Hello and welcome. In this post, we will discuss the composition scheme in detail. We have discussed the following topics:
- What is a Composition Scheme and who can opt for it?
- What is the tax rate applicable to a Composition Dealer?
- Reverse Charge Mechanism under the Composition Scheme
- Tax impact when purchasing goods from an unregistered dealer
- Tax amount calculation
- The Returns (GSTRs) applicable for a Composition Dealer
- Transition Provisions under GST for composition dealers
- Some common questions
If you are looking for a certain topic, go ahead and skip to it. Or you can read through the entire thing. With that, let’s begin.
What is a Composition Scheme?
The Composition scheme is applicable for small businesses who cannot maintain detailed books of accounts and have a small annual turnover. Such businesses can opt for an easy tax (GST) compliance under this scheme.
Who can opt for Composition Scheme?
Any business with annual turnover less than Rs 1.5 crore can opt for composition scheme. The annual turnover for consideration of composition scheme is the turnover of all the businesses under the same PAN.
Only certain business i.e. Manufacturers of goods, Dealers, and Restaurants (not serving alcohol) can opt for the composition scheme.
Below listed are the businesses who cannot opt for the Composition scheme:
- Service Providers
- Business doing interstate sales
- Business paying TDS under GST
What is the tax rate applicable to a Composition Dealer?
The chart given below provides the details of the tax rate applicable under the composition scheme:
|Tax rate applicable under composition scheme|
|Type of Business||CGST||SGST||Total|
|Manufacturer and Traders (Goods)||0.5%||0.5%||1%|
|Restaurants not serving alcohol||2.5%||2.5%||5%|
|Note: Service Providers are not eligible for composition scheme|
Reverse Charge Mechanism under the Composition Scheme.
A Composition Dealer has to pay the tax under Reverse Charge Mechanism wherever it is applicable. The GST payment has to be same as the rate of the supplies i.e., you cannot use the GST rate applicable under composition scheme for reverse charge. Also, Input Tax Credit is not available for the payment of tax under reverse charge for a composition dealer.
Tax impact while purchasing goods from an unregistered dealer
If you are purchasing goods from an unregistered dealer, the payment of tax has to be at the normal rates. This is applicable only for the months of July and August 2017. From the month of September, there is no need to pay tax on these purchases.
Tax amount calculation
A composition dealer has to pay the tax at a specific rate on total sales. Also, the dealer has to pay tax under reverse charge on specified purchases, purchases from an unregistered dealer and import of goods and services.
This means that the Total GST Payable = Tax on supplies (net of advance and returned goods) + Tax on B2B transactions where Reverse Charge is applicable + Tax on B2B purchases from the Unregistered suppliers (from the month of July and August 2017) + Tax on Import of Services.
The rate of Tax on:
- transactions under Reverse Charge
- purchase from an unregistered dealer
- import of services
will be at normal rates, i.e. the rates applicable to the supplies. Rates under Composition Scheme are applicable only for sales of a composition dealer.
Returns applicable for a Composition Dealer
The composition dealer has to furnish only one return i.e., GSTR-4. GSTR-4 filing has to be done quarterly. However, filing of a Form GSTR-9A has to be done once a year.
Auto-drafted details are not available for the composition dealer for the quarters July to September and October to December. Hence, the dealers have to enter the sales details manually.
Transitional Provisions under GST for composition dealers
Transition provisions for the business who transits from Composition Scheme under old regime to the Regular Taxation under GST regime
If you had a registration under the composition scheme in VAT regime, then you can avail credit for any input stock or semi-finished or finished goods. This credit will be as per the stock held on the day before the day of opting out of the composition scheme.
Conditions for availing input credit on stock lying at the time of transition
If you want to avail the credit for input stock at the time of conversion from composition scheme to the normal scheme, then consider the following points:
- The inputs or goods will be used for making taxable supplies.
- The CENVAT Credit was eligible to be claimed in the previous regime, however, couldn’t claim it being under composition scheme.
- The ITC is eligible for availing under GST regime.
- The taxpayer has bills of input tax paid on such goods.
- The invoices should not be older than 1 year from 1st July 2017 (i.e. not dated before 1st July 2016).
Treatment for input credit availed when transitioning from normal scheme to Composition Scheme
When switching from normal scheme to composition scheme, the taxpayer will be liable to pay an amount. This will be equal to the credit of input tax in respect of input stock held on the day immediately preceding the date of such switchover. The balance of input tax credit after the payment of such amount, if any lying in the credit ledger will lapse.
Can Composition Scheme be opt in one year and opted out in next year?
Yes, this is possible. You can choose to switch between the Composition Scheme and the normal scheme based on your turnover. However, you will have to keep in mind that this will affect the way you issue the invoices and file your returns. The declaration of change can be submitted to the GST Portal.
How is composition scheme applicable in case of multiple branches of the same business?
If the composition scheme is opted by the dealer, then it will be for all the businesses that are associated with the PAN.
Can a Composition Dealers sell a product at a lower price than the regular dealers?
Yes. The Composition dealers cannot charge GST on their sales. So, the end consumer pays less money than the usual one.
Can composition scheme opt in anytime during the year?
No. Before the beginning of every financial year, a registered taxpayer is necessary to provide a declaration on the GST Portal. This cannot be done anytime during the year.
What will happen if opted out of composition scheme in mid-year?
When a dealer opts out of composition scheme all the normal rules will be applicable from the day of opting out.
For e.g., the composition dealer opts out of the composition scheme on 15th October 2017. In this case, the dealer will have to file two GSTR-4. One for the quarter July to September, and also for the month of October (15 days). The dealer will also have to file GSTR-1 for the month of October 2017 (sales from 15th October until end of the month).
How to withdraw from the Composition Scheme?
A composition dealer can withdraw from the scheme by giving an intimation in Form GST CMP-04. Within 30 days for such intimation Form, GST ITC-01 has to be filed. This form provides the details of Input stock with the dealer.
What are the Records to be maintained by a Composition Dealer?
A dealer registered under the composition scheme is not required to maintain any detailed records as required by a normal taxpayer.
Can composition dealers avail Input Tax Credit?
A Composition Dealer is not allowed to avail input tax credit of GST on any purchases.
Do composition dealers issue a tax invoice?
A Composition Dealer has to issue a Bill of Supply. They cannot issue a tax invoice. This is because the tax has to be paid by the dealer out of pocket. The Composition Dealer is not allowed to recover the GST from the customers.
Do composition dealers have to collect tax from customers?
A Composition Dealer is not allowed to collect tax from the customer.
Is inter-state supplies applicable under composition scheme?
The Composition Scheme is available only for the dealers doing intra-state supplies. If a dealer is involved in inter-State supplies, then they have to opt out of the scheme and register as a regular dealer.
This ends our post on the complete guide to Composition Scheme under GST. If you have any queries or doubts kindly drop them in the comment section below.
- The Detailed GSTR-4 guide.
- Payment Formats under GST for Normal and Composition Dealers [With PDF]
- E-way Bill – The detailed guide