Understanding the GST Composition Scheme Transition Provisions

The Goods and Services Tax (GST) Composition Scheme provides a simplified tax compliance option for eligible small taxpayers. This scheme allows businesses to avoid complex GST formalities by paying a fixed percentage of their turnover as tax. This section outlines the transition provisions related to input tax credit when a taxpayer moves between the normal GST scheme and the Composition Scheme.

The Rationale Behind the GST Composition Scheme

Every tax system aims for efficient tax collection, streamlined return filing, and simplified record-keeping, including invoices and other documents. These aspects often present significant challenges for small businesses. To address these difficulties, a composition scheme was initially introduced under various State VAT Laws, with specific eligibility criteria. The current GST Law also offers an option for registered taxpayers, whose turnover falls below a defined threshold, to pay tax at a reduced rate, subject to certain conditions.

Key Aspects of the Composition Scheme

For a taxable person to be granted the Composition Scheme, all registered entities associated with the same Permanent Account Number (PAN) must also register under this scheme. The primary goal here is to ensure that all business segments operating under a single PAN are covered by the Composition Scheme.

A registered taxpayer whose aggregate turnover did not exceed INR 75 lakh in the preceding financial year can opt to pay tax at a lower rate. This rate is typically capped at 2.5% for the restaurant sector and 0.5% for manufacturers and other goods suppliers, in lieu of the standard Central Tax rate. The Composition Scheme is designed to support small taxpayers primarily engaged in intrastate transactions and those not involved in the import or export of goods. As per a notification dated January 1, 2018, the term 'turnover' for traders specifically refers to the turnover of taxable supplies of goods.

Input Tax Credit Provisions During Scheme Transition

Just as the previous tax regime offered a composition scheme with certain conditions, the GST Composition Scheme includes transition provisions. These provisions address the allowance of credit for eligible duties and taxes on inputs held in stock, subject to specific conditions, during the switch between schemes.

Shifting from a Regular Taxpayer to a Composition Scheme Holder

When a taxpayer moves from the normal GST scheme to the Composition Scheme, they are required to reverse an amount equal to the input tax credit on inputs held in stock on the day immediately preceding the date of this change. Any remaining input tax credit balance in the credit ledger after this reversal will lapse.

Transitioning from a Composition Scheme Holder to a Regular Taxpayer

A taxpayer switching from the Composition Scheme under the previous regime to a normal taxpayer under GST will be subject to specific transition provisions. They will be permitted to claim credit for duties held in stock as inputs, or credit for Value Added Tax (VAT) on inputs and inputs contained in semi-finished or finished goods, on the appointed date. This is contingent upon fulfilling the following conditions:

• Such inputs or goods are used, or intended for use, in making taxable supplies.

• The taxpayer is not a holder of the Composition Scheme.

• The taxpayer is eligible to claim input tax credit.

• The inputs were not previously inadmissible for credit under the earlier law, such as those listed in any schedule or otherwise restricted.

• The taxpayer possesses invoices or documents proving payment of duties under earlier laws concerning inputs held in stock and semi-finished or finished goods.

• These invoices and/or documents were issued a maximum of twelve months before the appointed date.

The precise method for calculating the amount of credit under GST for the Composite Scheme will be detailed in further guidelines. For more comprehensive information on the Composition Scheme under GST, including its benefits or drawbacks, additional resources are available.