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Composite Taxpayers under GST – To Be or Not to Be?

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Composite Taxpayers under GST – To Be or Not to Be?

The composition levy is an alternative method of levy of tax designed for small taxpayers whose turnover is up to India is a developing nation that has a great diversity of businesses- big and small, in its economy. While the mega industries and MNCs help the nation to stand out in the global economy, the mid to small businesses fulfil important leg in the distribution of goods and services to every nook and corner of the nation. These businesses, are not very huge in their operations, yet contribute much towards development of the country. Recognizing their role, government has made certain provisions under GST to ensure lesser compliance and higher growth of such businesses. This article will help you to decide what to look forward to as Composite Dealers/Composite Taxpayers.

Types of Tax Payers under GST
The GST mandate segregates taxpayers under 3 categories on the basis of their turnover and filing correlation:

Exempted Taxpayers
Taxpayer/ businessperson with an annual turnover of Rs. 40 lakhs or below are exempted to pay or collect tax on supply of their goods or services.

Earlier, the limit for turnover was Rs. 20 lakhs, however same was extended to Rs. 40 lakhs after the 32nd GST Council Meeting.

Composite Taxpayers
Taxpayers/ businesses with an annual turnover of Rs. 1.5 crores (Rs. 75 lakhs for North Eastern states and Himachal Pradesh, Rs. 50 lakhs for Service providers) or below are required to file just a single return form GSTR 4 quarterly. At the same time, they can enjoy the perk of paying tax at a lower rate.

Earlier the limit was Rs. 1 crore, however the same was extended to Rs. 1.5 crore after the 32nd GST Council Meeting.

Regular Taxpayers
Taxpayers/businesses with an annual turnover exceeding Rs. 1.5crores (75 lakhs for North Eastern states and Himachal Pradesh) are considered as regular taxpayers and are required to file monthly returns as applicable on the nature of their business.

The composition scheme is the sweet spot where multitude of Indian businesses thrives. It offers few advantages to the taxpayer namely:

Pros of Composition Scheme:
Ease of Compliance
A business with annual turnover of Rs. 1.5 crore is one with average monthly billing cycle of 1.5 – 2 lacs. This could be a small trader, grocery shop owner, mobile shop or a similar profile. To them, simplicity of procedures is the most important factor in attaching to a uniform taxation system. GST helps here by providing composite dealer with a quarterly filing system instead of monthly. They are required to file form GSTR 4, which is a quarterly filing form.

Thus, the taxpayer is free from the hassle of filing multiple forms every month and focus his/her resources on the growth of the business.

Lower Tax Liability
For taxpayers registered under the composition scheme, the tax rate is nominal under the GST Law.

Business

CGST+SGST

Total

Manufacturer and trader of goods

0.5%+0.5%

1%

Non-Liquor Restaurants

2.5%+2.5%

5%

Service Providers

3%+3%

6%



Rs. 1.5 crore and pays a flat rate of tax regardless of what they manufacture, provide as a service or trade they carry on. Moreover, it is optional and the eligible person 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 rate.

High Liquidity
As stated above, the tax rate applicable for a composite dealer is nominal, which means, the financial resource blocked in the form of ITC is also nominal. Thus, for a taxpayer registered under GST does not have to depend on his suppliers returns and utilize the available resource for his daily transactions.

Growth Margin
Even though the annual turnover of a composite dealer is lower than a regular taxpayer, he/she can still have a leading edge in the market and gain better profit margin than his/her counterparties. With the composition scheme’s nominal tax rate, the composite dealer has the advantage to provide better quality goods and services at a competitive price and get a good hold of the market.

Cons of Composition Scheme
Restricted Business Territory
For a taxpayer to be eligible for composition scheme, it is mandatory for him to have his business presence restricted to intrastate supplies. Thus, a composite dealer cannot expand his business to inter-state supplies and import/export while trading under the umbrella of composition scheme.

No Collection of Tax
Since the rate of composition tax is kept very nominal at 1% - 5%, a taxpayer under composition scheme, he/she is barred from issuing tax invoice. Thus, a composite dealer cannot recover such tax on his outward supply of goods and services form his customers.

No available ITC
As stated above, a composite dealer cannot recover tax from the sales of his goods and services. Thus, the buyer of such goods will not get any credit on tax paid, resulting in price distortion and cascading. For a normal taxpayer, such investment can lead his business in loss and thus he/she might refrain themselves from buying from a taxpayer registered under composition scheme.

How to Opt in for Composition Scheme under GST
An eligible taxpayer who wishes to register his business under composition scheme has to inform the government about their choice by filing form CMP-01 and CMP-02 on the GST Portal/ GSTN.

The deadline to opt in for composition scheme for the FY 2019-20 has elapsed. (31st March, 2019)

How to Opt out of Composition scheme

A Composition Dealer who wants to opt out of Composition Scheme has to file GST CMP-04.
Form CMP-04 is also required to be filed if,
The annual turnover of a composite dealer exceeds the threshold limits;
The business/ taxpayer do not fall under the eligibility criteria anymore.

A composite dealer is required to file GST CMP-04 within 7 days from the date on which the taxpayer plan to opt out of Composition Scheme or is ineligible to be covered in the scheme.

IRIS GST is one of the leading GSPs in India. Our GST compliance solution, IRIS Sapphire, is designed to make your return preparation and filing process easy and efficient.

For any queries or to book a demo, please write to support@irisgst.com .

About Anushree Joshi

Anushree

Anushree Joshi is a Senior Domain Specialist in IRIS GST team and is responsible for product development and customer success. She is a Chartered Accountant, Cost & Management Accountant and have been associated with IRIS for 7+ yrs. Prior to joining the IRIS GST team, she was part of the IRIS US SEC XBRL team, helping listed companies in US file their annual reports in IFRS and US GAAP. She enjoys reading and a Kathak (Indian classical dance) enthusiast.

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taxmuneem 3 months ago

Nice blog!!

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