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 lack of knowledge
To make compliance easier for small businesses, many state governments have 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. Although such a system is missing in Service Tax laws.
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. 50 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. 50 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
- 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 prescribed form in prescribed manner within eighteen days after the end of relevant
GSTR-4 has been prescribed by the government as a tax return form to be filed by a dealer under Composition
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.