Simplified GST Scheme for Service Providers with Lower Tax Rates

The Government of India introduced the Goods and Services Tax (GST) composition scheme to reduce the compliance burden for small taxpayers. This scheme was initially available only to suppliers of goods, requiring fewer records and simplified monthly returns. However, during the 32nd GST Council Meeting, an announcement was made to extend this scheme to service providers, effective from April 1, 2019. This article outlines the conditions necessary for service providers to opt into this beneficial scheme.

Recent Regulatory Updates

• February 6, 2023: Taxpayers eligible for or currently under the composition scheme for the fiscal year 2023-24 could submit their declaration via Form CMP-02 on the GST portal by March 31, 2023.
• July 5, 2022: The due date for filing GSTR-4 for FY 2021-22 was extended, with a late fee waiver, until July 28, 2022, as per Notification 12/2022. Additionally, the due date for CMP-08 for the April-June 2022 quarter was extended to July 31, 2022, also by Notification 12/2022.
• May 26, 2022: Notification no. 7/2022 announced a waiver of late fees for GSTR-4 for FY 2021-22 if filed between May 1 and June 30, 2022.
• February 24, 2022: Composition taxpayers, and those intending to join the scheme for FY 2022-23, were required to file Form CMP-02 on the GST portal by March 31, 2022.
• May 28, 2021: Following the 43rd GST Council meeting and a CBIC notification:
  • Interest relief was provided for CMP-08 filings for the January-March 2021 quarter. No interest was charged until May 3, a reduced 9% interest applied until June 17, and 18% thereafter.
  • The filing deadline for GSTR-4 for FY 2020-21 was extended to July 31, 2021.
  • The maximum late fee for GSTR-4 was capped at Rs. 500 for nil filings and Rs. 2000 for other filings.
• May 1, 2021:
  • The GSTR-4 due date for FY 2020-21 was moved from April 30, 2021, to May 31, 2021.
  • Form CMP-08 for January-March 2021, due by April 18, 2021, received interest charge relaxations: no interest until May 8, 9% interest between May 9 and May 23, and 18% thereafter.
  • The deadline for newly opted composition taxpayers to file ITC-03 for FY 2021-22 was extended to May 31, 2021.

Understanding the Composition Scheme for Service Providers

The composition scheme offers service providers with an annual aggregate turnover up to Rs. 50 lakh the option to pay tax at a reduced, fixed rate, provided certain conditions are met. This scheme is open to:

• Service-only suppliers.
• Suppliers of both goods and services who previously did not qualify for the composition scheme.

It is important to remember that suppliers of goods and restaurant service providers were already eligible under the original composition scheme.

Enrolling in the Composition Levy for Service Providers

The rules for the composition scheme, as outlined in notification number 2/2019 dated March 7, 2019, also apply to service providers. The enrollment process for service providers is similar to that for existing composition taxpayers. However, those opting into the scheme must specifically select “any other supplier eligible for composition levy” under Sl. no. 5(iii) in their application. The remaining sections of the form should be completed as usual for any composition scheme dealer.

Advantages and Disadvantages of the Composition Scheme

Eligibility Criteria for the Scheme

To qualify for the composition scheme, service providers must satisfy the following conditions:

1. Their turnover in the preceding financial year must be below Rs. 50 lakh.
2. They should not be supplying non-taxable goods.
3. They must not be involved in making inter-state supplies.
4. They should not be supplying services through an e-commerce operator.
5. They must not be a casual taxable person or a non-resident taxable person.
6. They are required to issue a Bill of Supply instead of a tax invoice, explicitly stating “composition taxable person” on the bill.
7. They are prohibited from charging or collecting tax from their customers.
8. They are ineligible to claim input tax credit.
9. They must pay normal tax for supplies under the reverse charge mechanism.
10. They should not be supplying specific items like ice cream, other edible ice (with or without cocoa), pan masala, and tobacco or its manufactured substitutes.

Applicable Rate and Compliance for Service Providers

For service providers under the composition scheme, the Goods and Services Tax (GST) rate is 6% (comprising 3% Central GST + 3% State GST). When calculating the aggregate annual turnover, the value of exempt services derived from extending deposits, loans, or advances, where the income is in the form of interest or discount, should be excluded.

Compliance for Service Providers: Taxpayers under this scheme are required to file only one annual return, along with quarterly tax payments and a straightforward declaration.

Normal vs. Composition Scheme: A Comparison

The table below illustrates a financial comparison between a normal taxpayer and a composition taxpayer:

Note: Under the composition scheme, dealers cannot collect tax directly from their customers, as the liability is borne by the dealer.