A to Z of Composition Scheme in GST

The GST brings with itself a lot of compliances to be observed. It, in turn, increases the cost of compliance in the form of blocked working capital, additional manpower requirement etc. Big business houses can afford an extra cost. What about Small and Medium Enterprises (SME)? They neither have resources nor will to adhere to strict compliance requirement of GST.  In order to provide relief to small businessmen, CGST Act, 2017 provides for Composition Scheme. Let us first look at its advantages and disadvantages before moving on to the regulatory provisions.

Advantages of opting Composition Scheme:

1.      Limited Compliance

·        One Quarterly return as compared to  3 monthly returns under normal scheme ( see ‘Returns’ section below)

·        No need to maintain detailed books of accounts. Only information about Turnover in state, Inward Supplies, Tax Payable and Tax paid has to be maintained. ( see ‘Books of Accounts’ section below)

·        Do not require audit of accounts to be done unlike in normal cases. ( see ‘Audit’ section below)

2.      Reduced tax burden ( see ‘Tax Liability’ section below)

3.      High Liquidity – Under composition scheme, the registered person has to pay tax on turnover on quarterly basis only. Thus a substantial amount of working capital would be available to be circulated in business.

4.      Optional – Composition scheme is an optional one. A person may choose to register as normal taxpayer if he wish to do so.  

Disadvantages of opting Composition Scheme:

1.      Potential loss of business – Since the person opting for composition scheme cannot issue a tax invoice, hence, the purchaser of goods or recipient of service will not be eligible to claim ITC on such purchases. It may act as a deterrent to existing or future customers to purchase from such supplier and thus may lead to loss of business.

2.      No ITC – The person opting for composition scheme cannot claim ITC on its purchases.

3.      Cash Outflow – The person opting for composition scheme cannot charge tax (GST) from its customers and hence they have to pay taxes from their own pocket.

Regulatory Provisions

A.    Applicability

·        Registered Person

·        Aggregate Turnover (TO) in the preceding FY do not exceed Rs 75 Lakhs

B.     Eligibility

·        Registered person is not engaged in inter- state supply of goods (See Note 3 below)

·        he is not engaged in the supply of services other than supplies referred to in clause (b) of paragraph 6 of Schedule II ( See Note 1 below)

·        he is not engaged in making any supply of goods which are not leviable to tax under GST Act

·        he is not engaged in making any supply of goods through an electronic commerce operator who is required to collect tax at source under section 52 of CGST Act, 2017

·        he is not a manufacturer of such goods as may be notified by the Government on the recommendations of the Council

·        he should neither be a casual taxable person nor a non-resident taxable person

·        the goods held in stock by him on the appointed day have not been purchased in the course of inter-State trade or commerce or imported from a place outside India or received from his branch situated outside the State or from his agent or principal outside the State ( See Note 2 below)

·        the goods held in stock by him have not been purchased from an unregistered supplier and where purchased, he pays the tax under sub-section (4) of section 9 (i.e. reverse charge)

·        he shall mention the words “composition taxable person, not eligible to collect tax on supplies” at the top of the bill of supply issued by him

·        he shall mention the words “composition taxable person” on every notice or signboard displayed at a prominent place at his principal place of business and at every additional place or places of business

Note :

1.      Service under clause (b) of Schedule II is –

“supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.”

It implies that Composition scheme is available for Restaurant service provider only. It is also applicable for the restaurant services provided by the hotels.

2.      This clause is applicable to the person who is registered under current law and has opted for composition scheme under GST. There should not be a stock in hand as on 1^st July which has been purchased from outside the state. So it is advisable to sell such stock before registering in GST as composite supplier. The restriction is only for stock in hands as on 1^st July and not on fresh purchases.

3.      There is restriction on Inter – state Supply and not purchase after opting for composition scheme in GST. One can still purchase from outside the state after opting for composition scheme in GST.

4.      The registered person opting for composition scheme may not file a fresh intimation every year and he may continue to pay tax under the said section subject to the provisions of the Act and these rules.

C.    Registration

a)     Migration to GST

·        File intimation electronically, in FORM GST CMP 01 , duly signed or verified through electronic verification code (EVC), on the Common Portal, either directly or through a Facilitation Centre notified by the Commissioner, before 1^st July

·        The intimation should be filed not later than 30 days from 1^st July.

·        If the intimation is filed after 1^st July the registered person shall not collect any tax from the appointed day but shall issue bill of supply for supplies made after the said day. 

·        Any person who applies for registration under this rule may give an option to pay tax under section 10 (Composition Scheme) in Part B of FORM GST REG-01, which shall be considered as intimation to pay tax under the said section.

·        Furnish the details of stock, including the inward supply of goods received from unregistered persons, held by him on the day preceding the date from which he opts to pay tax under the said section, electronically, in FORM GST CMP-03, on the Common Portal, either directly or through a Facilitation Centre notified by the Commissioner, within sixty days of the date from which the option for composition levy is exercised or within such further period as may be extended by the Commissioner in this behalf.

·        Any intimation under this rule in respect of any place of business in any State or Union territory shall be deemed to be intimation in respect of all other places of business registered on the same PAN. 

b)     New Registration under GST

·        File intimation electronically,  in FROM GST CMP 02 duly signed or verified through electronic verification code (EVC), on the Common Portal, either directly or through a Facilitation Centre notified by the Commissioner prior to the commencement of the financial year for which the option to pay tax under the aforesaid section is exercised.

·        File a statement in FORM GST ITC 3 within sixty days from the commencement of the relevant financial year.

·        Any intimation under this rule in respect of any place of business in any State or Union territory shall be deemed to be an intimation in respect of all other places of business registered on the same PAN. 

D.    Tax Liability

·        Manufacturer (other than manufacturer of notified goods) – 2% of turnover

·        Suppliers (food or any other article for human consumption or drinks ( other than alcoholic liquor for human consumption) – 5% of turnover

·        Other supplies (i.e. Dealer, trader or retailer of goods) – 1% of turnover

E.     Returns

·        The taxable person is required to furnish only one return i.e. GSTR-4 on a quarterly basis and an annual return in FORM GSTR-9A.

F.     Invoice

·        Person opting for composition scheme cannot issue a tax invoice. Instead he has to issue a Bill of Supply.

·        The Bill of Supply should mention the following details:

a)      name, address and GSTIN of the supplier

b)     a consecutive serial number not exceeding sixteen characters, in one or more multiple series, containing alphabets or numerals or special characters -hyphen or dash and slash symbolised as  “-” and “/”respectively, and any combination thereof, unique for a financial year;

c)      date of its issue

d)     name, address and GSTIN or UIN, if registered, of the recipient

e)      HSN Code of goods or Accounting Code for services

f)      description of goods or services or both

g)     value of supply of goods or services or both taking into account discount or abatement, if any

h)     signature or digital signature of the supplier or his authorized representative

G.    Books of Accounts

·        There is no need to maintain detailed books of accounts. Only the details of Purchase, sale and bills of supply need to be maintained.

H.    Audit 

·        Not applicable to person opting for composition scheme.

I.      Mode of Payment of Tax

·        Internet Banking through authorized banks

·        Credit card or Debit card through the authorised bank

·        National Electronic Fund Transfer (NEFT) or Real Time Gross Settlement (RTGS) from any bank

·        Over the Counter payment (OTC) through authorized banks for deposits up to ten thousand rupees per challan per tax period, by cash, cheque or demand draft

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c

Anti - Profiteering Rules - Penalties [Rule 14(3)]

Where the Authority determines that a registered person has not passed on the benefit of reduction in rate of tax on the supply of goods or services or the benefit of input tax credit to the recipient by way of commensurate reduction in prices, the Authority may order -

(a) reduction in prices;

(b) return to the recipient,

• an amount equivalent to the amount not passed on by way of commensurate reduction in prices
• along with interest at the rate of eighteen percent
• from the date of collection of higher amount till the date of return of such amount or
• recovery of the amount not returned in case the eligible person does not claim return of the amount or is not identifiable, and depositing the same in the Fund referred to in section 57

(c) imposition of penalty as prescribed under the Act; and

(d) cancellation of registration under the Act

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Modes of Verification under GST

Government of India via Notification No. 6/2017 – Central Tax has notified the following modes of verification, :-

(i) Aadhaar based Electronic Verification Code (EVC);

(ii) Bank account based One Time Password (OTP):

(iii) Digital Signature ( compulsory for Companies)

Where the mode of authentication of any document is through any of the modes mentioned in (i) and (ii), such verification shall be done within two days of furnishing the documents. 

Author's Opinion - Since the Government has not determined any time limit for signing through Digital Signature, in my opinion, the document or any other electronic submission, which has to be digitally signed, shall be submitted ONLY after digitally signing it. There can be no submission without digitally signing it. One cannot submit first and sign later.

However, in case of Aadhaar based Electronic Verification Code (EVC) and Bank account based One Time Password (OTP), documents or any other submissions can be submitted before and signed later but within two days of submission.

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Summary of decisions taken by the GST Council on 18/06/2017

I. Return Filing

1. For July & August - 

• Form to be filled     - Form GSTR 3B
• Details to be filled  - Summary of Outward & Inward supplies (and not invoice details)
• Time limit               - 20th of August & September
• Penal Provisions     - No late fees and penalty would be levied for the interim period.

This is only a provisional arrangement to ensure that the business houses get time to prepare 

themselves for the historic change.  Regular GSTR 1 and 2 (with invoice details) has to be filed as per below schedule:

2. From September onwards -  GSTR 1 has to be filed by 10th of next month, GSTR 2 by 15th of next month and GSTR 3 by 20th of next month. 

II. Hotel Industry 

• Non AC, non liquor serving restaurants to face tax rate of 12%
• AC, liquor serving restaurants to face tax rate of 18%
• Outdoor caterers to face tax rate of 18%
• Hotel charging rates from Rs 2500  to Rs 7500 to face tax rate of 18%
• Hotel charging rates Rs 7500 or less to face tax rate of 18%
• Hotel charging rates more than Rs 7500 to face tax rate of 28%
• 5 star or above rated schools serving food and drinks at their restaurant to fact tax at the rate of 18%

III. State run Lotteries 

• Lottery run by State Governments            – 12% of face value of lottery ticket 
• Lottery authorized by State Governments – 28% of face value of lottery ticket

IV. Anti - profiteering

• A three-tier structure will ensure compliance with the anti-profiteering clause. 
• The GST implementation committee, consisting of four state government officials, four central government officials, and one GST Council member, will function as the standing committee to look into anti-profiteering complaints. 
• The complaints will then be referred to DG (Safeguards), which will function as the investigative authority. The final decision will be taken by a five-member committee with a retired Secretary as its chairman.

 V. E- way bill

• As of now e- way bills have been deferred as it will take 2-3 months to have the IT set up to implement it.
• Till then, State governments will continue to use their system for interstate stock transfer. That means VAT forms will continue to be operational.  How will that be taken into picture of GST seems to be seen when the council again meets on 30th June. 

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All about Stock Transfer in GST

TAXABILITY OF STOCK TRANSFER

Under existing VAT/CST Laws, practically every company that makes inter-state stock transfers, does so under Form F and thus, no tax liability arises. In case of intra-state stock transfer, as such no VAT liability arises. However, assessee is required to reverse input tax credit on purchases if such goods are stock transferred.

In GST, every taxability is based upon supply concept. Does that mean Stock Transfers are taxable in GST? Let's find out.

Since the point of taxation in GST is supply, it is important to understand what constitutes supply, which is explained in section 7 of the CGST Act, 2017. 

Section 7 states that:

(1) For the purposes of this Act, the expression “supply” includes–– 

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

 (b) import of services for a consideration whether or not in the course or furtherance of business;

 (c) the activities specified in Schedule I, made or agreed to be made without a consideration; and 

(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.

Schedule I narrates the situation where activities are to treated as supply even without . They are:

1. Permanent transfer or disposal of business assets where input tax credit has been availed on such assets. 

2. Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business

Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.

 3. Supply of goods— 

(a) by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or

(b) by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal. 

4. Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business

Thus, Schedule I states that only when supply is made between two related or distinct persons, that would constitute a taxable supply otherwise not. 

"Related Person" is defined explanation to section 15 as:

a persons shall be deemed to be “related persons” if––

 (i) such persons are officers or directors of one another’s businesses;

 (ii) such persons are legally recognised partners in business; 

(iii) such persons are employer and employee; 

(iv) any person directly or indirectly owns, controls or holds twenty-five per cent. or more of the outstanding voting stock or shares of both of them; 

(v) one of them directly or indirectly controls the other; 

(vi) both of them are directly or indirectly controlled by a third person; 

(vii) together they directly or indirectly control a third person; or (viii) they are members of the same family;

"Distinct Person" is defined in sub section 4 of section 25 as:

A person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act.

Thus, a harmonious reading of all the sections together would lead us to derive the following conclusions:

• A branch operating in different state would be treated as a "distinct person".
• If a person has two separate registration within the same state (as per section 25 of CGST Act read with registration rules), both the registration would constitute a "distinct person".
• If a person has an "additional place of business" within the same state, under one registration only, that would not constitute as "distinct person".
• Only a transfer between two distinct person constitute a supply and hence taxability would arise.
• Both intra-state and inter-state transfer constitute supply.
• Inter - state transfer is  always taxable as separate registration is required in each state.
• Intra - State transfer is taxable only when the person is transferring to an establishment having a different registration. If the intra- state transfer has been made to an additional place of business, warehouse, godown or depot, having same registration as of the supplier, such transfer is not taxable

VALUATION OF STOCK TRANSFER

Rules for valuation in case of stock transfer has been provided in  rule 2, 4 and 5 of valuation rules (dated 17/05/2017). They are as follows:

 Rule 2: Value of supply of goods or services or both between distinct or related persons, other than through an agent  

The value of the supply of goods or services or both between distinct persons as specified in sub-section (4) and (5) of section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall,-  

(a) be the open market value of such supply;

 (b) if open market value is not available, be the value of supply of goods or services of like kind and quality; 

(c) if value is not determinable under clause (a) or (b), be the value as determined by application of rule 4 or rule 5, in that order 

Provided that where goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to ninety percent (90%) of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person 

Provided further that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of goods or services

It Implies that:

• Value of taxable inter-state branch transfer would be calculated using this rule. 
• If the branch makes further sale of goods,without any addition or modification to the received goods, the value of stock transfer would be 90% of the value of goods at which they are sold to unrelated customers. However, it is at the option of the supplier.

Rule 4: Value of supply of goods or services or both based on cost   

Where the value of a supply of goods or services or both is not determinable by any of the preceding rules, the value shall be one hundred and ten percent of the cost of production or manufacture or cost of acquisition of such goods or cost of provision of such services. 

• The above rule is same as provided under the existing Excise Laws.

Rule 5: Residual method for determination of value of supply of goods or services or both    

Where the value of supply of goods or services or both cannot be determined under rules 1 to 4, the same shall be determined using reasonable means consistent with the principles and general provisions of section 15 and these rules

Provided that in case of supply of services, the supplier may opt for this rule, disregarding rule 4. 

INVOICE/CHALLAN FOR STOCK TRANSFER

• For inter - state transfer of goods and intra state transfer of goods between distinct persons, invoice has to be issued. Please refer to invoice rules for further details.
• For intra - state transfer of goods, to a warehouse or depot or branch of the same person, rule 10 of the invoice rules provide generation of delivery challan. 

Rule 10 of Invoice Rules: Transportation of goods without issue of invoice   

(1) For the purposes of :

(a) supply of liquid gas where the quantity at the time of removal from the place  of business of the supplier is not known,  

(b) transportation of goods for job work,  

(c) transportation of goods for reasons other than by way of supply, or   

(d) such other supplies as may be notified by the Board,  

the consigner may issue a delivery challan, serially numbered not exceeding sixteen characters, in one or multiple series, in lieu of invoice at the time of removal of goods for transportation, containing the following details:   

(i) date and number of the delivery challan,  

(ii) name, address and GSTIN of the consigner, if registered,  

(iii) name, address and GSTIN or UIN of the consignee, if registered, 

(iv) HSN code and description of goods,  (v) quantity (provisional, where the exact quantity being supplied is not known),  

(vi) taxable value,  

(vii) tax rate and tax amount – central tax, State tax, integrated tax, Union territory tax or cess, where the transportation is for supply to the consignee,  

(viii)  place of supply, in case of inter-State movement, and  

(ix)  signature.  

(2) The delivery challan shall be prepared in triplicate, in case of supply of goods, in the following manner:–  

 

(a) the original copy being marked as ORIGINAL FOR CONSIGNEE; 

(b)  the duplicate copy being marked as DUPLICATE FOR TRANSPORTER; and  

(c)  the triplicate copy being marked as TRIPLICATE FOR CONSIGNOR.  

(3) Where goods are being transported on a delivery challan in lieu of invoice, the same shall be declared in FORM [WAYBILL].  

(4) Where the goods being transported are for the purpose of supply to the recipient but the tax invoice could not be issued at the time of removal of goods for the purpose of supply, the supplier shall issue a tax invoice after delivery of goods.   

(5) Where the goods are being transported in a semi knocked down or completely knocked down  condition,  

(a) the supplier shall issue the complete invoice before dispatch of the first consignment;  

(b) the supplier shall issue a delivery challan for each of the subsequent consignments, giving reference of the invoice; 

 (c) each consignment shall be accompanied by copies of the corresponding delivery challan along with a duly certified copy of the invoice; and  

(d) the original copy of the invoice shall be sent along with the last consignment.   

I have tried to catch all the rules related to treatment of stock transfer, either to branch, depot, godown or warehouse both inter-state and intra-state in my blog. However, please feel free to point me out if I have missed out anything and also shoot any question which may come up in your mind. 

THANK YOU