The Goods and Services Tax (GST) composition scheme is a simplified taxation structure designed to ease the compliance burden for small businesses in India. This scheme is primarily chosen by businesses with specific annual turnovers. Under the GST law, businesses with an annual aggregate turnover of up to ₹1.5 crore (₹75 lakh for special category states) can opt for the composition scheme.
However, for service providers (except restaurants), the turnover threshold is fixed at ₹50 lakh, and the GST rate applicable is 6%. The composition scheme allows eligible taxpayers to pay GST at subsidised rates of 1%, 5%, or 6%, depending on whether they are involved in the manufacturing, trading, restaurant services, or brick manufacturing sectors.
However, it's crucial to note that these reduced rates do not apply to transactions covered under the reverse charge mechanism. In such cases, businesses must discharge the tax at the normal GST rates, such as 5%, 12%, or 18%. The government, through the GST Council, has also excluded specific goods like ice cream, pan masala, and tobacco from the composition scheme.
Compliance requirements
Businesses that opt for the GST composition scheme have specific compliance requirements to follow, which differ from those of regular GST dealers. According to Sanjay Chhabria, Director, Indirect Tax at Nexdigm, the key compliances include quarterly payment of GST through Form GST CMP-08, due by the 18th of the month following the quarter and annual filing of Form GSTR-4, due by April 30 after the end of the financial year.
In addition to periodic filings, composition dealers must label themselves as "composition taxable persons" on notices and signboards displayed at their primary and additional places of business.
Restrictions and prohibitions
While the composition scheme offers simplified taxation, it comes with certain conditions:
1. Restriction on the supply of goods not taxable under GST, such as alcohol.
2. If a taxpayer has various business segments under the same PAN, all such businesses must register under the composition scheme.
3. Composition dealers are prohibited from collecting GST from their customers, availing input tax credit, making inter-state supplies, supplying non-taxable goods and services, and working with e-commerce operators that collect tax at source.
No tax invoice, only bill of supply
Composition dealers cannot issue a tax invoice as they are not permitted to collect GST from their customers.
"Instead, they must provide a bill of supply, which must explicitly state composition taxable person, not eligible to collect tax on supplies," Chhabria said.
Who cannot opt for the composition scheme?
Certain categories of taxpayers are ineligible for the GST composition scheme:
1. Taxpayers with aggregate turnovers exceeding the prescribed threshold.
2. Taxpayers engaged in making supplies not leviable to GST, inter-State outward supplies, or supplies through electronic commerce operators required to collect tax at source.
3. Casual taxable persons or non-resident taxable persons.
4. Manufacturers and traders of ice cream, pan masala, or tobacco.
Choosing based on primary business nature
For businesses engaged in both manufacturing and trading, it's important to note that the composition scheme applies at the PAN level.
"If a registered person is involved in manufacturing ice cream, they are specifically restricted from availing the composition benefit, even if they have a trading business alongside. The eligibility is determined based on the primary nature of the business," Chhabria told CNBC-TV18.com.
First Published: Oct 24, 2023 12:45 PM IST
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