Composition Scheme

A Composition/Compounding Scheme will be an important feature of GST, to protect the interests of small traders and small scale industries. The basic principle underlying the composition scheme is to minimize the burden of compliance for small taxpaying dealers. The Composition/Compounding scheme for the purpose of GST should have an upper ceiling on gross annual turnover and a floor tax rate with respect to gross annual turnover. Businesses dealing only in goods (manufacturers and traders) can only opt for composition scheme only if annual turnover is below Rs 1.50 crore*. Now, Services providers can also opt this scheme provided their annual turnover/receipt does not exceed Rs. 50 lakhs,

Composition Scheme is available only for intra-state supplies. If a dealer is involved in inter-State supplies, then he cannot opt for the scheme.

     It is an alternative method of levy of tax, designed for small tax payers whose aggregate annual turnover is up to 1.5 crores (Rs 75 lakhs in case of few States like Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Himachal Pradesh) and for service providers the threshold limit of turnover is 50 Lakhs. The objective of this scheme is to bring simplicity and reduce the compliance cost for small taxpayers.

Aggregate Turnover: Aggregate turnover will be computed on the basis of all India basis and will include value of all taxable supplies, exempt supplies and exports made  by all persons with same PAN but excluding inward supplies under reverse charge as well as Central , State/Union Territory and Integrated taxes and cess.

	Category of Registered Persons	Rates of Tax
1.	Manufacturers (other than manufacturers of such goods as may be               notified by Govt like ice cream, Pan Masala, Tobbacco Products etc.)                   and for Traders or any other suppliers	1%(0.5% CGST  + 0.5% SGST)                                of turnover.
2 .	Restaurant Services/catering services .	5%(2.5%CGST+ 2.5% SGST)                 of turnover .
3.	Other service providers	6%(3%CGST+ 3% SGST)                    of turnover .

Note--Manufactures of ice-cream and other edible ice, Pan masala, tobacco and manufactured tobacco substitutes are not eligible for composition scheme.

• It is optional and the eligible persons opting to pay tax under this scheme can pay tax at a prescribed percentage of his turnover every quarter, instead of paying tax at normal rates.
• A person opting to pay tax under composition scheme is out of credit chain. He cannot take credit of his input supplies.
• He cannot collect tax paid by him on outward supplies from his customers.
• Such dealers cannot issue a tax invoices. He will issue bill of supply in lieu of tax invoice.
• The registered person making purchases from a taxable person paying tax under the composition scheme cannot avail credit.
• The supplier is required to mention “Composition Taxable Person” on invoices, signboards etc.
• A person opting for the composition levy will have to pay tax on quarterly basis before 18^th of the month succeeding the quarter during which the supplies were made. Such persons need to electronically file quarterly return in Form GSTR- 4 by 18^th of the month succeeding the quarter.  Also such dealers are required to file annual return in Form GSTR 9A.

Persons not eligible for composition scheme:

• Casual Taxable Person or a Non Resident taxable persons,
• Suppliers whose aggregate turnover in the preceeding financial year exceeds 75 lakhs/50 lakhs,
• Persons supplying goods which are not taxable under GST,
• Persons making any inter-State outward supplies of goods,
• Supplies making any supply of goods through an electronic commerce operator who is required to collect tax at source,
• Manufacturer of ice cream and other edible ice, pan masala, tobacco and other manufactured tobacco substitutes.

Transition from composition scheme to normal scheme:

Option to pay tax under composition scheme lapse on the day the tax payer crosses the aggregate turnover limit of 1crore. Also, the concerned dealer can withdraw from such scheme voluntarily.  Intimation in Form GST CMP-04 is to be filed within 7 days of occurrence of event. After that normal procedure of invoice, record keeping, returns etc. will be applicable. The dealer will be allowed to take credit of input held in stock immediately preceding such date.

Applying for GST Composition Levy

The procedure for applying for GST composition levy differs from persons migrated to GST having provisional GST registration and those obtaining fresh GST registration.

For Taxpayers Who Migrated to GST

Any person who has been granted a provisional GST registration can apply for the GST Composition Levy scheme by filing Form GST CMP-01. Form GST CMP-01 can be filed on the GST Common Portal or a GST Facilitation Centre with the authorised signatory’s sign. Form GST CMP-01 is to be used by persons having provisional GST registration, who migrated from an service tax or VAT or Central Excise or other such registration subsumed under GST. Form GST CMP-01 for GST composition levy must have been filed by those having provisional GST registration should file the form before the date of GST coming into force or within 30 days of GST coming into force or any further period as extended by the Commissioner.

Taxpayers who migrated to the GST registration are also required to file Form GST CMP-03, with details of stock, including the inward supply of goods received from unregistered persons, held by the taxpayer on the day preceding the date from which the taxpayer opts to pay tax under GST Composition levy.

For Taxpayers Who Obtain Fresh GST Registration

Form GST CMP-02 should be filed by those taxpayers obtaining a GST registration for the first time. GST CMP-02 must have been filed by the taxpayer prior to the commencement of the financial year for which the taxpayer would like to adopt the GST composition levy. Further, after filing GST CMP-02, the taxpayer must file FORM GST ITC-3 within 60 days from the commencement of the relevant financial year.

Validity of GST Composition Levy Registration

The option exercised by a registered taxpayer to pay tax under the GST composition levy scheme is valid as long as the business satisfies all the conditions mentioned in the eligibility criteria above. In case any of the above mentioned eligibility criteria is not satisfied by the taxpayer, the taxpayer should cease claiming benefits under the GST composition levy scheme and begin issuing tax invoice for every taxable supply made thereafter. To intimate the cancellation of the GST composition levy scheme, the taxpayer is required to file an intimation for withdrawal in FORM GST CMP-04 within seven days of occurrence of any event that makes the business ineligible for the GST composition levy.

Advantages of opting Composition Scheme

Limited Compliance:  

Under the composition scheme, the taxpayer is required to furnish quarterly return only, and thus he need not worry on record keeping and can focus on his business more rather than being occupied in compliance procedures. The taxable person is required to furnish only one return i.e. GSTR-4 on a quarterly basis and an annual return in FORM GSTR-9A. A dealer registered under composition scheme is not required to maintain detailed records as in the case of a normal taxpayer.

Limited Tax Liability :

Another benefit of getting registered under the composition scheme is that the tax rate for such taxpayer is nominal under the GST Law.

High Liquidity:

One of the major benefits of registering as a composition supplier is high fund availability in the business. A normal taxpayer will be required to pay output tax on his supplies at a standard rate and any credit of input is available only when his own supplier files a return online which shall reconcile with his own return. Thus a large chunk of his working capital will always remain blocked in the form of input credit. However for a supplier registered under the composition scheme, output liability will be nominal and he does not need to bother about return filing by his supplier.

Level Playing Field: 

Just because a taxpayer has chosen to get registered under the composition scheme, it doesn’t necessarily mean he is losing the competitive edge. Since the profit margin of a supplier in composition scheme is more than a large taxpayer, such supplier can outplay the economies of scale of large enterprises by offering competitive prices and have a better hold on the local market of supply. Thus composition scheme ensures the interest of small suppliers carrying out intrastate transactions and provides with a sustainable and competitive supply market.So, it can be said that composition scheme will be a growth driver for small taxpayers who are carrying out intrastate transaction and not import-export of goods. If any taxpayer carries out interstate transactions or gets into import-export transaction then the benefit of composition scheme is not available to such taxpayer and such suppliers are required to get registered as a normal taxpayer.

Disadvantages of opting composition scheme:

Limited Territory for Business: 

A taxpayer registered under the composition scheme is barred from carrying out inter-state transactions and cannot offer import-export of goods and services. Thus, he is compelled to carry out only intra-state transactions and this limits the territory of his business. Furthermore, this section is in contradiction of “One nation One tax” as this section limits the benefit only to the boundary of the state.

No Credit of Input Tax: 

A Composition Dealer is not allowed to avail input tax credit of GST paid to their supplier. There has been no provision of input credit on B2B transactions. Thus, if any taxable person is carrying out business on B2B model, such person will not be allowed the credit of input tax paid from the output liability. Also, the buyer of such goods will not get any credit on tax paid, resulting in price distortion and cascading. This will further result in a loss of business as a buyer registered as a normal taxpayer will not get any credit when buying from a person registered under composition scheme. Eventually, such buyers might avoid purchases from a taxpayer under composition scheme

No  Taxable Invoice:

Since a Composition Dealer is not allowed to avail input tax credit, such a dealer cannot issue a tax invoice as well. A buyer from composition dealer will not be able to claim input tax on such goods.

No Collection of Tax: 

Though the rate of composition tax is kept very nominal at  0.5%, 1% or 2.5%, a taxpayer under composition scheme is not allowed to recover such tax from his buyer, as he is not allowed to raise a tax invoice.

Penal Provision: 

Another provision which is heavily debated is the penal provision for a taxpayer under composition scheme. As per the GST Law, if the taxpayer who has previously been given registration under composition scheme is found to be not eligible for the composition scheme or if the permission granted earlier was incorrectly granted, then such taxpayer will be liable to pay the differential tax along with a penalty which can extend up to the amount of total tax liability i.e. 100%. On analysis of this provision, it can be fairly said that if a small taxpayer who has limited knowledge of tax laws and compliance makes any mistake under composition scheme, he shall be liable to pay tax at the standard rate on his total turnover along with a penalty which will be equal to the total tax liability.

Electronic Commerce out of scope:

One of the major industries which has flourished in recent times, is the e-commerce in India. There have been numerous companies who are into e-commerce, some of them have turnover into crores, however many of them are still at nascent stage and have not achieved breakeven as well. Such units carry out their business online through internet and supply across states. Since they are into inter-state supplies they are not eligible for composition scheme and thus the benefit of this section has been kept away from them. This is further in contradiction with the government vision of “Digital India” and “Startup India” which are aimed to promote the startup ecosystem and a digital experience for Indian citizens.

Reverse Charge under GST

Under the normal taxation regime, supplier collects the tax from the buyer and deposits the same after adjusting the output tax liability with the input tax credit available. Under Reverse Charge Mechanism, liability to pay tax shifts from supplier to recipient. Reverse charge means the liability to pay tax is on the recipient of goods/services instead of the supplier. It is a mechanism under which the recipient of the goods or services is liable to pay the tax instead of provider of the goods and services. Reverse charge may be applicable for both services as well as goods.All provisions of GST will apply on the recipient (i.e., the buyer) of goods or services.

As per Section 2(98) of CGST Act’ 2017, “Reverse Charge” means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both.

Reverse Charge -Applicablility under GST

Supply by Unregistered Dealer:

As per Sec 9(4) of CGST Act, if a registered person purchases goods or avail services from an unregistered person, then the liability to pay tax shifts on the registered person i.e. the recipient of goods/services, where such supply is of taxable supplies. No reverse charge mechanism in case of exempted supplies. This provision will apply if the below conditions are met:

• There should be a supply of goods or services
• The supply should be in respect of taxable goods/services
• Supply must be by an unregistered person.
• Supply must be to a registered person
• Supply must be an intra-state supply as compulsory registration is required for inter-state sales

The tax will be paid by the registered dealer and all the provisions of the Act will be applicable to him as if he is the supplier of the goods or services The concept behind this to prevent tax evasion since it would be almost impossible to collect tax from the unregistered dealer. It would increase tax compliance and promotes transparency. Input credit will be allowed to the registered dealer of the tax paid by him under the reverse charge mechanism.

Exemption of Rs. 5000/- per day has been provided in this case. So if the aggregate amount of purchase of goods or services availed does not exceed Rs. 5000 per day from unregistered persons then no liability arises under reverse charge mechanism. This covers all the business expenses of the business concern. But now this limit has been abolished and any purchase by business entity from un registered dealer is covered under RCM.

Following is an example of some expenses which can attract GST under RCM-

• Rent                                                                   Commission payments
• Printing and stationery                                        Repairs and Maintenance
• Office Maintenance                                              Vehicle maintenance
• Computer maintenance                                       Legal Fees
• Consultancy Fees                                                Professional Fees
• Audit Fees                                                           Freight and transportation expenses (GTA)
• Gift expenses                                                      Business promotion expenses
• Advertisement

Example:

ABC Ltd. is a registered company which has spent Rs. 7,500 on purchases from a URD. Should it pay GST via RCM (Reverse Charge Mechanism) on Rs. 1,500?

Once the limit of Rs. 5,000/- in a day is crossed, the GST is payable on the entire amount of Rs. 7,500 on RCM.

Exceptions

For these items, RCM will not apply for the simple reason that GST is not applicable on these:

• Salary and wages
• Electricity
• Interest
• Car fuel (Diesel/petrol)
• Government Fees (such as MCA fees, land registration fees etc.)

Exempted Goods and RCM: If the supply involves exempted goods/services RCM will not be applicable.

Examples:*A registered person hires auto rickshaw for commuting from one place to another. 

This section will not apply as the transportation of passenger by auto rickshaw is exempted from GST.

*A registered person stays in a budget hotel whose tariff is Rs. 800 per day. Is GST applicable on RCM?

Since the room tariff is less than ?1,000 it is exempted from GST. The question of RCM does not arise.

Latest update as per 22nd GST Council Meeting held on 6th Oct 2017—

Reverse charge is deferred till 31.03.2018

For Services Provided by E-commerce Operator

In case of services provided by e-commerce operators, liability to pay tax lies on the recipient of services i.e . reverse charge will apply on the e-commerce operator. He will be liable to pay GST. If the assessee has no physical presence in the taxable area, then the representative of such e-commerce operator will be liable to pay tax. If there is no representative, then the assessee has to appoint one who will be liable to pay GST.

For example, UrbanClap, an e-commerce operator, provides services of plumbers, electricians, teachers, beauticians etc. UrbanClap is liable to pay GST and collect it from the customers instead of the registered service providers. If the e-commerce operator does not have physical presence in the taxable territory, then a person representing such electronic commerce operator for any purpose will be liable to pay tax. If there is no representative, the operator will appoint a representative who will be held liable to pay GST.

For example, Ola Cabs enlist drivers to ply their cars. Drivers are providing chauffeur/driving services to Ola. Ola is the service receiver and pays drivers a share of the fare collected from passengers.

Ola pays GST on the drivers’ services on reverse charge basis. This becomes cost to Ola which is later recovered from passengers.

The aim of reverse charge is to bring unorganized sector into the tax umbrella. It also removes the burden of tax compliance from individuals with limited resources (drivers) to large companies (Ola) with enough resources.

For Services

CBEC has notified a list of services on which reverse charge mechanism will be applicable under GST

S.No.	Provider	Recipient
1	Goods Transport Agency	Casual Taxable person, body corporate, partnership firm, any           society, factory, any person registered under CGST, SGST,                      IGST Act.
2	Recovery Agent	Banking Company, NBFC or any financial institution.
3	A Director of a Company or a Body                      Corporate	A Company or a Body Corporate
4	An individual advocate or firm of                         advocates, An arbitral tribunal	Any business entity
5	An insurance agent i.e. Services                           supplied by an insurance agent to any             person carrying on insurance business.	Any person carrying on insurance business located in a                                 taxable territory.
6.	Non-resident service provider	Service receiver
7.	Sponsorship Services	Recipient Liable for GST Payment under Reverse                           Charge: Anybody corporate or partnership firm.
8	Specified Services provided                by Government or               Local Authority to  Business entity,                    excluding,-              (1)renting of immovable property, and              (2) services specified below-             (i)services by the Department of Posts             by way of speed post, express parcel                    post, life insurance, and agency                        services provided to a person other than            Government;          (ii)services in relation to an aircraft or a                 vessel, inside or outside the precincts             of a port or an airport;              (iii) Transport of goods or passengers.	Recipient business entity Liable for GST Payment under                Reverse Charge.
9	Transportation Services on                        Import i.e. Import of Services by way of               transportation of goods by a vessel                 from a place outside India up to the                        customs station of clearance in India.	The importer of services located in taxable territory will                      have  to pay tax on reverse charge basis.
10	Transfer or permitting the use or enjoyment of a copyright  relating to original literary, dramatic, musical or artistic works	Publisher, Music company, Producer
11	Any services supplied  by any person who is located in a non-taxable territory and received by any person located in the taxable territory other than non-taxable online recipient (OIDAR)	Any person located in the taxable territory other than            non-taxable online recipient (Business Recipient)

There is two type of reverse charge scenarios mentioned in the law. First one is dependent on the nature of supply and nature of supplier. This covered under section 9 (3) of CGST/ SGST (UTGST) Act and section 5 (3) of the IGST Act. Second one taxable supply made by the unregistered person to a registered person covered under section 9 (4) of the CGST/SGST (UTGST) Act and section 5 (4) of the IGST Act.

Registration Requirement under Reverse Charge Mechanism:

As per Section 24 of CGST Act’ 2017, A person who pays taxes under reverse charge is required to register under GST irrespective of the threshold and annual threshold Limit is 20 lakhs (10 lakhs in case of Hill states and North Eastern State).

Manner of Payment of GST under Reverse Charge Mechanism

Tax under reverse charge can be paid through cash only without availing the benefit of ITC. The supplier must mention in his tax invoice whether the tax is payable on reverse charge. Under the reverse charge mechanism, the GST applicable must be submitted to the Government on every 20th of next month.

#Whether GST paid under RCM be eligible for ITC?

Yes, the GST paid on reverse charge is eligible for ITC.

Input Tax Credit:

The recipient can avail Input Tax credit on the Tax amount that is paid under reverse charge on goods and services. The only condition is that the goods and services are used or will be used for business or furtherance of business. If the composite dealer falls under reverse charge mechanism then the dealer is ineligible to claim any credit of tax paid. The tax will be paid at the normal applicable rates and not at the composition rates.

#Whether liability to pay tax under Reverse Charge Mechanism depends only upon category of goods or services?

No, liability to pay tax under RCM not only depends upon category of goods or services, but it also depends upon the category of recipient, category of supplier and place of provision of such supplies.

Time of Supply/when does the liability to Pay Tax under Reverse Charge Mechanism arise?

Under GST, time of supply means a particular point of time when the goods or services are rendered or supplied. It allows us to find out the tax rate, value and due dates for filing returns. Under Reverse Charge Mechanism, the receiver is entitled to pay GST. However, the time of supply for supplying of goods and services under reverse charge is varying from the supplies which are under forwarding charge.

How to find out time of Supply under Reverse Charge Mechanism?

1. In case of Goods: 

Time of supply in case of supplying goods when tax payable under Reverse Charge, whichever is earliest from the following dates:-

• the date of the receipt of goods;
• the date of payment(which is the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier);
• the date immediately following thirty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier

Note: However, if it is not possible to find out the time of supply in mentioned above cases than the time of supply will be considered the date of entry in the books of account of the recipient of the supply. Let us understand by an example given below:-

• Date of Payment – 18th June 2017
• Date of Invoice – 1st July 2017
• Date of Entry in books by recipient – 19th June 2017

In this case, the time of supply will be 18th June 2017

If the supplier is located outside India, then the time of supply shall be the earliest of:

• When the amount is paid i.e. the date of payment, OR
• When the recipient records the payment in his books of account.

1. In case of services: 

Time of supply in case of supplying services when taxes payable under reverse charge mechanism, whichever is earliest from the following dates:-

• the date of payment; or
• the date immediately following after sixty days from the date of issue of the invoice by the supplier; whichever is earlier.

However, if it is not possible to find out the time of supply in aforementioned cases, the time of supply will be considered the date of entry in the books of account of the recipient of the supply.

For example:-

• Date of Payment – 18th August 2017
• Date of Invoice – 1st September 2017
• Date of Entry in books by recipient – 19th August 2017

In this case, the time of supply will be 18th August 2017,

Due to some reasons if the time of supply can’t be ascertained under 1 or 2 head, in this case, it will be 19th August i.e., date of entry in books by the recipient.

GST Returns

“Return” is a statement of specified particulars, relating to business activity undertaken by the taxable person during a prescribed period. It is an important tool for the Revenue Department to collect the financial data and other related information of the assessee. This will enable the Department to have a concrete database which will in turn help them for enforcing the compliance part, as required by the law of land. Thus, return process has become a powerful tool to implement the ‘data and revenue’ collection system so also it has been emphasized as one of the pertinent process under the GST Regime. The submission and processing of return is an important link between the taxpayer and tax administration. So, A tax payer is required to file a document with GST authorities which is known as ‘Returns”. The returns are to be filed online.

As it is mandatory, every registered person is required to file returns for the prescribed tax period within the stipulated due dates as provided in the law. The GSTN upon enrollment will provide a User ID and Password which shall be used by him for filing the tax return on the Common Portal.

Form No.--   Purpose--  Due Dates of returns

1.GSTR1-- Outward supplies made by supplier (other than compounding taxpayer and ISD)-- 10th of the next month

2.GSTR2-- Inward supplies received by a taxpayer (other than compounding taxpayer and ISD)-- 15th of the next month

3.GSTR3-- Monthly return (other than compounding taxpayer and ISD)-- 20th of the next month

4.GSTR4-- Quarterly return for compounding taxpayer-- 18th of the month next to Quarter

5.GSTR5-- Periodic return by Nonresident foreign tax payer-- Last day of registration

6.GSTR6-- Return for ISD-- 13th of the next month

7.GSTR7-- Return for TDS-- 10th of the next month

8.GSTR8-- Annual Return-- 31st December of next FY

The GSTR1 & GSTR2 forms will contain details relating to sales and purchases of/from  various types of suppliers/vendors, exports/imports, sales/purchase returns, debit & credit notes etc., including revision and rectifications of the earlier returns if any.  Further GSTR3 form is a monthly return which will be a consolidation of Forms 1, 2, 6 & 7 along with details from ITC ledger, tax liability  & cash ledger, whereas GSTR4 form is specifically for compounding taxpayers and GSTR5 is for Non-resident tax payers.  

 However GSTR8 is for filing Annual return in which every registered taxable person shall furnish return for every financial year, except an ISD deductor, a casual taxable person and a non-resident taxable person. Further, taxable persons who get their accounts audited as prescribed under section 42(4) are required to electronically file annual return under this section along with a copy of the audited accounts as well as a reconciliation statement.

 The taxable person is required to file his very first return upon registration containing the details of his inward as well as outward supplies. It is to be filed from the date on which he became liable to registration (for outward supplies)/from effective date of Registration (for inward supplies) till the end of the month in which the registration has been granted. Further a Final Return has to be filed by registered taxable person who applies for cancellation of registration.