GST Composition Scheme: A Detailed Guide for Taxpayers
In recent years, the government of India has launched several programs and initiatives to support the growth of the small business sector in the nation. Implementing Goods and Services Tax (GST) has helped small and medium-sized enterprises (MSMEs) by streamlining and improving the tax system. However, the GST Composition Scheme is expected to make tax compliance even easier for qualified businesses. This guide provides taxpayers with a comprehensive explanation of the GST composition scheme.
Table of Content
What is the GST Composition Scheme?
GST composition scheme is essentially a tax payment system. The nation's small enterprises can use it to receive benefits like less paperwork and tax compliance combined with lower tax obligations. Companies that have annual revenue under Rs. 1.5 crore are eligible to use the Composition Scheme under GST. This allows them to pay taxes at a predetermined percentage of that revenue. For example, individuals who sign up under this program can file one yearly and one quarterly report each year. Besides that, they also pay taxes at the rates of 1% to 6% of their total turnover. A yearly GST return must be submitted in addition to three monthly returns for individuals who are not registered under this plan.
Eligibility for GST Composition Scheme
Businesses may decide to participate in the composition program only if their total yearly revenue is more than Rs. 1.5 crore. The turnover must be determined for the composition scheme's purposes by adding the turnover of all companies with the same PAN. The composition system under Section 10 is only available to manufacturers, dealers, and restaurants that do not serve alcohol. Service providers can make a choice to participate in a comparable program for composition dealers. It has a Rs. 50 lakh total turnover cap, as announced in the CGST (Rate) announcement no. 2/2019, dated March 7, 2019.
Furthermore, the government implemented a distinct composition plan for brickmakers on March 31, 2022. It encompasses construction bricks, fossil meal or silicon dioxide earth bricks, roofing or earthen tiles, and fly ash bricks and blocks. Individuals who have chosen to participate are eligible to pay an additional 6% tax rate without receiving an input tax credit. The following individuals are not permitted to choose to participate in the composition scheme:
Producers of pan masala, ice cream, and tobacco
A person who supplies states across
A supplier who has surpassed the turnover threshold limit is required to enroll in the composition scheme
A foreign taxable person
A person involved in the provision of non-taxable products under the GST law
Businesses that supply goods with the help of an e-commerce operator
Conditions for the GST Composition Scheme
Taxpayers should be aware of the following requirements about the composition scheme's applicability before registering.
Dealers who register under the system are prohibited from selling products (like alcohol) that are exempt from GST.
Input tax credits are not available to dealers who choose to participate in this scheme. All transactions conducted through the reverse charge mechanism will be subject to standard taxes.
Taxpayers who choose to participate in this program must state on all signs and notices posted at their place of business that they are a "composite taxable person." These words must also be mentioned on the issued bills of supply.
All enterprises that fall under the same PAN but are registered under other sectors, such as grocery, textiles, electronics accessories, etc., must be registered collectively by the taxpayer. The taxpayer will be required to withdraw from this program otherwise.
The GST Composition Scheme benefits are available to traders and manufacturers who provide services up to Rs. 5 lakh or up to 10% of their total revenue, whichever is larger, as per the CGST (Amendment) Act of 2018. This clause went into force on February 1st, 2019.
After taking these GST Composition Scheme regulations into account, taxpayers can register for the program.
Steps to Register for the GST Composition Scheme
To receive the benefits of this program, qualified taxpayers must complete Form CGST CMP 01 or 02 via the official website. The steps to start this process are as follows:
Step 1: Visit the GST portal, log in, and enter the registered ID and password.
Step 2: Select the drop-down menu for "Services" and click on "Registration." Then, select the "Application to opt for composition levy" option.
Step 3: Carefully read the terms of the scheme and tick the box for confirmation. Next, select the appropriate options from the drop-down menu to complete the boxes labelled "Place" and "Name of authorising signatory" and save them.
Step 4: LLPs and businesses must select the "Submit with DSC" option so as to submit the information. The options "Submit with EVC" and "Submit with e-signature" are available to all other taxpayers.
Step 5: Next, a warning sign will appear, with the option to "Proceed" underneath. Press the button.
The application will be successfully submitted once you do this. A confirmation will be sent to registered taxpayers' selected email addresses or mobile phones. Following a successful registration process, taxpayers will be eligible to take advantage of the benefits offered by the GST Composition Scheme.
Composition Scheme GST Rate: Tax Rate Applicable to a Composition Dealer
The chart below describes the tax rate on turnover in the state as follows:
GST Composition Scheme Turnover Limit
Every individual with the same Permanent Account Number (PAN) will have their total turnover calculated on an all-India basis. It will be the total of all expenses incurred by external suppliers that fit into these categories:
Taxable materials
Exclusivity materials
Goods and services exports, or both
Supply between states
Nonetheless, it does not include taxes (including cess) paid in accordance with the GST statute or the value of inbound supplies for which tax is due on a reverse charge basis.
Calculation of Tax for a GST Composition Dealer
A composition merchant must pay sales tax at a predetermined rate. In addition, the dealer must pay reverse charge taxes on certain sales, purchases made from unregistered dealers, and imports of services. This indicates that the total amount of GST owed is equal to the following:
Tax on supply (net of advance and returned items) + tax on business-to-business transactions in which a reverse charge is applicable + tax on business-to-business purchases from unregistered suppliers if applicable + tax on services import
Tax rates will be regular, or the rates that apply to the suppliers, on reverse charge transactions, purchases from unregistered dealers, and services imports. Sales which are made only by composition dealers are subject to the rates under the composition scheme.
Filing GST Composition Scheme Return
Registering firms and individuals are required to file electronic returns on the Official GST Portal by the 18th of the month succeeding the last month of the previous quarter. This is stated in accordance with the regulations of the currently in effect GST composition scheme. This entails that the GST composition scheme return for the quarter that concluded in December is required to be submitted online by January 18 of the following year. Firms and individuals who are enrolled under composition should use the GSTR-4 Form to file their taxes. You can get ready by using the GSTR-4 Offline Tool before filing your taxes online.
Rules for GST Composition Scheme
A variety of manufacturing and service industries, including restaurants and retailers, are permitted to register under the composition scheme in accordance with the terms of the GST Act. Nevertheless, the following individuals or organisations do not get any coverage under the GST composition scheme:
A non-resident taxpayer or a transient taxpayer
Companies or individuals that supply items via an operator of an e-commerce portal that collects tax at the source (u/s 52).
Individuals or companies who are involved in the interstate delivery of commodities
Producers of edible ice, including ice cream, with or without chocolate added.
Producer of pan masala, tobacco goods, and tobacco replacements
Companies or individuals who have bought products from unregistered suppliers (permitted if reverse charge GST is paid on such goods)
Vendors that offer items that are excluded from GST Act regulations.
Conclusion
In conclusion, businesses gain from the streamlining of tax procedures brought about by the GST Composition Scheme. It reduces tax obligations, speeds up expansion, and cuts down on bureaucracy. For those who qualify, there are fewer tax requirements and easier compliance. However, there are restrictions, including restrictions on excluded products and regional restrictions. Still, it offers small firms a lot of benefits.
FAQ
Q1. What advantages come with choosing to participate in the composition scheme?
The composition approach has the following benefits:
Fewer and easier compliance requirements to meet (such as filing taxes and keeping records in books, sending invoices, etc.)
Tax payments are made quarterly
Tax liability is limited
Tax rates are lower, resulting in high liquidity
Q2. What drawbacks does the composition system have?
A restricted business area due to the dealer's inability to conduct interstate transactions
Composition dealers are not eligible for input tax credits.
The taxpayer will not be allowed to supply items through an e-commerce portal or non-taxable goods like alcohol under the GST.
Q3. When is the effective date of the composition levy?
The beginning of the fiscal year will mark the effective date for taxpayers who file Form GST CMP-02 to enroll in the composition scheme. The effective date of registration as per sub-rule 2 or 3 of Rule 10 of the CGST Rules, 2017 will apply to individuals who seek a new registration by completing Form GST REG-01.
Q4. What kind of returns must a composition dealer file?
It is mandatory for a composition dealer to file a quarterly challan-cum-statement, or Form CMP-08. Additionally, they must submit an annual return using Form GSTR-4.
Q5. Can a composition dealer collect tax from customers?
No, the buyer is not charged composition tax from a composition merchant.
Q6. Does a composition dealer need to keep thorough records?
No, a dealer who has a registration under a composition scheme is excused from the regular taxpayer's requirement to keep thorough records.
Q7. Do composition dealers qualify for the Input Tax Credit?
It is not possible for a composition dealer to claim an input tax credit for GST on purchases.
Q8. Can tax invoices be issued by a composition dealer?
A Bill of Supply must be issued by a composition dealer. A tax invoice cannot be issued by them. This is due to the dealer's need to pay the tax out of pocket. It is not permitted for a composition dealer to collect GST from clients.
Q9. Is it possible for a dealer engaged in interstate supply to choose the composition scheme?
The plan of composition is exclusive to dealers who supply within the state. A dealer must choose not to participate in the program if they are participating in interstate supplies.
Q10. Is it possible for me to choose the composition scheme one year and opt out the following year?
Yes, it is feasible to do this. On the basis of your turnover, you have the alternative to shift between the conventional scheme and the composition scheme. It is important for you to remember that this will have an impact on how you send out invoices and submit your taxes. The GST Portal is where the declaration of change can be lodged.
Q11. Can I choose to participate in the composition scheme at any time of the year?
No. A registered taxpayer must submit a declaration on the GST Portal prior to the start of each fiscal year. You cannot accomplish this at any time of the year. For both suppliers of commodities and providers of services, opting into the composition system requires completing Form CMP-02.
Q12. What happens if I decide to withdraw from the composition plan in the middle of the year?
All standard regulations are in effect as of the day the dealer chooses to withdraw from the composition scheme. For instance, on October 15, 2020, a composition dealer chooses not to participate in the composition scheme. This indicates that the dealer will need to submit two CMP-08 forms (15 days) for the quarters ending in July through September. In addition, the dealer must file GSTR-1 and GSTR-3B for the sales period ending on October 15, 2020, and all subsequent months.
Q13. What were the provisions for transitioning a business from the old tax regime's composition system to regular GST taxation?
Inputs held in stock, semi-finished products, or finished goods on the day prior to the day of opting out of the composition scheme were eligible for credit for taxpayers enrolled under the VAT composition scheme.
Q14. Who is a composition dealer?
Small enterprises having yearly sales up to Rs. 1.5 crore can opt to use voluntary composition schemes. These schemes allow them to select fixed tax rates above ordinary GST rate. Also, they make it easier for small firms to operate since they have less regulatory requirements.
Q15. What is the GST composition scheme turnover limit for service providers?
The GST composition scheme limit for states was increased to Rs. 1.5 crore at the 32nd GST Council Meeting, which took place on January 10, 2019. This means that individuals or businesses having an annual turnover of up to Rs. 1.5 crore have the option to register under the GST composition scheme, effective as of April 1, 2019.
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