by The composition scheme under GST is a simplified compliance mechanism for small businesses with a turnover of up to Rs. 1.5 crores. This scheme is aimed at reducing the compliance burden for small businesses and providing them with an opportunity to be a part of the formal economy.
The composition scheme allows small businesses to pay a fixed percentage of their turnover as tax instead of paying tax under the regular scheme. The rate of tax under the composition scheme varies for different businesses, such as 1% for manufacturers, 2% for traders, and 5% for restaurants. The businesses opting for the composition scheme are not allowed to claim input tax credit on their purchases.
Assessment under the composition scheme:
The businesses registered under the composition scheme are required to file quarterly returns and pay tax on a quarterly basis. The quarterly returns have to be filed in Form GSTR-4, which includes details of the supplies made and tax paid during the quarter.
The assessment of the businesses under the composition scheme is also different from that of the regular scheme. The businesses under the composition scheme are not required to undergo a regular assessment by a tax officer. However, the tax officer can conduct a general inspection of the business premises to ensure that the business is complying with the composition scheme’s provisions.
If a business under the composition scheme crosses the turnover threshold of Rs. 1.5 crores during the financial year, it is required to opt out of the scheme and register under the regular scheme. Similarly, if a business violates any of the composition scheme provisions, it will be required to pay the tax under the regular scheme.
Advantages of the composition scheme:
- Reduced compliance burden: The composition scheme reduces the compliance burden for small businesses as they are required to file quarterly returns instead of monthly returns.
- Simple tax structure: The composition scheme provides a simple tax structure for small businesses as they are required to pay a fixed percentage of their turnover as tax instead of paying tax under the regular scheme.
- Lower tax liability: The composition scheme allows small businesses to pay a lower tax liability as compared to the regular scheme.
- Increased competitiveness: The composition scheme makes small businesses more competitive by providing them with an opportunity to be a part of the formal economy.
An example to help illustrate the concept of composition scheme:
Suppose Mr. X runs a small stationery shop in Delhi and has an annual turnover of Rs. 40 lakhs. He can opt for the composition scheme under GST, where he will have to pay a fixed percentage of his turnover as tax instead of the regular GST rate.
Assuming he chooses to opt for the composition scheme, he will have to pay tax at the rate of 1% on his turnover. Therefore, his annual tax liability would be Rs. 40,000 (1% of Rs. 40 lakhs).
Under the composition scheme, Mr. X will not be eligible to claim input tax credit on his purchases. This means that the tax paid by his suppliers will not be available as a credit to him. Additionally, he cannot issue tax invoices to his customers, which means that he cannot charge GST separately on his sales.
In case of any default or non-compliance under the composition scheme, the authorities can initiate proceedings for regular assessment, which may result in higher tax liabilities and penalties. Therefore, it is important for businesses opting for the composition scheme to ensure strict compliance with the requirements and rules specified under the scheme.
