The GST Composition Scheme is a tax payment scheme designed for small taxpayers under the GST regime. It allows eligible taxpayers to pay tax at a lower rate and reduces their compliance burden. In this article, we will discuss the composition scheme in detail, including its eligibility criteria, benefits, limitations, and application process.
What is the GST Composition Scheme?
The GST Composition Scheme is a voluntary scheme introduced under GST for small taxpayers with an annual turnover of up to Rs. 1.5 crores (Rs. 75 lakhs for special category states). Under this scheme, eligible taxpayers can pay a fixed percentage of their turnover as tax instead of paying the regular GST rates applicable to their goods or services.
The GST Composition Scheme is available for businesses engaged in the supply of goods as well as services. However, certain categories of taxpayers are not eligible to opt for this scheme, such as manufacturers of ice cream, pan masala, tobacco, and aerated drinks.
Eligibility Criteria for the GST Composition Scheme
To be eligible for the GST Composition Scheme, a taxpayer must meet the following criteria:
1. Annual turnover: The annual turnover of the taxpayer should be less than Rs. 1.5 crores (Rs. 75 lakhs for special category states). This turnover includes the turnover of all businesses registered under the same PAN.
2. Business nature: The taxpayer must be engaged in the supply of goods or services or both. However, certain categories of taxpayers, such as non-resident taxable persons and those making supplies through e-commerce platforms, are not eligible to opt for the composition scheme.
3. Inter-state supplies: The taxpayer should not be engaged in the supply of goods or services outside the state. This means that taxpayers engaged in inter-state supplies are not eligible for the composition scheme.
4. Rate of tax: The taxpayer should not be engaged in the supply of exempt goods or services. If a taxpayer is engaged in the supply of exempt goods or services, they will have to pay tax at the regular GST rates applicable to those goods or services.
5. Registered persons: The taxpayer should not be a registered person under the composition scheme in the previous financial year. If a taxpayer was registered under the composition scheme in the previous financial year, they will have to switch to the regular GST regime in the current financial year.
Benefits of the GST Composition Scheme
The GST Composition Scheme offers several benefits to eligible taxpayers, such as:
Lower tax rates: Taxpayers registered under the composition scheme can pay tax at a lower rate than the regular GST rates applicable to their goods or services. For instance, taxpayers engaged in the supply of goods can pay tax at a rate of 1%, 2%, or 5% depending on their business category.
Reduced compliance burden: Taxpayers under the composition scheme have to file quarterly returns instead of monthly returns required under the regular GST regime. This reduces their compliance burden and saves them time and resources.
1. No input tax credit: Taxpayers under the composition scheme are not eligible to claim input tax credit on their purchases. This means that they cannot reduce their tax liability by claiming credit for the tax paid on their purchases.
2. Cash payment: Taxpayers under the composition scheme have to make payment in cash. This means that they cannot use their input tax credit balance to make payment of their tax liability.
3. Limited liability: Taxpayers under the composition scheme have a limited liability. This means that their tax liability is capped at a certain percentage of their turnover, and they are not required to maintain detailed records of their purchases and sales.
Limitations of the GST Composition Scheme.
While the GST Composition Scheme offers several benefits to eligible taxpayers, it also has some limitations, such as:
1. Limited threshold: The threshold limit for the composition scheme is relatively low at Rs. 1.5 crores (Rs. 75 lakhs for special category states). Taxpayers with a turnover above this limit are not eligible to opt for the composition scheme and will have to register under the regular GST regime, which may increase their compliance burden.
2. No input tax credit: Taxpayers registered under the composition scheme are not eligible to claim input tax credit on their purchases. This means that they cannot reduce their tax liability by claiming credit for the tax paid on their purchases. This may increase their cost of doing business, as they cannot pass on the tax paid on their purchases to their customers.
3. Cash payment: Taxpayers registered under the composition scheme have to make payment in cash. This means that they cannot use their input tax credit balance to make payment of their tax liability. This may lead to cash flow issues for small taxpayers who do not have sufficient cash reserves.
4. Limited liability: Taxpayers registered under the composition scheme have a limited liability. This means that their tax liability is capped at a certain percentage of their turnover, and they are not required to maintain detailed records of their purchases and sales. However, this may limit their ability to claim exemptions and deductions available under the regular GST regime, which may result in a higher tax liability.
5. Limited scope: The composition scheme is not available for all businesses, and certain categories of taxpayers are not eligible to opt for this scheme, such as manufacturers of ice cream, pan masala, tobacco, and aerated drinks. This may limit the scope of the scheme and exclude some small taxpayers from its benefits.
Application process for the GST Composition Scheme
Taxpayers who meet the eligibility criteria for the GST Composition Scheme can apply for registration under this scheme through the GST portal. The application process for registration under the composition scheme is similar to that for regular GST registration, and taxpayers have to provide the following information:
PAN card details of the applicant
Aadhaar card details of the applicant
Bank account details of the applicant
Business details, such as the nature of business and the type of goods or services supplied
Contact details of the applicant
Once the application is submitted, it will be verified by the GST department, and if the application is approved, the applicant will be registered under the composition scheme. The taxpayer will receive a unique composition scheme registration number (CRN) and will have to pay tax at the prescribed rate on their turnover.
Conclusion
The GST Composition Scheme is a tax payment scheme designed for small taxpayers under the GST regime. It offers several benefits, such as lower tax rates and reduced compliance burden, to eligible taxpayers. However, it also has some limitations, such as a limited threshold, no input tax credit, and limited liability. Taxpayers who meet the eligibility criteria for the composition scheme can apply for registration through the GST portal and pay tax at the prescribed rate on their turnover.
