Composition Scheme Under GST

The composition scheme is a simple and straightforward scheme under GST for traders. Small taxpayers can get rid of cumbersome GST paperwork and pay GST at a fixed rate of turnover. This scheme can be chosen by any taxpayer whose turnover is less than Rs. 1.5 crore.

A taxpayer whose turnover is less than Rs. 1.5 crore can opt for the composition scheme. For the northeastern states and Himachal Pradesh, the limit is now Rs. 75 lakhs.

To calculate the turnover in the sense of the composition scheme, the turnover of all businesses with the same PAN must be added. Only goods manufacturers, dealers and restaurants (who do not serve alcohol) can choose the composition scheme according to section 10. Service providers can opt for a similar scheme for composition distributors, as set out by the CGST (Rate) Notice no.2/2019 of March 7, 2019, with the total turnover limit being Rs 50 lakh.

GST Rate

Type of Business

CGST

SGST

Total

Manufacturer and Traders (Goods)

0.5%

0.5%

1%

Restaurants not serving alcohol

2.5%

2.5%

5%

Service Providers

3%

3%

6%

Not eligible for composition scheme

  • Manufacturers of ice cream, pan masala, or tobacco.
  • A person making inter-state supplies.
  • Casual taxable person or a non-resident taxable person.
  • Businesses who supply goods through an e-commerce operator.
  • Supplier who has purchased any goods or services from an unregistered supplier unless he has paid GST on such goods or services on reverse charge basis.
  • Person supplying goods which are not taxable under GST.

Reverse charge under composition scheme

A composition dealer has to pay tax under reverse charge mechanism. The rate applicable to supplies is the rate at which the GST must be paid, which means that the compounding scheme should not be used for reversal charge purposes. In addition, no input tax credit is available to a composition dealer for reverse charge.

Benefits

  • Reduced tax payments- With lower tax rates, the liability to pay tax is less.
  • Lesser compliance requirements- Low compliance requirements, therefore suitable for small businesses with limited resources
  • Increased liquidity- From a financial point of view, reduced tax liability through fixed rates means higher liquidity for the company. With more liquidity, you can better maintain cash flow, which will help you keep operations running smoothly.

Drawbacks

  • No input tax credit- B2B businesses are not allowed to offset the input tax paid for output liability. The buyer of such goods does not receive any credit for the taxes paid. As a buyer who is registered as a normal taxpayer, you will not receive any credit if you buy from a person registered under the composition scheme, this will result in a business loss. Ultimately, such buyers could avoid buying from a taxpayer under the composition scheme.
  • No collection of tax- Under the scheme, taxpayers cannot reclaim composition tax from their buyers as they cannot raise the tax bill.
  • Restricted reach of business- Businesses are geographically restricted as GST composition does not cover interstate supplies. You can also not use the potential of the Internet, since the supply of goods through e-commerce portals is not allowed according to the composition scheme.

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