Brief Idea About GST Composition Scheme

We have discussed GST in our previous article. And we know about rates and how they tax it. Now its is time to consider GST Composition Scheme related to small traders.

Small traders have many queries like if someone is selling a Nail or doing any small scale business, how will he survive in the market if government force him to pay 18% tax. And the answer is GST is not to fill the stomach of Big and hurt the small fishes.

That is why there are different schemes for different traders. One of these schemes is the GST Composition Scheme, in which there is no slab like 5%, 12%, 18%, 32%, etc. Traders under this scheme have only to pay 2% ( for manufacturers), 5% suppliers ( food or any article for consumption or any other drink excluding liquor for human consumption) and 1% for any other providers.

composition scheme tax rates

Key features of the scheme:

  • Tax rate:  Fixed rate of the total turnover (Sales)
  • Eligible candidate: whose turnover is less than  ₹ 1.5 cr.
  • Place for supply:  Affects only within the State supplies.
  • Annual IT Return:  No monthly filing, but Quarterly returns required.
  • ITC:  Not fit for Input Tax Credit (ITC).
  • Billing and Invoice:  Issues Bill of Supply but not the tax bill.

Who can and can’t Opt for GST Composition scheme?

Any Registered taxpayer whose aggregate turnover (sales) does not go beyond One and a half crore ( ₹. 15000000) in last fiscal year.

Following persons/business can’t apply for GST Composition Scheme:

  1. Unregistered Dealers.
  2. Supply of goods which are not under any act.
  3. One who provide goods/services within two or more states/UTs/nations.
  4. Makes supply through E-Commerce (e.g. Selling Online)
  5. One who does not furnish goods not leviable to any tax.

Note:  This is important as if a person has the several businesses under same PAN card, then he must register all trades in one GST composition scheme. Turnover will be an aggregate turnover of all firms. Traditional methods of evading tax by dividing businesses into parts and paying less or no tax have no chance in GST Act. If you do so, don’t forget that this is first taxation reform with Penal Action.

Why should you go for GST composition scheme????

  • No obligation to keep records.
  • Hassle-free payments of tax at unique significant rate
  • Filing monthly IT returns is an expensive and clumsy process, free yourself from that mess.

Some Salient Features of GST Composition Scheme:-

Lesser Compliances in Returns:

An ordinary taxpayer fill 3 Returns for record of one month, and one yearly consolidated return. If we aggregate, there are 37 returns within a year. But under the GST composite scheme, there will be only four returns  (GSTR4A) which will be obligatory on January 18th, April 18th, July 18th, October 18th. These returns will include Inter/Intra state supply from registered/unregistered persons/firms, and detail of outward supplies.

Rules for Credit and collection of tax:

On purchase bill, individuals or businesses get Input Tax Credit (ITC) while paying tax. But in GST Composition scheme, there is no Input Tax Credit.

And as the tax rate is minimal, so business people under this system will not be able to collect this tax from their buyers, as they can’t raise tax invoice. This amount of tax is to be bear by people in business himself.

Strict Penal Provision:

As every expert of GST says that this scheme is “Handle with Care” type. If you have limited knowledge concerning this system, don’t rush quickly,  as if you fail to fulfill the compliance of this scheme, you will be liable to pay taxes as per GST slab along with penalty which can be equal or more than tax liability. And also If a taxable person was not eligible for the plan but go for it, he shall be accountable to pay differential tax along with fine and provisions of demand and recovery will apply.

Pluses of GST Composition Scheme:

benefits of gst composition scheme

  • Lesser compliance:

inferior compliances regarding filing returns, as there is only quarterly return as compared to monthly and annual returns in case of a regular dealer.

  • Lesser tax liability:

This is the probably the best benefit of GST Composition Scheme as the rates under these are only 1% to 5%. It is far lesser than the regular GST rate slabs of 12, 18, 28 %.

  • Ease of making the trade:

Smaller tax liability & compliance will make it easy for small firms to expand and thrive. On the one hand, lower taxes will result in the swell of profit margin while on the other, moderate compliance will diminish hassles enabling a party to concentrate more on business.

  • Contentious Supply Business:

Ordinary people have a misunderstanding that taxpayers enrolled under the GST composition scheme doesn’t have a competing edge. The profit & product sale value of small industries are much more than big business. The GST composition scheme guarantees the small firms of making profits even while carrying out intrastate activities/supplies at the same time giving a sharp edge.

Minuses of GST Composition Scheme:

As all the glitters are not Gold, there are some issues with this scheme as well.

  • Limited scope for business:

This is the biggest shortcoming under this scheme that you can sell only within your state. A taxpayer enrolled under the scheme is blocked from conducting interstate business and cannot carry out import/export of goods & services. Thus, he is forced to offer only intra-state transaction & limits the area of his trade.

  • No ITC:

Under this scheme, there will be no Input tax credit (ITC) for purchases by any dealer. GST Compounding Scheme has no stipulation of input credit on B2B businesses.

  • Not applicable for E-Commerce supplier:

This is also a strange thing. As on one side Govt is encouraging E-Technology, and not giving this benefit to E-Commerce.

  • Penal Provision:

The government says that punitive actions are necessary to prevent any fraudulent activities, but due to limited knowledge and lack of awareness programs by the Govt., it will lead to mistakes. And it will harass even honest taxpayers.

  • Pay tax from your pocket:

Although the rate of composition tax is presumed to be low, a taxpayer under this scheme is not permitted to collect such tax from his customer. The taxpayer will not raise a tax invoice. Consequently, the weight of such tax is on the trader himself & he will pay it out of his pocket.

What if we want to surrender this scheme ??

Yes, you can do it by filling GST CMP-04, and within 30 Days or such option in the form of GST ITC-01 bearing detail of stock inputs to be filed.

 More questions about GST composition scheme:  Read Here

Input Tax Credit Scheme explained

gst composition scheme


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