Earlier this year, the GST composition scheme limit for manufacturers of goods was raised to Rs. 1.5 crore from the prevailing Rs. 1 crore threshold. Similarly, the GST council extended the benefits of the composition scheme to service providers on 10th January 2019. This scheme relaxes the tax compliances and payments for individuals having a turnover within the specified limits. As such, this scheme can be a great boon for your venture as it enhances your liquidity. While the scheme benefits B2B businesses greatly, B2C ventures can also profit from it.
To know whether the scheme will help tip the scales in your favour, read on to discover the meaning, advantages and nuances of the GST composition scheme.
What is the GST composition scheme?
GST composition scheme is a tax-paying mechanism offered to small businesses. Compared to regular GST filing, the composite scheme offers two main benefits: reduced paperwork and compliance and lower tax liability. For instance, normal taxpayers must submit three monthly GST returns (GST-1, GST-2, and GST-3) and one annual return (GST 9). However, if you’ve applied for the composition scheme GST, filing gets easier as you need to file just one quarterly return (GSTR 4) and one annual return (GSTR 9A).
Upon registering for the composition scheme under GST, you are liable to pay tax at a fixed rate of 1% to 6% of your turnover. For instance, if you are a manufacturer of goods other than tobacco, ice cream or pan masala, then thanks to the composition GST, you have to pay 1% tax basis your turnover.
GST composition scheme rules
As per the GST act, a range of manufacturing and service businesses and traders can register under the GST composition scheme, excluding the following:
- Individuals or businesses who supply goods through an e-commerce portal operator that collects tax at source
- Non-resident taxable persons or casual taxable persons
- Ice cream manufacturers or manufacturers of other edible ice with(out) cocoa as additives
- Manufacturers of pan masala and tobacco products and substitutes
- Individuals or businesses who have purchased goods from unregistered suppliers (allowed if GST is paid on such goods on a reverse charge basis)
- Suppliers involved in the supply of goods that are exempt under the GST act
- Suppliers involved in the supply of goods and services
Who can and cannot avail of the GST composition scheme?
As a taxpayer, you can opt for the GST composition scheme, provided your annual turnover falls within the specified limits. It’s important to note that the GST composition limit includes turnover for all businesses registered under a particular PAN. In general, small manufacturers, traders and service providers can avail of the composite scheme.
- Shopkeeper
- Food-service unit
- Small manufacturing unit
- Trade/ manufacturing sector unit
- Fruit and vegetable vendor
- Service sector unit
- Truck operator
- Repair shop
- Machine operator
- Artisan and more
What is the GST composition scheme limit?
The composition scheme limit under GST varies depending on the type of business you have.
- For manufacturers and traders: As a newly registered business, your turnover should not exceed Rs. 1.5 crore in the current financial year. If you have already registered, your turnover must not exceed Rs. 1.5 crore in the previous financial year.
- For restaurants not serving alcohol: The above terms apply here as well.
- For service providers: As a newly registered business, your turnover should not exceed Rs. 50 lakh in the current financial year. If you have already registered, your turnover must not exceed Rs. 50 crore in the previous financial year.
Additionally, the Rs. 1.5 crore cap is further limited in the special category states to Rs. 75 lakh. Further, suppose your turnover exceeds the specified composition scheme limit in a financial year. In that case, you will have to convert to the regular GST payment mechanism to comply with the GST composition scheme rules.
What are the benefits of the composition scheme in GST?
The salient benefits of the GST composition scheme are:
- Reduced tax payments
With the new tax rate structure, the liability for taxpayers has been reduced.
- Lower compliance requirements
With lesser compliance to be followed in keeping books of record, taxpayers now need to file fewer returns and side-step the need to provide tax invoices.
- Increased liquidity
From the financial perspective, reduced tax liability via the fixed rate translates to higher levels of liquidity for the business. With more liquidity, you can maintain cash flow better, which will help you sustain operations smoothly.
Are there any drawbacks of opting for a composition scheme under GST?
While GST composition is advantageous, you should be aware of a few pitfalls to the scheme before registering.
- No input tax credit
B2B businesses are not allowed the credit of input tax paid from the output liability. The buyer of such goods will not get any credit on tax paid, resulting in price distortion and cascading. A buyer registered as a regular taxpayer will not get any credit when buying from a person registered under a composition scheme, resulting in a loss of business. Eventually, such buyers might avoid purchases from a taxpayer under the scheme. - No collection of tax
Under the scheme, taxpayers cannot recover composition tax from their buyers, as they cannot raise a tax invoice.
- Restricted geography/ reach for businesses
Businesses are restricted geographically, as GST composition does not cover inter-state transactions. They also cannot leverage the potential of the internet as a supply of goods via e-commerce portals.
What are the tax rates applicable for the composition scheme in GST?
Upon registering for GST composition, a fixed tax rate applies to your business turnover. The current rates are as follows:
- For goods manufacturers and traders: 1% GST, divided as 0.5% CGST and 0.5% SGST
- For restaurants not serving alcohol: 5% GST, divided as 2.5% CGST and 2.5% SGST
- For service providers: 6% GST, divided as 3% CGST and 3% SGST
The taxes you pay come from your finances as you do not charge any to consumers and include taxes on supplies made and on reverse charge.
How easy is it to file composite GST returns?
As mentioned, the composite GST scheme dramatically reduces the burden of tax filing. With it, you need to file only GSTR 4 every quarter and GSTR 9A annually. GSTR 4 must be filed by the 18th of the month succeeding every quarter-end.
How to apply for the GST composition scheme
If you deem the scheme profitable, you can apply for it online via the GST website. Then you need to file GST CMP-02 as this serves as intimation, indicating your readiness to come under GST composition.
As a whole, the composition scheme greatly simplifies the taxation process and reduces tax liability to a larger extent. This leaves room for better working capital management.
To boost your operations further and amp up your supply chain, you can bolster your finances with the Bajaj Finserv Business Loan. With it, you get access to a collateral-free sanction of up to Rs. 20 lakh on simple terms and for a flexible tenor. What’s more, you stand a chance to profit from a speedy 24-hour loan disbursal, especially when you check your pre-approved business loan offer from Bajaj Finserv first to enjoy instant approval via a deal that is tailor-made for you.
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