Get to know about the GST Composition Scheme for small businesses in India, its key features & registration in this guide by earlyGST.

What is GST Composition Scheme?

Last Update Date : January 12, 2018

Every tax system prescribes several actions which need to be taken by businesses to ensure compliance with statutory provisions. Things like periodic payment of taxes, filing timely returns and maintaining prescribed records are necessary steps in a tax system for corporate taxpayers. However, small business owners find it overwhelmingly challenging to deal with such requirements of the law due to lack of knowledge and expertise.

To make compliance easier for small businesses, many state governments had provisions in their VAT system for payment of a composition levy by small businesses. This ensures greater compliance without the need for maintaining copious records.  Service tax laws do not have this system.

The One Nation One Tax Scheme (GST) which promises to club all the indirect taxes into one also boasts a composition scheme for small businesses. The GST Composition Scheme will make compliance with tax laws hassle free for eligible businesses opting for the scheme.

Here are some key features of the scheme:

  • Eligibility – Not everyone is eligible to enroll under this scheme. It is meant for taxpayers whose aggregate turnover does not exceed Rs 75 lakh threshold in a Financial Year.
  • Tax rate – Rate of tax as prescribed will be less than regular GST but not less than 1% of the turnover during the Financial Year. Tax rates under the scheme are expected to be between 1% and 3%.
  • Not eligible for Input Tax Credit – As per section 16, those goods and services on which Composition Tax has been paid (under section 8) do not qualify for Input Tax Credit.
  • Applies to Intra-state supplies – Local suppliers, i.e., those who supply within a state can only take advantage of this scheme. Inter-state suppliers will come under regular GST laws.
  • Needs voluntary application – Taxpayers need to make voluntary registration every year for getting the benefits of GST Composition Scheme. However, if the taxpayer crosses the minimum turnover limit of Rs. 75 lakh then he will be transferred to regular scheme.
    Taxpayers who are already a part of VAT Composition Scheme also need to voluntarily register for this scheme.
  • Quarterly returns – Instead of filing 3-4 returns monthly, taxpayers registered under this scheme will be required to file returns once every quarter.
  • Bill of supply not tax invoice – Unlike regular scheme where a taxpayer needs to present tax invoice to the tax authorities, taxpayers registered under this scheme need to present bill of supply.
  • Penalty – If a taxable person is found not eligible for this scheme then the tax authorities can impose a penalty equal to the amount of tax on such person along with his tax liability. So utmost care needs to be taken when opting for this scheme and paying taxes.

Registration under Composition Scheme

Any existing taxpayer not under Composition Scheme may choose to opt for it (subject to being qualified), only from the beginning of the next financial year. The application will have to be filed on or before 31st March of the previous year so that returns can be filed accordingly.

Dealers under Composition Scheme may be allowed to switch over to normal scheme even during the year if they want to. However, they cannot switch over to Composition Scheme again during the same financial year.

Returns under Composition Scheme

  • A registered taxable person paying tax under the provisions of Composite Scheme shall furnish a return for each quarter in the prescribed form in the prescribed manner within eighteen days after the end of relevant quarter.
  • GSTR-4 has been prescribed by the government as a tax return form to be filed by a dealer under Composition Scheme.
  • Composition dealers need to furnish the first return for the period starting from the date on which they become a registered taxable entity till the end of the quarter in which the registration has been granted.

Impact on Input Tax Credit during transition between Regular Scheme and Composition Scheme

Transition from Composition Dealer to Normal Dealer

Section 16(3) of Model GST Law states that when a taxpayer ceases to pay composition tax and becomes liable to pay tax as a regular taxpayer under GST then he is eligible to take Input Tax Credit in respect of inputs held in stock and inputs contained in semi-finished and finished goods held in stock as on the day immediately preceding the day from which he becomes liable to pay tax under regular scheme.


Transition from Normal Dealer to Composition Dealer

As per section 16(12) of Model GST Law, when a taxpayer liable to pay tax as a regular taxable person switches over as a taxable person for paying tax under section 8 (GST Composition Scheme), then he needs to pay an amount by way of debiting in the electronic credit /cash ledger equivalent to Input Tax Credit in respect of inputs held in stock and inputs contained in semi- finished and finished goods held in stock as on the day immediately preceding the day of such switch over.

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