Comparison of Composition Scheme and Normal Scheme under CGST Act 2017

 

Introduction

The Composition Scheme serves as an alternative method for levying Goods and Services Tax (GST) in India. Specifically designed to cater to the needs of small businesses with turnovers below a prescribed limit, this scheme offers a simplified compliance mechanism. Originally, the Composition Scheme was primarily applicable to suppliers of goods and restaurant services. However, it has since been extended to include certain service providers within a specified threshold. It is important to note that participation in the Composition Scheme is voluntary and optional for eligible businesses.

The primary objective of the Composition Scheme is to bring simplicity and reduce the compliance costs associated with GST for small businesses. Recognizing the challenges faced by such enterprises, the scheme provides them with a simplified tax structure and relieves them from some of the burdensome compliance requirements.

By opting for the Composition Scheme, eligible businesses can enjoy the following benefits:

Lower Tax Liability: Under the Composition Scheme, taxpayers pay tax at a fixed percentage of their turnover, which is usually lower than the regular GST rates. This ensures a reduced tax liability and provides financial relief to small businesses.

Minimal Compliance Requirements: The scheme significantly reduces the compliance burden for participating businesses. Unlike regular taxpayers, businesses under the Composition Scheme are not required to maintain detailed records of inward and outward supplies, issue tax invoices, or keep track of input tax credits. This streamlined approach simplifies the overall accounting and record-keeping processes.

Ease of Doing Business: The Composition Scheme allows eligible businesses to focus on their core operations rather than grappling with complex GST compliance procedures. This promotes ease of doing business and encourages the growth of small enterprises.

Overview

Applicability: The Composition Scheme is available for businesses with an annual aggregate turnover below a specified threshold. Initially, the threshold was set at INR 1 crore for most states. However, some states have further reduced the threshold to INR 75 lakh. It's important to note that certain businesses are not eligible for the scheme, such as service providers (except restaurants), manufacturers of notified goods, inter-state sellers, and businesses engaged in e-commerce.

Tax Rates: Taxpayers opting for the Composition Scheme pay a fixed percentage of their turnover as tax. The rates may vary for different types of businesses. Generally, the tax rates under the scheme are lower compared to the regular GST rates. For example, for manufacturers, the composition tax rate is typically 1% of turnover, while for traders and restaurant businesses, it is 0.5% of turnover.

Input Tax Credit (ITC): Businesses registered under the Composition Scheme are not eligible to claim input tax credit on purchases. This means they cannot set off the tax paid on their inputs against the tax liability on their sales.

Quarterly Returns: Taxpayers under the Composition Scheme need to file a simplified quarterly return known as GSTR-4. The return includes details of the turnover, tax payable, and payment of tax.

Simplified Compliance: Businesses under the Composition Scheme have certain relaxations in terms of compliance requirements. They are not required to maintain detailed records of inward and outward supplies. Additionally, they do not need to issue tax invoices. Instead, they can issue a bill of supply without mentioning GST.

Restriction on Interstate Sales: Businesses opting for the Composition Scheme are not allowed to make interstate sales. They can only make supplies within the same state (intrastate supplies).

No Annual Audit: Taxpayers under the Composition Scheme are exempted from the requirement of getting their accounts audited.

 

Advantages of Composition Scheme:

Lower Rates of Tax: Taxpayers opting for the Composition Scheme enjoy lower rates of tax compared to regular GST rates. The tax rates under the scheme are fixed at 1%, 2%, 5%, or 6% of turnover, depending on the type of business.

High Liquidity: The Composition Scheme provides high liquidity to businesses as they are not required to maintain detailed records of input tax credits. This frees up working capital that would otherwise be tied up in the input tax credit mechanism.

Less and Easy Compliance: One of the key advantages of the Composition Scheme is the simplified compliance requirements. Businesses under this scheme are exempted from maintaining detailed accounts and records. This reduces the administrative burden and saves time and effort.

Simple Calculation of Tax: Tax liability under the Composition Scheme is calculated based on the turnover of the business. This eliminates the need to worry about the classification of goods or services and the applicable GST rates. Businesses can easily calculate their tax liability and manage their finances accordingly.

Disadvantages of Composition Scheme:

Restriction on Inter-State Sales: Businesses under the Composition Scheme are not allowed to make inter-state sales. This limitation can impact the reach of the business, particularly for those aiming to expand their customer base beyond their state.

Inability to Collect GST from Customers: Taxpayers registered under the Composition Scheme cannot collect GST from their customers. This means that they have to bear the tax liability themselves, potentially affecting their profit margins.

Ineligibility for Input Tax Credit: Businesses under the Composition Scheme are not eligible to claim input tax credit on their purchases. This can result in higher costs for the business, as they cannot offset the tax paid on inputs against their output tax liability.

Regular GST or Normal Scheme:

The Regular GST or Normal Scheme refers to the standard registration and compliance process under the GST regime. Every supplier of goods or services (or both) is required to obtain registration if their aggregate turnover exceeds the specified threshold limit in a financial year.

Under the Regular GST scheme:

Taxpayers must register if their turnover exceeds the threshold limit (currently set at INR 20 lakhs, or INR 40 lakhs for specific states).

Taxes must be paid on a monthly basis and returns must be filed on a quarterly basis for businesses with turnover up to INR 5 crores. For businesses with turnover above INR 5 crores, taxes and returns must be filed on a monthly basis.

Businesses Eligible to Opt for Composition Scheme:

The Composition Scheme is available to the following businesses if their turnover is within the prescribed limit of INR 1.5 crore (INR 75 lakhs for specified states) or INR 50 lakhs for services:

Restaurants, Traders of Goods , Manufacturers of Goods ,Shopkeepers ,Fruits and Vegetable Vendors ,Service Providers, Repair Shops ,Salons, Tailors, Artists.

Difference between Composition Scheme (Section 10 and 10(2A)) and Normal Scheme ( Section 9) of CGST Act, 2017

Aspect	Composition Scheme	Regular Scheme
Meaning	Designed for small taxpayers dealing with intra-state sales	Applicable to taxpayers dealing with intra-state and inter-state sales
Turnover Threshold	Supplier of goods/restaurants: Up to Rs 1.5 crore (75 lakhs for specified states) Service providers: Up to Rs 50 lakhs	Rs 20 lakhs/40 lakhs depending on the state and nature of business
Intra State/Inter State Sales	Can only make intra-state sales	Can make both intra-state and inter-state sales
SEZ/Exports	Cannot make sales to SEZ or exports	Can make sales to SEZ or exports
Rate of Taxes	0%, 1%, 2%, 5%, 6%	0%, 5%, 12%, 18%, 28%
Input Tax Credit	Cannot claim input tax credit	Can claim input tax credit
Documents	Bill of Supply needs to be issued	Tax invoice needs to be issued
Returns	Quarterly payment of taxes and returns in CMP-08, Annual Return- GSTR-4 Return of outward supply GSTR-1, Returns of GSTR-3B & Inward Supply GSTR-2A (Automatic), Annual Return GSTR-9	Monthly/quarterly returns, depending on turnover
Charge of GST	Cannot collect GST from customers; needs to pay from pocket	Can collect GST from customers
Entry/Exit	Can opt out of the composition scheme at any time during the year	Cannot opt out of the regular scheme anytime; can opt into composition during Feb-March every year
Switching from Regular GST to Composition GST	Form CMP-02 needs to be filed to opt into the composition scheme; the scheme will be effective from April 1st	The due date for conversion is 31st March every year; the window for conversion is open in Feb-March
Eligibility	Non Resident Indian and Casual Taxable Person are not eligible for Composition Scheme	Non Resident Indian and Casual Taxable Person are eligible for Normal Scheme
Ledger	Only E-Cash Ledger is to be maintained for discharging GST Liability	Both E-Credit Ledger amd E-Cash Ledger is to be maintained.
Important Note	Taxpayers switching to the composition scheme should file ITC-03 for reversal of input tax credit on stocks of inputs, semi-finished goods, and finished goods within the prescribed period	-

Displaying Composition Taxable Person's Ineligibility to Collect Tax on Supplies on Invoices

According to the GST rules in India, a composition taxable person is not allowed to collect tax from their customers. Instead, they need to pay the tax from their own pocket.

To comply with this requirement, composition taxable persons must mention the following statement on their invoices:

"Composition taxable person, not eligible to collect tax on supplies."

By including this statement on their invoices, composition taxable persons inform their customers that they are not charging GST on their supplies and that the tax liability is borne by the composition taxable person themselves.

It is important for composition taxable persons to ensure that their invoices clearly reflect this information to avoid any confusion or non-compliance with GST regulations.

Conclusion

In conclusion, the Composition Scheme under the GST law in India provides a simplified and cost-effective compliance mechanism for small businesses with turnovers below a prescribed limit. It offers advantages such as lower tax rates, reduced compliance requirements, and simplified tax calculations based on turnover. However, there are limitations, such as the inability to make inter-state sales, the ineligibility to claim input tax credit, and the requirement to bear the tax liability without collecting GST from customers.

 

On the other hand, the Regular Scheme is applicable to taxpayers who do not wish to pay tax at fixed rates and engage in both intra-state and inter-state sales. It involves regular monthly or quarterly tax payments, detailed record-keeping, and the ability to claim input tax credit. Regular taxpayers have the flexibility to collect GST from their customers and engage in inter-state sales and exports.

 

Overall, businesses must carefully evaluate their eligibility, consider the advantages and disadvantages, and make an informed decision based on their specific requirements and circumstances. Adhering to the relevant GST regulations and seeking professional advice can ensure proper compliance and efficient tax management in either scheme.

Article Compiled by:-

Mayank Garg

(LegalMantra.net Team)

+91 9582627751

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including newspapers, Journals, Bare Acts, Case Materials , Charted Secretary etc.

Print