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

Thanks

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