Composition Scheme under GST is an alternative method of tax levy designed for small taxpayers.
The threshold turnover limit to qualify as small taxpayer was revised to 1.5 Crores under notified circumstances vide Notification 14/2019-Central Tax, dated 07-03-2019. GST Notification No. 08/2017 – Central Tax dated 27.06.2017 had prescribed the threshold limit of turnover to qualify as Small Taxpayer to be 1 Crore.
India is a developing nation that has a great diversity of businesses- big and small, in its economy. While the mega industries and MNCs help the nation to stand out in the global economy, the mid , small and micro enterprises (MSME) fulfil important leg in the distribution of goods and services to every nook and corner of the nation. These businesses, are not very huge in their operations, yet contribute much towards development of the country.
Recognizing their role, government has made certain provisions under GST to ensure lesser compliance burden and higher growth of such businesses. This article will help you to decide what to look forward to as Composite Dealers/Composite Taxpayers under the GST Composition Scheme.
Types of Taxpayers under GST
The GST mandate segregates taxpayers under 3 categories on the basis of their turnover and filing correlation:
1. Regular Taxpayers
Taxpayers/businesses with an annual turnover exceeding Rs. 1.5crores (75 lakhs for North Eastern states and Himachal Pradesh) are considered as regular taxpayers and are required to file monthly returns as applicable on the nature of their business.
2. Composite Taxpayers
Taxpayers/ businesses with an annual turnover of Rs. 1.5 crores (Rs. 75 lakhs for North Eastern states and Himachal Pradesh, Rs. 50 lakhs for Service providers) or below are required to file just a single return form CMP 08 At the same time, they can enjoy the perk of paying tax at a lower rate.
Earlier the limit was Rs. 1 crore, however the same was extended to Rs. 1.5 crore after the 32nd GST Council Meeting.
3. Exempted Taxpayers
Taxpayer/ businessperson with an annual turnover of Rs. 40 lakhs or below are exempted to pay or collect tax on supply of their goods or services. (Rs. 10 lakhs for North Eastern and Hilly States)
Earlier, the limit for turnover was Rs. 20 lakhs, however same was extended to Rs. 40 lakhs after the 32nd GST Council Meeting.
What is Composition Scheme under GST?
Composition Scheme is a simple and easy scheme under GST for small taxpayers. Under GST small taxpayers can choose to free themselves from the hassles GST formalities by simply opting in for composition scheme. However, the composition scheme is available only for taxpayers whose turnover is less than Rs. 1.5crores (75 lakhs for North Eastern states and Himachal Pradesh).
4 Reasons Why You should Opt for Composition Scheme
Composition scheme in GST for Composite Taxpayers or small taxpayers is the sweet spot where multitude of Indian businesses thrives. It offers few advantages to the taxpayer namely:
1. Ease of Compliance
A business with annual turnover of Rs. 1.5 crore is one with average monthly billing cycle of 1.5 – 2 lacs. This could be a small trader, grocery shop owner, mobile shop or a similar profile. To them, simplicity of procedures is the most important factor in attaching to a uniform taxation system. GST helps here by providing composite dealer with a quarterly filing system instead of monthly. They are required to file form GSTR 4 CMP 08, which is a quarterly filing form. And Annual Return GSTR 4 is to be filed for each financial year from FY 2019-20
(Note: Up to 31st March 2019 GSTR 4 was Quarterly return which is to be filed on annual basis from 1st April 2019. And CMP 08 is to be filed on Quarterly basis from 1st April 2019)
Thus, the taxpayer is free from the hassle of filing multiple forms every month and can focus his/her resources on the growth of the business.
2. Lower Single GST Rate Liability
Earlier tax rate for taxpayers registered under the composition scheme:
|Manufacturer and trader of goods||0.5%+0.5%||1%|
|Service Providers or mixed supplier of goods and services||3%+3%||6%|
However, same has been updated as per Notification 50/2020 dated 24th June 2020.
The taxpayer pays a flat rate of tax regardless of what they manufacture, provide as a service or trade they carry on. Moreover, it is optional and the eligible person opting to pay tax under this scheme can pay tax at a prescribed percentage of his turnover every quarter, instead of paying tax at normal rate.
3. High Liquidity
As stated above, the tax rate applicable for a composite dealer is nominal, which means, the financial resource blocked in the form of ITC is also nominal. Thus, for a taxpayer registered as composite taxpayer under GST does not have to depend on his suppliers returns and utilize the available resource for his daily transactions.
4. Growth Margin
Even though the annual turnover of a composite dealer is lower than a regular taxpayer, he/she can still have a leading edge in the market and gain better profit margin than his/her counterparts. With the composition scheme’s nominal tax rate, the composite dealer has the advantage to provide better quality goods and services at a competitive price and get a good hold of the market.
Issues in Composition Scheme under GST
However, along with the pros, there are a few cons also associated with this scheme.
- Restricted Business Territory
For a taxpayer to be eligible for composition scheme, it is mandatory for him to have his business presence restricted to intrastate supplies. Thus, a composite dealer cannot expand his business to inter-state supplies and import/export while trading under the umbrella of composition scheme. If only, he wants to trade intra -state or import/export, the taxpayer needs to register as regular taxpayer.
- Not eligible to collect GST
Since the rate of composition tax is kept very nominal at 1% – 5% 6%, a taxpayer under composition scheme, he/she is barred from issuing tax invoice. Thus, a composite dealer cannot recover such tax on his outward supply of goods and services form his customers.
Many taxpayers take benefit of the ignorance of the customers on this. And collect tax in the name of GST, however do not deposit the same with the government in turn as they are registered under composition scheme. For such cases, one can check the GSTIN health of any taxpayer using IRIS Peridot, a free mobile app for GSTIN data repository.
- Not eligible to claim ITC
Composition taxpayer cannot claim ITC paid on purchase of any goods or services
- No ITC Available to person dealing with Composite taxpayer
As stated above, a composite dealer cannot recover tax from the sales of his goods and services. Thus, the buyer of such goods will not get any credit on tax paid, resulting in price distortion and cascading. For a normal taxpayer, such investment can lead his business in loss and thus he/she might refrain themselves from buying from a taxpayer registered under composition scheme.
How to Opt-in for Composition Scheme under GST?
An eligible taxpayer who wishes to register his business under composition scheme has to inform the government about their choice by filing form CMP-01 and CMP-02 on the GST Portal/ GSTN.
This intimation should be given before beginning of every Financial Year by taxpayer opting for Composition Scheme. Say, taxpayer planning to opt for Composition Scheme for FY 2020-21 shall file the intimation on or before 31st March 2020.
Composition Scheme for 2017-18: The deadline to opt in for composition scheme for the FY 2017-18 was (1st August, 2017)
Composition Scheme for 2018-19: The deadline to opt in for composition scheme for the FY 2018-19 was (31st March, 2018)
Composition Scheme for 2019-20: The deadline to opt in for composition scheme for the FY 2019-20 was (31st March, 2019. This was extended to 30th April 2019 vide Circular No. 97/16/2019-GST. This was further extended to 31st July and later 30th September 2019 via corrigendum to same circular.
Composition Scheme for 2020-21: The due date to opt-in for Composition Scheme for FY 2020-21 was amended as per GST Notification 30/2020-Central Tax dated 3rd April 2020. to allow registration until 30th June 2020. The statement in FORM GST ITC-03 shall be filed until 31st July 2020 and to allow cumulative application of condition in rule 36(4).
An advisory was issued to this effect which can be accessed here: Advisory to Opt-In for Composition Scheme under GST for FY 20-21.
How to Opt-out of Composition scheme under GST?
A Composition Dealer who wants to opt-out of Composition Scheme has to file GST CMP-04.
Form CMP-04 is also required to be filed if,
- The annual turnover of a composite dealer exceeds the threshold limits;
- The business/ taxpayer do not fall under the eligibility criteria anymore.
A composite dealer is required to file GST CMP-04 within 7 days from the date on which the taxpayer plan to opt out of Composition Scheme or is ineligible to be covered in the scheme.
Non-eligibility for Composition Scheme
Besides taxpayers with an annual turnover above 1.5 crores, the following people cannot opt for the scheme:
- Manufacturer of ice cream, pan masala, or tobacco.
- A person making inter-state supplies.
- A casual taxable person or a non-resident taxable person.
- Businesses which supply goods through an e-commerce operator.
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