Posts, Tax

Composition Scheme Under Goods And Service Tax: Testing The Utility

By: Tushar Behl

Introduction

Being one of the most innovative tax reforms, the “Goods and Services Tax” (hereinafter GST) contemplates on putting a stop to all other indirect tax procedures and authorities in order to bring uniformity and flexibility in the taxation policy. In order to curb the struggle with regard to compliance with statutory provisions and in support of its procedural simplicity, the Central Government has extended this current scheme under Value Added Tax (hereinafter VAT) law and introduced “Composition Scheme”. Registered entities can have recourse to the benefit of Composition Levy which is provided by the GST law itself.[1] This scheme is intended to resolve the procedural intricacies faced by Small and Medium Enterprises (hereinafter SME’S) that contribute on a large scale to the service sector and Gross Domestic Product (hereinafter GDP) of the country.

The Composition Scheme

Business Compliance is the requirement of every taxation system which needs to be handled by small businesses periodically and in a timely manner. Under VAT law, Composition Scheme provides recourse to the taxpayers registered under Schedule V of the act to file summarised returns, maintain prescribed records, recompense periodic tax payments, claim a deduction on gross value and much more. This ‘Option’ is available to a registered entity, having an “aggregate turnover” of less than seventy-five lakh rupees in the preceding financial year. The registered person may opt to pay an amount so commended in lieu of the tax payable by him.[2] However, if the turnover crosses the limit of seventy-five lakh rupees, the person becomes ineligible to do so.

The term “aggregate turnover” implies, the aggregate value of all taxable and non-taxable supplies excluding the value of supplies on which tax is levied on a reverse charge basis and the value of inward supplies.[3]

It must be noted that no such permission shall be granted to a taxable entity[4]–

(a) Who is not registered or liable to be registered under Schedule V of the Act.

(b) Exceeding the turnover limit of seventy-five lakh rupees in a financial year.

(c) Denies payment at such rate, not less than 2.5% each for CGST and SGST respectively, of the turnover in a State during the year in case of a manufacturer.

(d) Denies payment at such rate, not less than 1% each for CGST and SGST respectively, in any other case, of the turnover in a State during the year.

(e) Who does not take permission for levy under this scheme.

(f) Who’s act which affects any inter-State outward supplies of goods and/or services or to a person who is liable to pay tax under reverse charge scheme, is engaged in such supply of services, who is the manufacturer of such goods as may be notified on the recommendation of the Council, who makes supply of goods on which tax cannot be levied and who makes supply of goods through an electronic commerce operator who is required to collect tax at source under Section 56 of CGST/SGST Act.

Conditions Pertinent on Adoption of Composition Levy

The registered person who is liable to pay taxes will get the benefit of Composition Scheme only when all the registered entities under the same permanent account number[5] opt for the same.

  • Under Composition Levy, ‘fresh intimation’ is not required every year and tax could be paid according to the conditions precedent.
  • Filing return along with payment of tax on a quarterly basis in Form GSTR-4 following the termination of the quarter.
  • No entitlement to any kind of input tax credit.
  • No entitlement of tax on supplies made by the supplier.
  • Option lapses as soon as the limit of aggregate turnover exceeds seventy-five lakh rupees in a financial year.
  • Violation of the prescribed provisions would attract the application for determination of tax and penalty: provisions of Section 73 or 74 may attract.

Stipulation of Composition Levy as per Composition Rules[6]

  • The person this exercising option is given must be a registered taxpayer, neither a non-resident nor a casual taxpayer.
  • Reverse Charge would be attracted as in when the stock of goods held by the taxpayer has been acquired from an unregistered supplier.
  • Keywords “Composition Taxable Person” and the clause of “non-eligibility to collect tax on supplies” must be mentioned at every prominent place of his business, such as the bill of supply, notices, banners etc.
  • Tax would be levied upon inward supply of goods or services or both, the reverse charge would be applicable in that case.
  • Penal provisions would get attracted if the stock held by the taxpayer is acquired in the course of ‘Inter-State Trade’ or ‘commerce’ or from a place outside India by any means whatsoever.

Conclusion

Though the Goods and Service tax is a game changer curbing the cascading effect of double taxation, the Composition Scheme introduced in order to provide an easy compliance route and reduced tax liability system for small suppliers and manufacturers also has many restrictions defeating the intended purpose. Many service providers are excluded from availing the benefits of the scheme such as manufacturers and suppliers of ‘Pan Masala and ‘Tobacco’ products, ‘Ice-Cream’ and edible ‘Ice’, etc. The scheme is eligible only for Business to Consumer (B2C) Transactions and not for Business to Business (B2B) Transactions since Composition Levy only supports ‘Intra-State Transactions’ and there is a clear absence of credit facility. There is a need to take utmost care while taking the benefit of Composition Levy since there are strict penal provisions which are quite severe. Overall, this scheme has the potential to boost revenue and lower the budget deficit. There may be a bunch of taxpayers who would find it difficult to adjust with the compliance requirements of taxation laws. To solve this purpose, Composition Scheme has been launched to safeguard the interests of small taxpayers and to provide them a hassle-free business environment. A lot more can be expected out of this scheme and it will definitely turn out to be a ‘game changer’ and a ‘booster’ to the GDP of the country.

[1] Central Goods and Services Tax Act 2017, s 9.

[2] Central Goods and Services Tax Act 2017, s 9(1).

[3] Central Goods and Services Tax Act 2017, s 2(6).

[4] Section 10(1) of The CGST/SGST Act, 2017 states that “taxable person means a person who is registered or liable to be registered under Schedule V of the Act”.

[5] A person may opt for Composition Scheme only if all registered businesses having the same Permanent Account Number (issued under the Income-Tax Act 1961) opt for the same. This would be computed on all India basis excluding Central tax, State tax, Union territory tax, integrated tax and cess.

[6] Central Goods and Services Tax Act 2017, s 10.

(Tushar is currently a student at University of Petroleum and Energy Studies, Dehradun)