The Composition scheme under the GST is an easy, low procedure and compliance friendly tax scheme for small and medium enterprises -both providing goods and services. Under the scheme, firms under a threshold limit of turnover can pay a fixed percentage of their turnover as tax. They need to fill only reduced number of returns compared to normal tax payers under GST.
Why Composition Scheme?
Composition Scheme is a simple and easy scheme for small and medium businesses. What is unique about the scheme is that it reduces the compliance burden/effort and cost of small firms. The SMEs may face difficulties in submitting frequent returns and to undergo complex procedures of the tax network. Here, the composition scheme allows them to get rid of the usual compliance difficulties related to GST.
What are the main features of the Composition Scheme?
The composition scheme understandably gives several benefits to SMEs. Following are the important ones.
- Less number of tax returns: A tax payer under the Composition Scheme under GST will be required to file summarized returns only on a quarterly basis. On the other hand, for others, they must file three monthly returns. In total, the normal GST payer must submit 37 returns.
- Turnover limit for the Scheme: The Composition Scheme can be availed by any taxpayer whose turnover is less than Rs. 1.5 crores.
- The Composition scheme has been extended to service entities as well. Here, the limit is Rs 40 lakh for general states and for special category states it is Rs 20 lakh. Rate for service providers under the composition scheme is 6% (3% GST and 3% SGST).
- Scheme is available for only intra-state suppliers: The Composition Scheme is available only for intra-state supplies. This means that dealers engaged in inter-state supplies cannot opt for the scheme.
- No input scheme facility is available: A Composition scheme firm is not allowed to avail input tax credit of GST.
- No requirement for detailed records keeping: A firm under composition scheme is not required to maintain detailed records as in the case of a normal taxpayer.
- Ecommerce firms can’t opt for the Composition Scheme.
What are the benefits of composition scheme?
The scheme clearly gives benefits to the SMEs. Their compliance burden has been reduced. Similarly, the administrative cost of engaging with thousands of small firms has been curtailed from the angel of tax administration. This will give relief to the GST Network as well. Following are the main benefits of the Composition Scheme.
- Reduced Compliance Burden for SMEs
For a normal GST payer, he has to file 37 tax returns in an year. But for a Composition Scheme firm, only four tax filing is needed in an year. This indeed reduces the tax compliance burden of the small businesses. Besides, the Composition Scheme firm need not keep detailed books of accounts on a daily basis and supporting documents.
- Reduced tax liability
For a firm under the Composition Scheme, he has to pay a low fixed percentage of his turnover as tax. The rate is 1% for manufacturers, 2.5% for restaurant service providers, 0.5% for other suppliers of turnover. The rate is 6% for service providers who comes under the scheme.
- No cash block under input tax credit: High Liquidity
For normal taxpayers, some of his funds will be blocked as Input Tax Credit and this can be drawn back only after the supplier files his return. In the case of the Composition Scheme, there is no input tax credit and no blocking of funds.
- Transitional Provisions
A taxpayer opted for Composite Scheme can migrate to the status of a normal GST firm.
Amidst these benefits, some of the disadvantages of the Composition Scheme also to be noted. It is that first, the input tax credit facility is not available for the Composition Scheme firm. Similarly, he can’t engage in inter-state trade.