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May 8, 2020

Who should opt for Composite Scheme in GST?

Who should opt for Composite Scheme in GST?

Introduction

Under GST act the department has introduced a tax payment scheme known as Composition levy scheme. The scheme is an optional scheme available only to certain eligible taxable person. Under composition scheme the taxpayer pays tax as per specified rates notified by the CBIC. The tax is paid on the basis of the turnover of the state. The composition scheme supplier is not eligible to take ITC on the inputs used for production or for further supply. In this article we will be discussing about various points on composition scheme.

Eligibility for composition scheme:

A person is eligible to opt for payment of tax under the composition scheme if aggregate turnover is up to Rs. 1.5 Crore in the preceding financial year. However, the turnover shall be considered Rs. 75 lakhs for the preceding financial year where the person is located in any of the following special category states:

  1. Arunachal Pradesh
  2. Manipur
  3. Meghalaya
  4. Mizoram
  5. Nagaland
  6. Tripura
  7. Uttarakhand

Also below are the person who are not eligible to opt for composition scheme even if turnover is less than 1.5 Crore or 75 lakhs:

  1. Supplier of service other than restaurant service
  2. Supplies of goods which are not taxable under the GST act
  3. Interstate supplier of goods.
  4. Person supplying goods through e-commerce operator who is required to collect TCS
  5. Manufacturer of notified goods i.e. Ice cream and other edible ice, whether or not containing cocoa, Pan Masala, aerated waters and Tobacco or manufacturer of tobacco substitutes.
  6. Composition scheme shall not applicable for tax payable under reverse charge mechanism.

Note: At the time of calculating the total turnover of the business entity the following items shall be included and excluded as per section 2(6):

Items to be included:

  1. Taxable supplies
  2. Exempt supplies
  3. Export
  4. Interstate supplies

Items to be excluded:

  1. CGST, SGST, UTGST, IGST and Cess.
  2. Value of inward supplies on which tax is payable under reverse charge mechanism.

The turnovers of persons having same PAN to be computed on all India basis.

Rate of tax under composition scheme:

As per section 10(1), the rates of tax under composition scheme are as under a composition supplier may opt to pay tax in lieu of the tax payable by him under section 9(1), an amount of tax calculated at under mentioned rates:-

Sr. NoEligible personRate of Tax
1Manufacturer1% of the turnover in the state or union territory
2Restaurant service5% of the turnover in the state or union territory
3Other suppliers1% of the turnover of taxable supplies of goods or services in the state or union territory

Note:

A composition supplier can supply service during the year up not exceeding of Higher of 1 or 2

  1. 10% of turnover of the previous year, or
  2. Rs. 5,00,000

For instance the Mr. X is a composition supplier registered in Maharashtra and his turnover for the previous year FY 2019-20 is Rs. 1 crore. Hence, Mr. X can provide service during the FY 2020-21 upto a maximum of Rs. 10,00,000 i.e. higher of Rs. 10,00,000 (10% of 1 crore) or Rs. 5,00,000.

Benefits of Composition scheme:

  1. No requirement of maintenance of detailed books of accounts under composition scheme
  2. Less compliance as the taxpayer is not required to provide sales details monthly basis or provide each detail of the sale like invoice details, recipient details etc.
  3. No requirement of Tax invoice. Under composition scheme the supplier is required to bill of supply instead of tax invoice.
  4. Low professional cost to the taxpayer. The composition is require to file return through CMP 08 quarterly instead of GSTR3B which is a monthly requirement this leads to savings of professional fee cost.
  5. Composition supplier is not required to file fresh intimation every year. It is only required when the turnover crosses the threshold limit i.e. 1.5 crore or 75 lakhs
  6. Composition taxpayer is having advantage of low tax. Separate minimum rates are being specified for composition taxpayer.
  7. Since opting for composition scheme results into less payment of tax, as discussed above, there would be less amount of working capital blocked in tax payment resulting therein high liquidity for small taxpayer and the same can prove to be helpful in widening the business.

Disadvantages of Composition scheme:

  1. Composition scheme taxpayer cannot collect tax from recipient.
  2. Composition scheme lapses if the aggregate turnover exceeds Rs. 1.5 crore or Rs. 75 lakh.
  3. Composition taxpayer cannot avail Input tax credit on inputs and capital goods.
  4. Composition tax payer cannot involve in interstate supply of goods
  5. Composition supplier is not allowed to wholly engage in supply of service. The taxpayer can make supply of service during the year up to a maximum of Higher below two
    • 10% of turnover of the previous year, or
    • Rs. 5,00,000
  6. Composition supplier are not allowed to supply goods through e- commerce operator
  7. Composition supplier is not allowed to supply exempt goods.

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