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Understanding GST Composition Scheme Transitions

The GST Composition Scheme provides a simplified taxation option for small taxpayers, allowing them to pay a fixed percentage of turnover instead of complex GST formalities. This article explains the scheme's purpose, its operational details, and the conditions for eligibility, particularly for intrastate businesses. It also covers crucial transition provisions for input tax credit when taxpayers switch between the normal and composition schemes, detailing the implications for ITC claims.

📖 3 min read read🏷️ Composition Scheme

The Goods and Services Tax (GST) composition scheme offers a simplified approach for small taxpayers. This scheme helps them avoid complex GST procedures and allows them to pay GST at a fixed percentage of their turnover.

Important Update For the financial year 2018-19, eligible GST-registered taxpayers had until March 31, 2018, to opt into the Composition Scheme. The process required filing an intimation in Form GST CMP-02. Additionally, taxpayers needed to submit a statement in Form ITC-03 within 60 days from the start of FY 2018-19. This statement was for declaring any input tax credit (ITC) claims that had to be reversed on inventory (inputs, semi-finished goods, or finished goods) and capital goods.

Rationale for Implementing the Composition Scheme under GST

Every tax system aims for efficient tax collection, streamlined return filing, and simplified record-keeping, including invoices and other necessary documents. These aspects often present significant challenges for small businesses. To address these difficulties, a composition scheme was introduced under previous State Value Added Tax (VAT) laws, with specific eligibility criteria. Similarly, GST law includes an option for registered individuals with turnover below a certain threshold to pay tax at a reduced rate, subject to particular conditions.

Overview of the Composition Scheme

The Composition Scheme is granted to a taxable person only if all registered entities under the same Permanent Account Number (PAN) are also registered under this scheme. The goal is to bring all business segments sharing the same PAN under a unified scheme. A registered taxpayer whose total turnover in the preceding financial year does not exceed seventy-five lakh rupees can pay tax at specific rates: no more than 2.5% for the restaurant sector and 0.5% for manufacturers and other suppliers of turnover. This scheme benefits small taxpayers primarily involved in intrastate transactions and not engaged in importing or exporting goods. As per a notification dated January 1, 2018, the term 'turnover' for traders has been defined as 'turnover of taxable supplies of goods'.

GST Composition Scheme Transition Provisions for Input Tax Credit

The current tax system provides for a composition scheme subject to certain conditions. Correspondingly, the GST Composition Scheme transition provisions allow for the credit of eligible duties and taxes on inputs held in stock, contingent upon specific terms.

Shifting from a Standard Taxpayer to a Composition Scheme Holder

When a taxpayer transitions from the normal scheme to the composition scheme, they are required to pay an amount equivalent to the input tax credit on inputs held in stock on the day immediately preceding the date of this change. Any remaining balance of input tax credit in the credit ledger after this payment will lapse.

Shifting from a Composition Scheme Holder to a Standard Taxpayer

Moving from the composition scheme under the previous regime to a standard taxpayer under GST involves transition provisions. Such a taxpayer will be allowed credit for duties held in stock as inputs or credit for Value Added Tax (VAT) concerning inputs and inputs embedded in semi-finished or finished goods on the appointed date, provided the following conditions are met:

  • Such inputs or goods are used or intended for use in making taxable supplies.
  • The taxpayer is not a composition scheme holder.
  • The taxpayer is eligible to claim credit for taxes.
  • The inputs were not ineligible for credit under the previous law due to being listed in any schedule or for other reasons.
  • The taxpayer possesses invoices or documents proving the payment of duties under previous laws for inputs held in stock and semi-finished or finished goods.
  • These invoices and/or documents were issued no more than twelve months before the appointed date.

The method for calculating the amount of credit under GST for the composition scheme will be specified. For further details on the Composition Scheme under GST and its advantages or disadvantages, additional resources are available.

Frequently Asked Questions

What is the main objective of the GST Composition Scheme?
The primary goal of the GST Composition Scheme is to simplify tax compliance for small businesses by allowing them to pay a fixed percentage of their turnover as tax, thereby reducing complex procedural requirements.
Which types of businesses are generally ineligible for the Composition Scheme?
Businesses engaged in interstate supply of goods, manufacturers of certain notified goods, non-resident taxable persons, and those supplying services (except restaurant services) are generally ineligible for the Composition Scheme.
How does the Composition Scheme simplify compliance for small businesses?
The Composition Scheme simplifies compliance by requiring fewer GST formalities, such as filing fewer returns (quarterly instead of monthly), maintaining simpler records, and not needing to issue tax invoices.
What is the turnover limit for opting into the Composition Scheme in India?
The aggregate turnover limit for opting into the Composition Scheme is typically Rs seventy-five lakh in the preceding financial year, although this limit can vary for certain states and categories of taxpayers.
Can a business operating under the Composition Scheme claim Input Tax Credit?
No, a business registered under the Composition Scheme cannot claim Input Tax Credit (ITC) on the purchases of inputs or capital goods, as it pays tax at a reduced, fixed rate on its turnover.