An All-Inclusive Guide to GST Composition Scheme

Goods and Services Tax, or GST, is a crucial modification that reduces several taxes and amalgamates the Indian market. While the larger companies can easily handle the GST compliance segment, it is complex for the smaller firms. Hence, the government developed a GST composition scheme that makes compliance easier for smaller businesses. A primary factor associated with this composition scheme is a company's turnover limit, amendments to which may lead to several advantages and disadvantages. However, two specific benefits of the scheme for smaller firms are low tax liability and less paperwork. Any company or individual eligible to register for the GST composition scheme should submit annual and quarterly returns.

Importance of GST Composition Scheme

As per government data, around 13.8 million micro-enterprises account for 96% of the MSME sector of India as of February 2023. The medium and small enterprises occupy 0.28% and 3%, respectively, extensively contributing to manufacturing, exports, and India's GDP. The GST composition scheme effectively acknowledges this sector's significance by relieving GST procedures, tax rates, and filings for all companies.

Under the GST composition scheme, taxpayers can skip the monthly tax returns and file only one quarterly return or GSTR-4 by the 18th of the month following the quarter's end. They must also file an annual return or GSTR-9A by 31st December of the next fiscal year. Dealers registered under the GST composition scheme do not need to maintain thorough records.

Important Features of the GST Composition Scheme

GST composition scheme features include:

• The rates of this scheme may vary as per business type. For example, while manufacturers pay just 1%, restaurant owners must pay 5%.
• Business owners registered under the GST composition scheme must pay lower taxes than those registered under the regular GST scheme.

Applicable Tax Rate for GST Composition Scheme

• The applicable tax rate for manufacturers, except those producing things that the government may notify, like Pan Masala, Ice Cream, and Tobacco products, is 1% (CGST of 0.5% + SGST of 0.5%)
• The applicable tax rate for restaurant owners, as per clause (b) of paragraph 6 of Schedule II, is 5% (CGST of 2.5% + SGST of 2.5%)
• The applicable tax rate for traders and all other types of suppliers subject to composition levy is 1% (CGST of 0.5% + SGST if 0.5%)

Rules of GST Composition Scheme

As per the GST Act, service businesses, traders and manufacturing businesses can register under the GST composition scheme. But the following entities cannot register under the scheme:

• Casual taxable and non-resident taxable individuals.
• Businesses or individuals supplying products through e-commerce portals that collect taxes at source.
• Edible ice and ice-cream manufacturers with or without cocoa as an additive.
• Manufacturers of tobacco products, pan masala and substitutes.
• Businesses or individuals who purchase products from unregistered suppliers.
• Suppliers that supply goods exempt under GST Act.

Which Individuals or Businesses Can Register Under the GST Composition Scheme?

The following individuals or businesses are eligible to register under the GST composition scheme, provided their yearly turnover is within the specified limit of Rs. 1.5 crores.

• Food service units
• Shopkeepers
• Service sector units
• Small manufacturing units
• Truck operators
• Machine operators
• Repair store owners
• Artisans
• Vegetable and fruit vendors

GST Composition Scheme Limitations

A few limitations of the GST composition scheme include the following:

• Buyers transacting with sellers registered under the GST composition scheme may not get the advantages of the input tax credit, resulting in price cascading, distortion and complete loss of business.
• Taxpayers registered under the GST composition scheme cannot recover composition tax from the buyers because of their inability to create a tax invoice.
• Taxpayers registered under the GST composition scheme cannot indulge in inter-state transactions, exports, or imports. They also cannot use the internet to supply goods through different e-commerce portals.
• Taxpayers should pay taxes at regular rates on all transactions that use the Reverse Charge Mechanism.
• Dealers cannot sell products not subject to GST, like alcohol.
• Business owners with several businesses registered under a single Permanent Account Number must register all the businesses under the GST composition scheme.
• When making transactions under the reverse charge system, dealers should pay taxes as per the general GST rate.
• As per the CGST (Amendment) Act 20148, merchants and manufacturers can now offer services up to Rs. 5 lakhs or 10% of turnover, whichever is higher.
• The phrase "Composition Taxable Person" should appear on every supply bill issued by the taxpayer. Also, every notice and sign board displayed at the taxpayer's business place should include this phrase.

Advantages of the GST Composition Scheme

Advantages of the GST composition scheme for eligible business entities include:

• Taxpayers can now adhere to lesser compliances in maintaining their tax payment records and do not need to present tax invoices.
• Small businesses have lower tax liability due to fixed rates, which exposes them to higher liquidity. This, in turn, helps businesses maintain their cash flow, thus sustaining operations smoothly.

Understanding the Composition Limit under GST

The composition scheme under GST differs for varied businesses.

• Newly registered traders and manufacturers' turnover for the current financial year should not exceed Rs. 1.5 crores. And the already registered businesses' turnover should not exceed Rs. 1.5 crores in the previous financial year.
• Restaurants that do not serve alcohol can register themselves under the scheme only if their yearly turnover is above Rs. 1.5 crores.
• For newly registered businesses to be eligible for the GST composition scheme, their yearly turnover should not exceed Rs. 50 lakh in the present financial year. For already registered businesses, their turnover should be at most Rs. 50 crores in the previous financial year.

Important Elements of the GST Composition Scheme

Small businesses should provide specific details to register under the GST composition scheme, which include:

• HSN Code
• GSTIN
• Digital signature
• Accurate and complete company details
• Full name and address
• The exact worth of products and services being sold.

Business owners can also opt out of the GST composition scheme and choose the regular tax plan and ITC advantages. Further, credit shall be determined using semi-finished goods, final goods and stock inputs. However, business owners can switch between compounding and traditional vendors only once during the financial year.

Penalties Related to the GST Composition Scheme

Some penalties associated with the GST composition scheme include:

• Business owners need to pay a penalty of Rs. 100 per day, up to a maximum of Rs. 5 000 if they do not file the GSTR-4 on time.
• The tax authorities can exclude businesses from the GST composition scheme or even penalise them with an amount equal to the tax amount they owe if the business does not qualify for the scheme or if they find it to be enrolled unlawfully.
• Additionally, the tax authorities may cancel the registration of a business that fails to file returns for three consecutive years.

GST Composition Scheme Registration Procedure

Registered or existing taxpayers not under the GST composition scheme can go for it only from the start of the next financial year. They must file tax returns as or before 31st March of the previous year. Dealers also have the flexibility to switch to the regular tax scheme, although they may not be able to return to the GST composition scheme within the same fiscal year. Businesses and individuals registered under the GST composition scheme should fill in GST CMP 08 form to deposit their quarterly payments.

Conclusion

While the new tax reform called GST has led many large businesses to register under GST Act 2017, alternative tax registrations like the GST composition scheme have been beneficial for smaller businesses. This is an easy and simple scheme for small taxpayers enabling them to get rid of complicated GST formalities and pay GST at a fixed turnover rate.