Every tax authority aims towards the timely collection of taxes and to ensure filing of correct returns. These two aspects come with a lot of additional work involved such as maintenance of records, generating invoices, etc, and such elements are often a huge challenge for small businesses. To address these problems, composition schemes have been introduced under various State VAT Laws.
Composition Scheme allows the taxpayers to pay taxes at a low rate with conditions restricting the input tax credits.
Even under the GST regime, we have the option of Composition Scheme or Compounding Scheme for a registered taxable person having a turnover less than the limit prescribed to pay tax at a lower rate subject to certain conditions as specified therein. In this regard, the threshold limit with respect to the applicability of composition scheme has been fixed at 75 Lacs per annum in the recent GST council meet.
Conditions For A Composite Taxpayer
The following transactions of a taxpayer shall not be eligible for composition scheme:
- Supplies goods not taxable under GST
- Supplies services other than supply of food or drinks for human consumption
- Supplies goods interstate or exports the goods
- Makes a supply of goods through Electronic Commerce Operator i.e e-commerce and liable to collect taxes
- If the person has business in various segments, then he must register for all such businesses or simply opt out of the scheme
- If a business is involved in any of the above transactions, they cannot opt for Composition Scheme.
As the composition dealer is given as beneficial mechanism of discharging taxes at a reduced rate, he shall not be eligible to claim the credit of input tax credit. Such dealers cannot issue tax invoice as well.
Rates Under Composition Scheme
For a Manufacturer – 2%
For a Trader – 1%
Supplier of food or drinks for Human Consumption – 5%
A taxable person who is not eligible for this scheme but has opted for the same, shall be liable to pay differential taxes along with penalty. Other provisions of demand and recovery shall also apply.
Advantages Of Composition Scheme
- Limited Compliance – A normal taxpayer files at-least 37 returns in the entire year while a business under this scheme needs to file 5 returns (4 quarterly, 1 annual) a year. This allows to concentrate on the business and not on the compliances.
- Limited Tax Liability- Due to the lower tax rates
- High Liquidity
Disadvantages Of Composition Scheme
- Operations restricted to intrastate
- No credit of taxes paid on inputs
- No allowed to collect taxes from customers.
- Hesitance of business to buy from these dealers (B2B)
- Not eligible for service providers
Composition scheme comes with both advantages and disadvantages. So, should a dealer opt for it? This scheme could make sense in business scenarios where the dealer is purely into B2C transactions. However, it is suggested to take an informed decision considering the intricacies involved before opting for this scheme.