In essence, Composition scheme is meant for small businesses to help them with tax compliance in an easy manner without having to maintain copious records, registers and returns.
In current regime also, composition schemes are in place under VAT law as well as service tax law. Similarly in proposed GST structure, the composition scheme does exist.
Section 8 of Model GST Law provides for Composition Levy permitting the tax payer to opt for payment of GST as a fixed percent on turnover instead of paying tax under regular provisions of the law. In this article, we will be discussing the draft provisions relating to composition scheme under GST which inter alia includes:
- Scope and eligibility
- Scheme summary
- Conditions under the scheme
- An illustrative example
- Process to opt the scheme
- Procedural requirements
- Consequences of violating restrictions/conditions under the Scheme.
- Transitory provisions
Scope and eligibility
- The Scheme proposed is optional. The option has to be exercised.
- The scheme is applicable for both goods and/or services.
- Only a registered taxable person is eligible for the scheme.
- Tax payers making inter- state supplies or paying tax on reverse charge basis shall not be eligible for composition scheme.
- The aggregate turnover threshold for opting in the scheme is INR 50 Lakhs in a financial year.
Meaning of Aggregate turnover
Section 2(6) of Model law defines the term ‘aggregate turnover’. It is to be computed as follows:
|Type of supply||Amount|
|(+) Non-taxable supplies||xxx|
|(+) Exempt supplies||xxx|
- Taxes levied under CGST Act, SGST Act and IGST Act,
- Value of inward supplies
- Value of supplies taxable under reverse charge of a person having the same PAN.
- Taxpayer shall pay tax as a percentage of the turnover without benefit of Input tax credit. (Here, it is not clear whether turnover refers to aggregate turnover or taxable supplies.).
- The floor rate of tax for CGST and SGST shall not be less than 1%.
- A tax payer opting for composition levy shall not collect any tax from his customers. Accordingly, he cannot issue a tax invoice. GST has to be borne by the person out of the sale proceeds
- He shall not be entitled to claim input tax credit.
- He is not entitled to make exports as that would amount to inter-state supply as per law.
- If the taxable person has multiple businesses and has opted different registration for each business, composition scheme will be applicable to all the businesses under same PAN
- In case of purchases from unregistered dealers, composition dealers would be liable to pay tax under reverse charge.
Mr. A sells goods to Mr. B for Rs 10,000 on which Mr. B paid tax, assume @20%. Mr. B, who is under composition levy, sells them to customer X at Rs 15,000. The scheme will operate as follows:
|1.||GST payable @ 1% of INR 15,000||150|
|2.||Less: ITC (not eligible)||0|
|3.||GST to be paid to government||150|
Process to opt for or out of composition scheme
- Opting IN Composition scheme
Any existing taxpayer not under Compounding scheme may opt for Compounding scheme, if eligible, only from the beginning of the next Financial Year. The application will have to be filed on or before 31st March of the previous year so that Returns can be filed accordingly.
In such a situation:
- He shall have to pay an amount equivalent to the credit of input tax on inputs held in stock on the day immediately preceding the date of switchover.
- The amount can be paid either through the electronic credit ledger or the electronic cash ledger.
- Where payment is made through the electronic credit ledger, excess ITC balance lying, if any, will lapse.
- Opting OUT composition scheme
Compounding dealer may be allowed to switch over to Normal scheme even during the year if they so want, with a condition that they cannot switch over to Compounding scheme again during the same financial year.
Further, as per section 16(3) of the MGL, he can avail ITC in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date from which he becomes liable to pay tax under section 7.
For example, Mr. B, a registered taxable person was paying tax under composition rate up to 30th July, 2017. However, w.e.f 31st July, 2017, Mr. B becomes liable to pay tax under regular scheme. Mr. B is eligible for input tax credit on inputs held in stock and inputs contained in semi-finished or finished goods held in stock as on 30th July, 2017.
For those suppliers under composition levy, a bill of supply instead of tax invoice is to be issued. It shall contain the following details:
- name, address and GSTIN of the supplier;
- a consecutive serial number containing only alphabets and/or numerals, unique for a financial year;
- date of its issue;
- name, address and GSTIN/ Unique ID Number, if registered, of the recipient;
- HSN Code of goods or Accounting Code for services;
- description of goods or services;
- value of goods or services taking into account discount or abatement, if any; and
- signature or digital signature of the supplier or his authorized representative:
Bill of supply may not issued if the value of the goods or services supplied is less than INR 100 except where the recipient of the goods or services requires such bill.
- Tax payment
- Composition tax payers will need to pay tax on quarterly basis by 20th of the month following the quarter. For example, for the quarter ending 30th June 2017 (Apr-Jun 2017) due date is 20th July 2017
- Form GST PMT 4 is the challan for depositing GST.
You can refer our article http://taxingtax.com/understanding-goods-services-tax-procedural-aspects/607/ for further insights into procedural aspects.
- Compounding dealers are required to file quarterly return GSTR-4 by 18th of the month following the quarter. For example, for the quarter ending 30th June 2017 (Apr-Jun 2017) due date is 18th July 2017
- Details submitted in GSTR-8 will be available to recipient in GSTR-2A for auto-populating the data in the portal.
- Composition taxpayers are not required to file annual return.
Consequences of violating restrictions under Composition scheme
The consequences are depicted in the diagram below:
In addition to this, the draft rules provide that violation of conditions by one business vertical will apply to all other business verticals under same PAN and consequently above tax and penalty will apply to them as well.
However no penalty shall be imposed without giving a notice to show cause and without affording a reasonable opportunity of being heard to the person proceeded against.
Let us now discuss an example resulting in violation of conditions under composition scheme and resultant tax and penalty liability.
Suppose, you are having a turnover of 40 lakh and paying taxes @ 1% i.e. 40,000/-. You make interstate supply of 1,000/- to a customer. Now, one cannot realize how much this Rs.1000 supply will cost him. As per law, composition benefit will cease and the person will be liable for the standard tax rate, e.g. 20%.
Now, the tax required to be paid shall be:
|Tax at standard rate (40.01 lakhs*20%)||8.00 lacs|
|Less: tax already paid||0.40 lacs|
|Tax differential||7.60 lacs|
|Penalty of equivalent amount||7.60 lacs|
You can refer the following article for understanding the transitional provisions relating to Composition Scheme.
“8. Composition Levy
(1) Notwithstanding anything to the contrary contained in the Act but subject to subsection (3) of section 7, on the recommendation of the Council, the proper officer of the Central or a State Government may, subject to such conditions and restrictions as may be prescribed, permit a registered taxable person, whose aggregate turnover in a financial year does not exceed [fifty lakh of rupees], to pay, in lieu of the tax payable by him, an amount calculated at such rate as may be prescribed, but not less than one percent of the turnover during the year:
Provided that no such permission shall be granted to a taxable person who effects any inter-State supplies of goods and/or services.
Provided further that no such permission shall be granted to a taxable person unless all the registered taxable persons, having the same PAN as held by the said taxable person, also opt to pay tax under the provisions of this sub-section.
(2) A taxable person to whom the provisions of sub-section (1) apply shall not collect any tax from the recipient on supplies made by him nor shall he be entitled to any credit of input tax.
(3) If the proper officer has reasons to believe that a taxable person was not eligible to pay tax under sub-section (1), such person shall, in addition to any tax that may be payable by him under other provisions of this Act, be liable to a penalty equivalent to the amount of tax payable as aforesaid:
Provided that no penalty shall be imposed without giving a notice to show cause and without affording a reasonable opportunity of being heard to the person proceeded against.”
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