it is within the upper limit of Rs.5,00,000/- thus here both the conditions are satisfied and XYZ Electronics is eligible to opt composition scheme in case of Gujarat.

In case of Rajasthan, service portion in aggregate turnover is Rs. 50,000/- which is less than 10% of turnover being Rs.55,000/- thus here both the conditions are satisfied and XYZ Electronics is eligible to opt composition scheme in case of Rajasthan.

In case of Maharashtra, service portion in aggregate turnover is Rs.75,00,000/- which is more than both 10% of aggregate turnover being Rs. 9,80,000/- and upper limit being Rs. 5,00,000/- thus here condition no. 2 is not satisfied and hence XYZ Electronics cannot opt composition scheme in case of Maharashtra.

Conclusion.

A person holding single PAN can either opt for composition scheme or go for regular scheme, as XYZ Electronics is not eligible to opt composition scheme in Maharashtra it has to go for regular scheme in Maharashtra as well as rest of India.

Conditions for opting Composition Scheme:

• No Input Tax Credit: Composition dealers cannot claim ITC for GST paid on inward supplies.
• No Inter-state supplies: Composition dealers cannot make any inter-state supply of goods.
• PAN based opting: A person holding single PAN can either opt for composition scheme or go for regular scheme i.e. business houses operating in multiple states under single PAN, can either opt for composition scheme or regular scheme for the whole of India, similarly business houses dealing in various business segments can either opt for composition scheme or regular scheme for all the business segments.
• Payment of Tax at specified rates: Composition dealers are required to pay taxes at fixed rates depending upon their nature of business.
• Cannot supply notified goods: Composition dealers cannot deal in notified goods i.e. Ice Cream Pan Masala, Tobacco and Tobacco products
• Cannot supply GST exempted goods: Composition dealers cannot deal in GST exempted goods i.e. Petrol, Diesel etc.
• Bill of Supply: Composition dealers cannot issue a Tax invoice, however they can issue Bill of supply. The dealer should also mention “composition taxable person, not eligible to collect tax on supplies” at the top of the Bill of Supply.
• The taxpayer has to mention the words ‘composition taxable person’ on every notice or signboard displayed prominently at their place of business.
• Casual taxable persons cannot opt for composition scheme.
• Nonresidents cannot opt for composition scheme.

Specified rates applicable to a Composition Dealer:

Applicable GST Rates
Nature of Business	CGST	SGST	Total
Manufacturers and Traders (Goods)	0.50%	0.50%	1.00%
Restaurants not serving alcohol	2.50%	2.50%	5.00%
Composition dealers are allowed to provide services upto 10% of their turnover or Rs. 5 Lakhs whichever is higher

Advantages of Composition Scheme:

• Lesser Compliances: Composite dealers have to endure lesser GST related compliances such as they have to file less returns, they are not required to provide complete bill to bill details instead just total Turnover is required to be entered in quarterly GST returns.
• Limited Tax Liability: Another benefit of getting registered under the composition scheme is that the tax rate for such taxpayer is nominal under the GST Law. 
• High Liquidity: A regular taxpayer has to pay output taxes on inward supplies, however it can be availed as input credit later but it surely results in curbing of working capital. The absence of such provisions for a composite tax payer makes him have an active working capital with no blockage of funds in the taxes.

Disadvantages of Composition Scheme:

• Limited Business: Composition dealers cannot carry out inter-state transactions and neither they can supply goods through E-Commerce, thus area of operation is constrained.
• E-Commerce is excluded: Considering recent developments in the sector of E-Commerce in India, this is the major drawback for composition dealers that they cannot carry out their businesses through E-Commerce.
• No Input Tax Credit: Composition scheme dealer cannot claim credit of GST paid on inward supplies.
• Payment of taxes from own pocket: Composition dealers cannot collect taxes from their customers, they are required to pay taxes, though nominal, from their own pockets.

Reverse charge under Composition Scheme:

Reverse charge is applicable to composition dealers also thus composition dealer are required to pay tax under Reverse Charge Mechanism wherever applicable. No ITC is available for tax paid under reverse charge for a composition dealer.

***THANK YOU***

Disclaimer:

The views expressed on this blog are strictly personal and for knowledge purpose only. The contents of this blog are solely for informational purpose and it does not constitute any professional advice or recommendation. The laws related to GST and other taxes are under evolution and subject to constant changes and amendments over time. It is suggested to take specific legal advice and necessary due diligence before relying on the contents and information of this Blog. The authors of this blog, does not accept any liabilities for any loss or damage of any kind arising out of information on this blog and for any actions taken in reliance thereon.