ICAI issued Handbook on Composition Scheme under GST

The Institute of Chartered Accountants of India(ICAI) has issued Handbook on Composition Scheme.

Keeping in view the limited financial resources and infrastructure available with small taxpayers, the law makers have provided a special composition levy scheme in the GST law to facilitate such small taxpayers. A taxpayer registered under composition levy scheme pays tax on quarterly basis at a certain fixed percentage of his annual turnover. Further, neither does a composition supplier maintains elaborate accounts nor does he file monthly returns; the composition scheme provides simple and easy compliance for small taxpayers.

Considering the significance of the provisions related to Composition Scheme, the GST & Indirect Taxes Committee published a Handbook on Composition Scheme under GST in the year 2020 along with various other handbooks on different aspects of GST law. These Handbooks are one among the many initiatives of the Committee undertaken towards its objective of GST knowledge dissemination. The provisions related to the chosen topic are collated, explained and analysed in such handbooks for easy comprehension of all the interested stakeholders.

Introduction to Composition Scheme

1. Brief Overview and Historical Background

Implementation of the Goods and Service Tax (GST) was a game changer in the field of indirect taxation in India. It’s a destination based multipoint tax system covering in its ambit, both goods and services. All stages of production and distribution are held as mere pass through wherein tax paid is given as a credit to be adjusted against the liability to be paid at the next stage and tax finally “sticks” or gets added to the cost at the final consumption stage in the taxing jurisdiction. It has been further described as a destination-based Goods and Services Tax. Therefore, levy of GST ensures that tax on tax is not levied by way of availability of input tax credit of tax paid at the earlier stage. This is one of the biggest benefits of GST and one which has been the biggest contributor in the implementation of GST across the World.

Dealer base of GST is very wide and all activities of supplier whether as a trader, wholesaler, manufacturer, service provider or works contractor, are covered under the ambit of GST. It is a taxation system which covers within its ambit almost all facets of activities of the business involving supply of goods or services or both except for certain exceptions. It involves, therefore, maintenance of records for outward supplies and input tax credits, filing of regular monthly returns and assessment of tax.

In cases of small dealers, sometimes it becomes cumbersome for them to maintain such records in such detail. They suffer both on account of lack of infrastructure, manpower and financial resources. Therefore, it was deemed fit by the law makers to bring in a scheme for small dealers under the GST Regime wherein they would not be required to maintain detailed records but would have to calculate and pay tax through a simplified mechanism and file a simple return for declaration of outward supplies and tax paid thereon. The scheme is called “composition scheme”.

In the initial phase when GST was implemented, the composition scheme was primarily for supplier of goods and for persons engaged in making supplies referred to in clause (b) of paragraph 6 of Schedule II. Then as the time moved on and representations were submitted, it was modified to allow partial supply of services and finally a composition scheme specially for small service providers was introduced in GST. Therefore, the composition scheme would have to be understood from the perspective of small supplier who may be engaged in the supply of goods or of services.

2. What is Composition Scheme?

The word “composition” has been defined under the Oxford Dictionary to mean “a legal agreement to pay a sum in lieu of a larger debt or other obligation.” Composition scheme couldn’t have been explained better in the shortest possible manner. However, under the GST Legislation, for persons opting for composition scheme, the benefit does not end here. In fact, under GST, certain relaxations are given in respect of compliances under the law as well.

Suppose if the goods are taxable @18%, a registered person by virtue of the provisions of Section 9(1) of CGST Act, 2017 is required to charge tax @18% on the supply of goods and after availing input tax credit against the output tax liability is required to deposit the balance tax payable. The provisions of CGST Act, 2017 provide that a normal dealer would be required to file monthly GSTR-3B and Quarterly GSTR-1 (Less than Rs. 1.5 cr). This works out to be 16 Returns and these return forms require multiple information to be submitted by the registered person. Further Section 35 read with Rule 56, prescribes detailed maintenance of accounts and records by a normal dealer. These are broad compliances which are required to be performed by a normal registered person.

However, with a view to benefit small dealers having turnover upto a particular threshold, Government brought in the composition scheme whereby they –

(a) Allowed those users to pay a fix % amount (say @1%) on gross turnover without availing benefit of input tax credit,

(b) Gave relaxation in the matter of maintenance of accounts and records,

(c) Provided a return Form with simple information to be filled,

(d) Provided one single return with payment of tax on quarterly basis as against 16 returns to be filled in a year.

Therefore, the composition scheme allows registered persons up to a particular threshold limit to pay a small percentage of fixed amount on the turnover and at the same time, provide relaxation in compliances.

Composition Scheme for Supplier of Goods and for Persons engaged in making supplies referred to in clause (b) of paragraph 6 of Schedule II

1. Overriding Impact of Provisions of Section 10

Section 10 of CGST Act, 2017 starts with a non-obstante clause providing: “Notwithstanding anything to the contrary contained in this Act”. Therefore, the provisions of section 10 of CGST Act, 2017 overrides anything contained in CGST Act which runs contrary to the provisions of Section 10 of CGST Act.

2. Provisions Of Section 10 Are Subject To Provisions Of Section 9(3) And 9(4)

Provisions of Section 10 of CGST Act, 2017 are subject to the provisions of Section 9(3) and 9(4) of CGST Act, 2017. Section 9(3) and 9(4) of CGST Act, 2017 provides for liability of recipient to pay tax under reverse charge mechanism. By virtue of provisions of Section 10 being made subject to Section 9(3) and 9(4), even though a person might have opted for Composition Scheme and even though he may not be entitled for input tax credit of the tax paid under reverse charge mechanism but still he is required to pay tax under reverse charge mechanism.

Question: Ajay opted for composition scheme for the year 2019-20. He availed service of goods transport agency. He wants to know whether he is required to pay tax under reverse charge under Section 9(3) of CGST Act, 2017 since he would not be getting any input tax credit of the taxes paid.

Answer: Yes, even if Ajay had opted for composition scheme for 2019-20 and he might not get credit of tax paid under reverse charge, he would still be required to pay tax under reverse charge for the year 2019-20.

To Read Full Handbook Download PDF Given Below: