Drawbacks, Eligibility & Disqualification of Composition Scheme under GST

A composition scheme under GST Law is a scheme which is optional in nature and is provided for small suppliers and manufacturers to pay fixed amount in prescribed percent, in lieu of tax payable in normal levy. Section 10 of the Central Goods and Service Tax Act, 2017 (CGST) read with Composition rules contains the provision with respect to registration, levy, rates, etc. under composition scheme. Now check more details for “Drawbacks, Eligibility & Disqualification of Composition Scheme under GST” from below….

Drawbacks, Eligibility & Disqualification of Composition Scheme under GST

Drawbacks, Eligibility & Disqualification of Composition Scheme under GST

Drawbacks of Composition Scheme

Drawbacks of Composition Scheme are:

1. Restricted place for Business: A taxpayer registered under the composition scheme cannot carry:

  • Inter-state transactions;
  • Import-export of goods and services or both. Therefore, he is forced to carry out only intra-state transactions and this limits the territory of his business and his growth prospects.

2. No Credit of Input Tax: Any dealer registered under Composition Scheme cannot avail the benefit of taking credit of input tax credit on inward supplies (purchases). Also, the buyer including registered buyer of those goods will not get the input tax credit on his purchases. Eventually, such buyers might avoid purchases from a supplier registered under composition scheme.

3. Pay tax from own pocket: Though the rate of composition tax is kept very low at 1%, 2% or 5% (CGST + SGST), but a taxpayer under composition scheme is not allowed to recover such tax from his buyer and he is not allowed to raise a tax invoice. Consequently, the burden of such tax is kept on the taxpayer himself and this has to be paid out of his own pocket.

4. Strict Penal provisions: Utmost care has to be taken while taking benefit of composition levy under GST Law because the penal provisions are very severe. If by any chance, it is established that the assessee is wrongly registered under composition scheme, not fulfilling the required criteria and thereby avoiding taxes may lead to adverse consequences. The defaulter will be then asked to pay taxes along with penalty, which is equal to 100% of taxes put on him. The penalty will not be levied without giving a show cause notice to the dealer.

Eligible Persons For Composition Scheme Under GST (SECTION 10(1) OF CGST)

  • 1. A registered person, whose aggregate turnover in the preceding financial year did not exceed 1 Crore* rupees, may opt to pay, in lieu of the tax payable by him, an amount calculated at such rate as may be prescribed (by way of Rules).
  • 2. The Government may, by notification, increase the said limit up to one crore rupees, as may be recommended by the Council.

*Latest update as per 22nd GST Council Meeting held on 6th Oct 2017

Threshold for composition scheme has been increased to 1 crore (from earlier 75 lakhs)

Important points

  • i. Section 10(1) of CGST is subject to the provisions of subsections (3) and (4) of section 9 relating to levy under reverse charge mechanism.
  • ii. Getting registered under composition scheme is optional and voluntary.
  • iii. For special category states except Uttarakhand, this turnover limit has been reduced to fifty lakh (50 lakhs) rupees. Special Category States where limit is Rs. 50 Lakhs are Assam, Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Tripura, Sikkim and Himachal Pradesh.
  • iv. Registered person: As per section 2 (94) of CGST Act, “registered person” means a person who is registered under section 25 but does not include a person having a Unique Identity Number;
  • v. Aggregate turnover: As per section 2 (6) of CGST Act “aggregate turnover” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis but excludes central tax, State tax, Union territory tax, integrated tax and cess.
  • vi. Financial year: “Financial year” shall mean the year commencing on the first day of April.

Disqualification For Composition Scheme (Section 10 (2) of CGST)

1. The registered person shall be eligible to opt composition scheme, if:-

  • (a) he is not engaged in the supply of services – other than supplies referred to in clause (b) of paragraph 6 of Schedule II;
  • (b) he is not engaged in making any supply of goods which are not leviable to tax under CGST Act;
  • (c) he is not engaged in making any inter-State outward supplies of goods;
  • (d) he is not engaged in making any supply of goods through an electronic commerce operator who is required to collect tax at source under section 52 of CGST Act; and
  • (e) he is not a manufacturer of such goods as may be notified by the Government on the recommendations of the Council.
  • (f) The composition scheme is not available for manufacturers of tobacco and manufactured tobacco substitutes, pan-masala and ice-cream and other edible ice, whether or not containing cocoa.

2. Where more than one registered person is having the same Permanent Account Number, the registered person shall not be eligible to opt for the scheme under Composition Scheme unless all such registered persons opt to pay tax under Composition Scheme.

Important points:

i. as per clause (b) of paragraph 6 of Schedule II of CGST Act, composite supplies by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration shall be treated as supply of services. Except above service no other service provider can opt for composition scheme.

ii. Alcohol for human consumption and petrol and petroleum products are Goods which are not liable to tax under CGST Act.

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