The Indian Government, in recent years, has introduced several schemes and initiatives to help boost the country’s small business sector. While the introduction of GST itself has benefited start-ups and MSMEs by way of simplifying and standardising the taxation system, the GST Composition Scheme is set to further simplify tax compliance for eligible businesses.
What is the GST Composition Scheme?
It is, in effect, a tax-paying mechanism offered to the country’s small businesses to impart benefits like reduced tax compliance and paperwork alongside lower taxation liabilities.
Businesses with a turnover of less than Rs. 1.5 crore can opt for the Composition Scheme under GST and pay their taxes at a fixed rate of their annual turnover.
For instance, those registering under this scheme can pay their taxes at the rates of 1% to 6% of their total turnover and file one quarterly and one annual return each year. Alternatively, those not registered under this scheme need to submit 4 GST returns each year – 3 monthly and one annual.
Who is Eligible to Opt for this Composition Scheme?
As mentioned before, taxpayers with annual turnover below Rs. 1.5 crore can opt for this scheme. Further, for Himachal Pradesh and the North-Eastern states, this limit has been further reduced to Rs. 75 lakh per year. This cap is, however, set solely for manufacturers, traders and restaurants that do not serve alcohol.
For service providers, the cap is set at Rs. 50 lakh.
One must remember here that the collective turnover of businesses registered under the same PAN will be taken into account while gauging their eligibility to avail the benefits extended under GST Composition Scheme.
Who Cannot Opt for this Scheme?
Taxpayers belonging to the following categories are not eligible to avail the benefits of this scheme –
- Those engaged in making inter-state supplies.
- Businesses engaged in supplying goods via e-commerce platforms.
- Pan masala, tobacco and ice-cream manufacturers.
- Any non-resident and casual taxable person.
Conditions to Opt for this Scheme –
Before taxpayers register themselves under the composition scheme, they must take note of the following conditions pertaining to its applicability –
- Dealers registering under the scheme cannot be engaged in supplying goods that do not attract GST (e.g. alcohol).
- Dealers who opt for the benefits under this scheme cannot claim input tax credits.
- Any transaction made under the mechanism of reverse charges will be taxed normally.
- Taxpayers opting for this scheme will need to mention that they are a “composite taxable person” on every signboard or notice displayed at the location of their business. They will also need to put down these words on the bills of supply issued.
- If a taxpayer has businesses belonging to multiple sectors like electronic accessories, textile, groceries, etc., registered under the same PAN, all such businesses will need to be registered collectively. Otherwise, the taxpayer will have to opt-out of this scheme.
- According to the CGST (Amendment) Act of 2018, traders and manufacturers who extend services up to Rs. 5 lakh or up to 10% of their total turnover (whichever is higher) are eligible to avail the benefits of GST Composition Scheme. This provision was brought into effect from 1st February 2019.
With such GST Composition Scheme rules under consideration, taxpayers can proceed to register themselves under this scheme.
How to Opt for this Scheme?
To avail the benefits of this scheme, eligible taxpayers will need to file Form CGST CMP 01 or 02 through the designated portal.
Following are the steps to initiate this process –
Step 1 – Enter the registered ID and password to the GST portal and log in.
Step 2 – Navigate to “Services” and choose the option “Registration” from the drop-down menu. Next, click on the option marked – “Application to opt for composition levy”.
Step 3 – Read the scheme’s terms carefully and check the box provided for confirmation. Next, fill the boxes marked “Place” and “Name of authorising signatory” by choosing the right options from the drop-down menu and save them.
Step 4 – To submit the details, LLPs and companies need to choose the option marked “Submit with DSC”. All other taxpayers can choose between “Submit with EVC” or “Submit with e-signature”.
Step 5 – A warning sign will pop-up next, under which one will find the “Proceed” option. Click on it.
On doing so, the application will be submitted successfully. Registered taxpayers will receive a confirmation on their designated email IDs or mobile numbers.
Once the registration is successfully completed, taxpayers will be able to enjoy the benefits extended under the GST Composition Scheme.
What are the Benefits of this Scheme?
Upon registering successfully, taxpayers will be able to enjoy the following benefits –
- Reduced interest rates –
The GST Composition Scheme rates are significantly lower than what is levied normally. The applicable rates are illustrated in the table below –
|Traders and manufacturing businesses||0.5%||0.5%||1.0%|
|Restaurants (that do not serve alcohol)||2.5%||2.5%||5.0%|
|Others (service providers)||3.0%||3.0%||6.0%|
- Increase in liquidity
Owing to the fixed rate of taxation extended under this scheme, businesses can enjoy higher liquidity and maintain a better cash flow. Thus, the scheme can effectively ensure smoother operations for businesses.
- Minimal compliance
With this system in effect, taxpayers can do away with the need to file multiple returns and thus enjoy relaxation in compliances.
Nonetheless, while it can make it easier for small businesses to manage tax payments, this scheme is not without its drawbacks.
What are the Disadvantages of this Scheme?
Few of the pitfalls under this scheme include –
- Restriction on tax collection
Taxpayers registered under this scheme cannot raise invoices or collect composition taxes for their buyers.
- Input tax cannot be credited
Businesses are not allowed to collect input tax from any output liability. Further, buyers of these goods cannot collect credit from input tax. This can lead businesses registered under the composition scheme to lose out on customers.
Additionally, since this scheme does not apply to inter-state supply of goods, it can be geographically restricting.
Nonetheless, the advantages of the GST Composition Scheme certainly outweigh its disadvantages. Businesses looking to opt for this scheme must take note of all the above information before initiating the registration process to facilitate a smooth transition.