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GST Composition Scheme - How to Reduce Tax Liability

GST composition scheme is an option available for registered taxpayers for informing tax authorities about their intentions for registering under this scheme. If the taxpayer fails to register under GST Composition Scheme, he/she will be treated as a normal taxpayer and will be administered accordingly. This option is for all businesses i.e. for both who are dealing in goods as well as services.

The initial turnover limit under GST Composition Scheme was Rs. 50 Lakhs, but during the meeting held on 11th June 2017, this limit has been increased to Rs. 75 Lakhs for all eligible registered taxpayer. Registered taxpayers whose aggregate turnover are less than Rs. 75 Lakhs in the preceding Financial Year are liable to pay tax at a rate of 1% for manufacturers, 2.5% for restaurant sectors and 0.5% for suppliers.

States Eligible for Turnover Limit of Rs. 50 Lakhs

The states whose turnover limit have been assigned at Rs. 50 Lakhs are as follows:

  • Assam
  • Manipur
  • Arunachal Pradesh
  • Mizoram
  • Meghalaya
  • Sikkim
  • Himachal Pradesh
  • Tripura
  • Nagaland

The turnover limit for the state of Jammu and Kashmir under the composition scheme has not been decided yet.

Individuals who are Excluded from GST Composition Scheme

Not all individuals are included under GST Composition Scheme. The following taxpayers are not included under GST Composition Scheme:

  • Non-Resident individuals.
  • Supplies of goods anywhere apart from intrastate.
  • Individuals who supply services.
  • Individuals who supply goods without getting levied under the act.
  • Manufacturers whose goods cannot be notified.
  • An individual who supply goods through e-commerce medium and who are liable to collect taxes.

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Individuals who can Avail GST Composition Scheme

  • The individual must be a registered taxpayer.
  • The stocked goods should not have been purchased from outside one’s state or from outside the country from a foreign country.
  • The goods which have been stocked before GST must not have been purchased from an unregistered dealer (if the taxpayer bought the goods from an unregistered dealer then he/she will be levied a tax against the goods).
  • Suppliers with an annual turnover below Rs. 75 Lakhs in the preceding financial year (Rs. 50 Lakhs for Northeastern states).
  • Suppliers who only deal in Intra-State supply of goods.
  • Taxes will be paid normally if the individual is liable for taxation under Reverse Charge Mechanism.
  • The individual should not be a manufacturer of tobacco, ice-cream and pan masala or their substitutes either.

Benefits of GST Composition Scheme for Taxpayers Falling Under Lower Tax Bracket

  • Now, they will file single quarterly return instead of the multiple monthly returns.
  • GST Composition Scheme offers a competitive advantage, as it enables one to pay a lower tax rate.
  • It is a relaxed rule for maintaining books of accounts and records under GST.

Filing for Tax Returns

A registered taxable person under GST Composition Scheme is required to furnish the return for each quarter in the prescribed form in a prescribed manner within 18 days after the end of the relevant quarter. GSTR-4 is the prescribed tax return form introduced by the government which must be filed by the supplier under GST Composition Scheme.

Dealers under the composition scheme are required to furnish their first return for the period starting from the date on which they become a registered taxable entity until the end of the quarter in which the registration has been granted.

Transitional Provisions

Under the current regime and transits, a registered taxpayer under composition scheme can take the credit of input in the form of stock, semi-finished goods or finished goods. This must be applied on the day immediately preceding the date from when they choose to be taxed as a regular taxpayer.

Transitional Provisions

The conditions for availing credit of input are

  • Inputs or outwards are meant for making taxable supplies under GST provisions.
  • The dealer taking the input credit must be eligible under the previous tax regime but the claim has been denied due to registration under GST regime.
  • Goods should be eligible for credit under GST regime.
  • Documents or invoices should not be older than 12 months before the appointed date.

At the time of shifting from normal scheme to Composition Scheme, a taxpayer is liable to pay an amount which must be equal to the credit of input tax. The inputs which are held as stock, semi-finished goods or finished goods immediately preceding the date from which they choose to be taxed as a regular taxpayer.

Returns Under Composition Scheme

There are 3 kinds of return which are to be filed under composition scheme

Form Time Due Date Includes
GSTR-4 Quarterly 18th of the succeeding month
  • Details of outward supplies
  • Interstate supplies (Both Interstate and Intrastate) from registered as well as unregistered dealers.
  • If any change is to be made in inward supplies as per Form GSTR-4A.
GSTR-4A Quarterly - Details of inward supplies on the basis of GSTR-1 filed by the supplier
GSTR-9A Annually 31st December of the next year Details of the quarterly returns filed by the suppliers

Advantages of Composite Scheme

Below are some reasons why an Individual should choose to get registered under the composition scheme

  • Limited consent: Under this scheme, less consent is required with respect to maintenance of book of records, the furnishing of returns, and issuance of invoices. Under composition scheme, a taxpayer is required to file only the quarterly return under GSTR-4 either by; 18th July 18th October, 18th January or 18th April. However, under GST normal taxpayer must file a minimum of 3 returns and one annual (meaning the taxpayer must file a total of 37 returns in a year).
  • Less liability of tax: A person registered under composition scheme will be liable to pay tax at a rate, not more than 2.5% instead of a standard rate of 18%.
  • High liquidity: Taxpayers under composition scheme are liable to pay less tax as compared to normal taxpayers resulting in saving his working capital.

Disadvantages of Composite Scheme

Disadvantages of getting registered under composite scheme by a taxable person are as follows

  • Limited area for conducting business: Taxpayers registered under the composition scheme are restricted from carrying out inter-state transactions and cannot function under import-export of goods or services.
  • No credit of input tax is payable: Under this scheme, the credit of input tax paid on the purchases of the inputs from a normal taxpayer will not be allowed.
  • No tax collected: The rate of tax for a scheme holder is lower than the burden of taxation levied on the taxpayer, which increases the cost of sales.
  • Strict penal provision: If an individual registered under composition scheme is not eligible to be registered under the scheme, then such taxpayer is liable to pay differential tax along with penalty. The taxpayer will also be liable to provide for the demand and recovery.
  • Non-applicability for the suppliers of e-commerce: It is not applicable for suppliers, who supply goods through e-commerce.

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