GST - Composition Scheme
What is Composition Scheme, who can and cannot file for it and it's advantages and disadvantages
What is a composition scheme?
A composition scheme under GST is a way for small businesses to pay taxes more easily and quickly. The composition scheme saves the small businesses from formalities under GST and provides a mechanism of paying tax, which is a fixed percentage, on the overall sales of a year.
A business may under register under a composition scheme, which has an annual turnover of fewer than 1.5 crores, which was earlier set to one crore and later updated by the Central Board of Indirect Taxes and Customs (CBIC). As per the latest amendment in 2018 in CGST, a composition dealer can also supply services, with a limit of 5 lakh or 10% of the total turnover (whichever is more).
Note: For the businesses situated in the Northeastern states of India and Himachal Pradesh, they have a relaxed composition limit of 75 lakhs.
Who cannot opt for the composition scheme -
Businesses involved in e-commerce cannot apply for this scheme.
Example: Any business that has an online services portal like ZOMATO, or deals with customers in electronic form cannot apply for the composition scheme.
Businesses that are involved in making tobacco products, Pan masala products, and Ice cream manufacturing.
Example: Vimal company, famous for its tobacco products can not apply for composition scheme, no matter how much sales it makes.
3. Business involved in inter-state supply of goods has to pay I-GST only, and can not opt-in for composition scheme.
Example: If trader X is registered in Rajasthan and he has to supply goods to any state except Rajasthan, he cannot opt under the composition scheme and IGST have to be paid.
4. Foreign nationals and UN bodies: Anybody related to United Nations, World Health organization, foreign nationals who visit India for less than 6 months need not pay any tax to the government.
Conditions for composition scheme:
Input Tax Credit cannot be claimed by businesses that fall under the composition scheme. (Input tax credit is the refund of tax by the government. To learn more about it, visit our article on the input tax credit.)
Every bill issued should mention the phase ‘composition taxable person’.
‘Composition taxable person’ should be mentioned on every notice and signboard.
If businesses are involved in more than one segment of business, it has to register separately for each of the segments.
Businesses registered under the composition scheme can not deal in products that are exempted from GST. (like alcohol, live fish, etc.)
Cannot supply goods or services outside of the state: If a business is involved in supplying goods outside of the state where the business is registered, it has to register under a normal tax paying system and can not make sales outside of the state under composition scheme
Which returns are to be filed by the composition dealer?
Quarterly: - Quarterly statement CMP-08 is to be filed after the 18th of the month following the quarter-end.
Annual return:- GSTR-4 is to be filed by 30th April following the end of the financial year. Additionally, GST-9A is to be filed by 31st December of the next financial year.
Advantages of composition scheme:
Less paperwork, so best suited for small business.
High liquidity of cash. (As returns are to be filed on total turnover)
Lower tax liability, and comparatively easier filing of returns.
Disadvantages of composition scheme:
Business under composition scheme not eligible for inter-state supplies, and thus, limits the territory of the business.
Businesses registered under composition can not claim an input tax credit.
Businesses can not deal in the goods which are not included under GST (for example alcohol)
Businesses can not supply goods through any electronic means, because it would come under E-commerce, and thus, the composition scheme would not be applicable.
Tax rates applicable under composition scheme
Disclaimer: This article is intended for general consumption only. The information in the article was correct at the time of publication, but it is subject to change due to changes in government rules and regulations. The contents of the blog may not be copied unless prior permission is obtained.
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