GST Composition Scheme - How to Reduce Tax Liability

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. 1.5 crore in the preceding financial year (Rs. 75 lakh for the specified special category 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

• They only pay tax through a simple quarterly statement (Form CMP-08) and file a single annual return (GSTR-4), 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 a statement of self-assessed tax for each quarter in Form CMP-08 within 18 days after the end of the relevant quarter. In addition, GSTR-4 is the prescribed annual return which must be filed by the supplier under GST Composition Scheme by 30th June following the end of the financial year.

Dealers under the composition scheme are required to furnish their first statement 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.

Switching Between Composition and Regular Scheme

When a registered taxpayer moves out of the composition scheme, he or she can take the credit of input tax in respect of inputs held in stock, semi-finished goods or finished goods. This is computed as on the day immediately preceding the date from which they become liable to be taxed as a regular taxpayer.

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 hold valid tax invoices and be otherwise eligible to claim credit under his GST registration.
• Goods should be eligible for credit under the 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
CMP-08	Quarterly	18th of the month following the quarter	Statement of self-assessed tax Summary of outward supplies and inward supplies attracting reverse charge. Tax, interest and late fee payable and paid for the quarter.
GSTR-4	Annually	30th June of the next financial year	Annual return with details of outward and inward supplies for the year
GSTR-9A	-	Not required	The earlier annual return GSTR-9A has been waived since the annual GSTR-4 was introduced (FY 2019-20 onwards)

Advantages of Composite Scheme

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

• Limited compliance: Under this scheme, less compliance is required with respect to maintenance of books of records, the furnishing of returns, and issuance of invoices. A composition taxpayer only pays tax through quarterly CMP-08 statements (due 18th July, 18th October, 18th January and 18th April) and files one annual return in GSTR-4. A normal taxpayer, by contrast, files GSTR-1 and GSTR-3B every month (or quarter under QRMP) plus the annual return — around 25 filings in a year.
• Less liability of tax: A person registered under the composition scheme is liable to pay tax at a flat rate of 1% to 6% of turnover, depending on category, instead of the standard GST rates of 5% or 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.
• Restrictions for e-commerce suppliers: Earlier the scheme was not available to suppliers selling through e-commerce operators; since 1st October 2023, composition taxpayers may make intra-state supplies of goods through e-commerce operators, but services through e-commerce remain outside the scheme.