GST: Composition Scheme with Example, Limit, Tax Rate

In every economy, there are a large number of people who contribute a substantial portion of taxes and are unable to comply all the rule and regulation of the taxation law.

The existence of the Composition scheme in GST law is due to the above reason. This scheme provides a lot of relaxation to small suppliers and helps them to focus on their core business.

This scheme was already available in previous  VAT Law of many states. Its arrival in GST is just a continuation of the previous relaxation.

Let’s jump into this informative subject:

Turnover Limit for Becoming Composite Dealer

For availing this scheme, a registered person (under GST) should have aggregate turnover in preceding financial year up to  1 crore only (75 Lakh for Few States like (a) Arunachal Pradesh, (b) Assam, (c) Manipur, (d) Meghalaya, (e) Mizoram, (f) Nagaland, (g) Sikkim, (h) Tripura, (i) Himachal Pradesh )

Aggregate Turnover for composition scheme includes turnover within a state only. 

A registered person shall not be eligible to opt for composition scheme unless all his branches and unit throughout the country opt to pay tax under the same scheme.

😮 In the 23rd GST council meeting, Turnover for composition scheme registration has been recommended to be Rs. 1.5 Cr. It has not been notified yet !!

Dealers Excluded from Composition Levy

1. A casual taxable person or a non-resident taxable person
2. A supplier of services, other than restaurant service.                                                                                          ➡  After the Notification no.46/2017 Central Tax (rate) composition scheme has become irrelevant for restaurants who are liable for GST @ 5% (without ITC). However, Restaurants who are liable for 18% GST (with ITC) can still take composition scheme.
3. Persons supplying goods which are not taxable under GST law
4. Suppliers making any supply of goods through an electronic commerce operator who is required to collect tax at source under section 52 (Sellers on Amazon or Flipkart)
5. Manufacturer of (i) Ice cream and other edible ice, whether or not containing cocoa (ii) Pan masala (iii) Tobacco and manufactured tobacco substitutes.

GST rate for Composite Dealers

For manufacturer and restaurants, GST rates need to be applied on the turnover within a State/UT and this turnover will include taxable supply (excluding inward RCM supplies), exempted supplies and export. (under section 2(112) of CGST Act, 2017)

Example: Mr.Mohan, a grocery shop owner of Kolkata, in the month of Nov 2017 sells taxable goods of Rs.10 lakh and exempted goods of Rs.3 lakh. Calculate GST payable under the composite scheme.

Solution:  GST payable for Nov 2017  = (10+3) lakh * 1% = Rs. 13,000/-

After notification no. 1/2018 CT, for other eligible suppliers, GST is payable only on taxable supplies of goods. Therefore GST payable on or after 01.01.2018 = 10 lakh * 1% = Rs.10,000/-

What are the benefits of being Composite Dealer?

1. Can pay tax on a quarterly basis before 18th of the month succeeding the quarter during which the supplies were made. It increases the liquidity(cash availability).
2. Lower tax rates
3. No need to issue Tax Invoice (Issue Bill of supply)
4. No requirement to maintain any records like books of accounts
5. Need to file just 5 returns annually (GSTR-4 on a quarterly basis and an annual return in FORM GSTR-9A)

What are the disadvantages of being Composite Dealer?

1. Can’t avail INPUT credit.
2. Can’t charge tax from the consumer (include tax on Price) which means that your buyer will also not get any input tax credit. This may lead to loss of Business consumers.
3. Can’t make Interstate supply. Thus restricting your potential business reach.
4. Not allowed to take CENVAT credit of previous law like VAT, service tax, excise duty etc.

Composition Scheme Registration

A. Converting Normal GST registration into Composite Scheme

A person already registered as a Normal taxpayer under GST can opt for composition scheme by filling intimation in form GST CMP-02  before the financial year for which he requires composite registration.

The person will be eligible to pay tax as a composite dealer from the beginning of the financial year for which the registration was sought.

He should also file Form GST ITC-03 for reversal of ITC on stock within 60 days of the commencement of the financial year.

Example:

Mr Ravi wants to convert his GST registration into the composite scheme on 6th April 2018.

For the Financial year 2018-19, he can’t opt this scheme because he had missed the deadline to file form GST CMP-02 which was 31st March 2018.

For the financial year 2019-20, he can opt composite scheme if he files form GST CMP-02 on or before 31st March 2019.

B. Fresh Composite Scheme Registration

Fresh registration for composition scheme under GST can be obtained by filling form REG-01 and selecting the option of section 10 under part B.

Important facts a composite dealer must Know !!

1. Can Purchase from outside the state
2. Also liable to pay tax under RCM while taking inward supplies from an UNREGISTERED person or goods in which reverse charge mechanism (RCM) applies.
3. A single PAN no. can have multiple GST registrations (GSTIN). Under the composition scheme, a person will be regarded as a composite dealer only when all the GSTIN No. on such PAN OPT for the composite scheme. Example: Mr. Ram is having shops in West Bengal, Bihar and Jharkhand and each of such store is registered under GST under the PAN of Mr. Ram. So Under the Composite Scheme, Mr. Ram can become a composite dealer only when all of the three branches OPT for the same scheme.
4. Mention the words “composition taxable person, not eligible to collect tax on supplies” at the top of the bill of supply
5. Mention the words “composition taxable person” on every notice or signboard displayed at a prominent place at his principal place of business and at every additional place or places of business.
6. Composite dealers are liable to pay GST on advance received for goods/services.

Cancellation of Composite Scheme Registration

Composite Scheme registration remains valid as long as he satisfies all the required condition made under section 10 and CGST rule. Registration can be withdrawn or cancelled under the following conditions:

1.  He ceases to satisfy any of the conditions mentioned in section 10 and CGST rule. In this case, he is required to intimate govt. in the event of non-compliance in form GST CMP-04 within 7 days of the occurrence.

2. Voluntarily withdraw composite scheme registration. In this case, he is required to intimate govt. of his intention to voluntarily withdraw composite scheme registration in form GST CMP-04.

3. The proper officer may cancel composite scheme registration by giving notice in Form GST CMP-05. In this case, he is required to answer the notice within 15 days in Form GST CMP-06. Cancellation order will be issued after Notice’s reply in form GST CMP-07.

In all the 3 cases above, a composite dealer (now normal dealer) should file  a statement in Form GST ITC-01 within 30 days of date of withdrawal or cancelation of registration to get ITC of input, held in stock on the date of withdrawal or date of order to cancel registration in form GST CMP-07.

Recommended to Read: How to claim ITC under GST

Source: CGST Act and CGST Rule