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.
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.
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.
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.