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Does Composite levy under GST compensate SMEs for loss of exemptions?

COMPOSITION LEVY

As per current indirect tax laws, SMEs claim an exemption from Excise duty under following conditions:

  • Manufacturers – If the turnover is less than Rs. 1.5 Crore
  • Traders – As Excise duty is a tax on manufacturing, traders can choose to opt out regardless of the turnover. If they choose to opt-in, they can pass on the Excise in their invoices to the extent of input taken (traders don’t have to charge Excise duty for the value added)

This exemption will go away with the rollout of GST and all taxpayers will be subject to a uniform tax, i.e, GST. To ease the burden of GST compliance on small manufacturers and traders, GST Draft Law provides an optional scheme known as Composition levy.

 

What is Composition Scheme under GST ?

It is a scheme under the GST regime wherein eligible taxpayers can choose to pay a lumpsum tax based on turnover. It is an optional scheme –Taxpayer has the option to choose or not

 

Who is eligible to opt for Composition Scheme ?

Aggregate turnover of the person having same PAN during the previous financial year not exceeding Rs 75 lakhs.

Conditions for a Composite Tax Payer

Taxpayer if eligible based on turnover should also adhere to the following conditions

  • Taxpayer cannot be engaged in supply of services
  • Cannot be engaged in manufacture of specific notified goods
  • Cannot supply goods not taxable under GST
  • No Interstate supplies are allowed under the scheme
  • Cannot claim Input Tax Credit on inward supply of goods and / or services
  • Cannot collect tax on outward supply of goods and / or services
  • Applicable for all business verticals under the same PAN – Composition levy will be applicable for all business verticals operating within state or interstate under the same pan.
  • If the composite tax payer is in the trade of supplying goods and services, then composition levy will be applicable for both supply of goods and supply of services.
  • Cannot supply goods through an e-commerce operator
  • Tax payable under reverse charge mechanism would still be payable
  • Permission of proper officer of the central or state government is required for adopting this Scheme. This clause is particularly discretionary and may result in usual problems associated with bureaucracy.

 

Rate of Levy under the Composition scheme

  • Manufacturer –2 % of turnover
  • Traders – 1% of turnover
  • Restaurants – 5% of turnover

Benefits of Composition scheme

Given all the conditions and restrictions, are there any compelling benefits of the scheme? The main perceived benefits are

  • Ease of Accounting burden – Have an option of not having to maintain detailed records or follow tax invoicing rules
  • Simplicity – Pay taxes at a fixed rate as a percentage of turnover
  • Easier compliance norms – file GST returns quarterly instead of monthly

 

Return Forms for a Composite Tax Payer

A composite tax payer is required to file quarterly return and annual return. Types of returns and details to be furnished are explained below

Return TypeFrequencyDue DateDetails to be furnished
Form GSTR-4AQuarterlyInward supplies will be made available to the recipient registered under composition scheme automatically on the basis of FORM GSTR-1 furnished by the supplier.
Form GSTR-4Quarterly18th of succeeding monthAll outward supplies of goods and services including auto-populated details from Form GSTR-4A and tax payable details. Details of any additions, modifications, or deletions in Form GSTR-4A should also be submitted in Form GSTR-4.
Form GSTR-9AAnnually31st December of next fiscalConsolidated details of quarterly returns filed along with tax payment details.

 

Composition Scheme Example :

Lets consider a Samsung mobile phone with MRP for Rs.20,000.

The flow of product is as follows :

Step 1 – Manufactured by Samsung and sold to distributor – Coral Fabtech – for Rs.12000

Step 2 – Coral Fabtech sells it to retailer -Sangeetha Mobiles for Rs. 14000

Step 3 – Sangeetha Mobiles sells the phone to consumer for Rs. 20000

Assumptions
  • GST Rate is presumed at 20% for simplicity
  • Composition Levy presumed at 2% on turnover
  • MRP is fixed and a retail sale must take place at MRP or less as per law.
  • Composition dealer neither collects tax from recipient nor is eligible for an Input tax credit

The following scenarios are possible :

TaxpayerManufacturer
Samsung
Distributor
Coral Fabtech
Retailer
Sangeetha Mobiles
Use CasesTaxation Scheme
Scenario 1RegularRegularRegular
Scenario 2RegularCompositeRegular
Scenario 3RegularCompositeComposite
Scenario 4RegularRegularComposite

Scenario 1

This is the base case when none of the taxpayers opt-in for the Composite scheme. The results of other scenarios would be compared to this base case to determine if the scheme is beneficial.

Scenario 1
DescriptionManufacturerDistributor Retailer
Transaction typeB2BB2BB2C
GST optionRegularRegularRegular
Total Cost120001440016800
Less Input GST Credit200024002800
Net Cost (A)100001200014000
Total Sale Price144001680020000
Less Outward GST240028003333
Net Sale Price (B)120001400016667
GST payable400400533
Margin 200020002667
Less Composition TaxNA
Net Margin200020002667

Total Profit of Supply Chain                =          Rs. 6667

Total Tax Revenue for Government    =          Rs. 1333

 

Scenario 2

This is a scenario where intermediate taxpayer in the supply chain opts for Composition scheme and hence the GST credit chain is broken.

Scenario 2
DescriptionManufacturerDistributor Retailer
Transaction typeB2BB2BB2C
GST optionRegularCompositeRegular
Total Cost120001440016400
Less Input GST Credit200000
Net Cost (A)100001440016400
Total Sale Price1440016400*20000
Less Outward GST240003333
Net Sale Price (B)120001640016667
GST payable40003333
Margin 20002000267
Less CompositionTaxNA328
Net Margin20001672267

Total Profit of Supply Chain                =          Rs. 3939

Total Tax Revenue for Government    =          Rs. 4061

*Sale price to keep margin constant at Rs.2000

 

Scenario 3

This is a scenario where once a taxpayer in the supply chain opts for Composition scheme all taxpayers down the supply chain opt for composite scheme.

Scenario 3
DescriptionManufacturerDistributor Retailer
Transaction typeB2BB2BB2C
GST optionRegularCompositeComposite
Total Cost120001440016400
Less Input GST Credit200000
Net Cost (A)100001440016400
Total Sale Price144001640020000
Less Outward GST240000
Net Sale Price (B)120001640020000
GST payable40000
Margin 200020003600
Less Composition TaxNA328400
Net Margin200016723200

Total Profit of Supply Chain                =          Rs. 6872

Total Tax Revenue for Government    =          Rs. 1128

 

Scenario 4

This is a similar to scenario 3 , difference being that  only the last taxpayer who sells B2C i.e, directly to consumer, opts for Composition scheme.

Scenario 4
DescriptionManufacturerDistributor Retailer
Transaction typeB2BB2BB2C
GST optionRegularRegularComposite
Total Cost120001440016800
Less Input GST Credit200024000
Net Cost (A)100001200016800
Total Sale Price144001680020000
Less Outward GST240028000
Net Sale Price (B)120001400020000
GST payable4004000
Margin 200020003200
Less Composition TaxNA400
Net Margin200020002800

Total Profit of Supply Chain                =          Rs. 6800

Total Tax Revenue for Government    =          Rs. 1200

 

Conclusion

As evident from the above analysis, it is clear that once a supplier opts for Composition scheme, the GST credit chain is broken and resumption of GST by the supply chain results in increased tax liability, therefore the scheme is best suitable for B2C businesses. Further, whether it is profitable to opt for Regular GST scheme or Composite scheme is governed by GST rate, Composite Levy rate and value addition at each stage (margins). In the above example the margins were high at each stage- 15-20% approx. and composition levy was low at 2%.

Lower margins or increased number of middlemen will have an adverse effect on the  benefits of composition scheme.

Feel free to reach out to us at support@gstsmadhaan.com for in-depth analysis and appropriate GST strategy for your business.

Prakash Agarwal

Author is an IIT, IIM graduate with many years of experience in finance and SME sector.

11 Comments

  1. Vikram says:

    Dear sir,
    I have a medical shop….and i hv gone under composite scheme….if my turnover increases to 80 lakh or 1 crore what problems i have to face?

    • GST Samadhaan says:

      You dont have to face any problems. Opt out of Composite scheme when your turnover is touching 75 lakhs. You will be able to avail input credit of GST paid on stock in hand at the date of becoming regular dealer. We can manage the process for you. Get in touch when you need to become regular dealer.

  2. Amit says:

    Dear sir
    I am owner of a small nursing home and also propriter of a medical store attached to nursing home.
    What is the GET liability for me.
    Whether my income from nursing home and medical store both climbed for HAT or only medical store.

  3. AMOL SANCHETI says:

    I have trader & I have stock out of state &my total turnover less than 75 lakh so can I eligible for camopisite shame ???? My Stock is non taxable before GST

  4. Alok, Tripura says:

    Dear Sir, i have a retail medicine shop of 30-50 lakhs/year turn over. I have already applied for GST registration number. Medicines are bought from whole
    sellers with GST from July,2017 and records are maintained. Now please guide and help to opt for Composite scheme and how to submit GST ?

  5. Ashok says:

    Sir, i am planning to open a proprietary retail shop under franchise model within 2 months(fully functional). Do i need to register in GST beforehand? While registering it asked for date of commencement of business. But since I haven’t started the business yet, I left the form incomplete. Kindly guide me. Moreover I haven’t yet opened a current account in the name of firm. Can i provide details of my existing SB bank account in the GST form and later when I open the Current account, I would do transactions with that.
    Moreover,the retail store which i am planning to open attracts a GST rate of 28%. So which one would be better, Composite or Regular GST.

  6. George Kerala says:

    If i have a sales turnover of 15lakhs and require Interstate purchases to do business can i opt for the composite scheme? Please clarify “No Interstate supplies are allowed under the scheme”

    • gstsamadhaan says:

      You can make purchases from outside state but cannot sell outside the state.
      Many businesses have this confusion. Please spread the word.

  7. Anonymous says:

    Dear Sir
    Hi Can you please highlight the list of items falls under below mentioned line:-
    “Cannot be engaged in manufacture of specific notified goods”

    This very important to know and Govt. should put all items of 28% GST rate under specific notified goods. This is because 28% category is of white goods and if persons desired to manufacture such goods, then he must opt for regular dealer.

    Secondly price difference between GST registered dealer and Composite Dealer will be too high.

    So list of goods falling under 28% GST Rate should become part of specific notified goods.

    Thanks
    Harman

    • gstsamadhaan says:

      Specified goods are mostly Sin goods like alcohol, cigarettes etc. Please note that limit of turnover is Rs.50 lakhs only per year. This is mostly for benefit of small traders and Micro enterprises. Any white goods manufacturer would almost certainly have a a much higher turnover.

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