GST Composition Scheme Widens Tax Base for Government

GST Composition scheme is one of the easiest schemes for taxpayers with turnover of less than INR 75 lacs in a year that government has introduced with small traders and businesses in mind.

Assesses or Tax payers under the scheme rose to 1.5 million in just about 2 months after the introduction of the scheme. With 50% coming in the 15 days’ window that was opened from 16^th Sep to 30^th Sep. alone reflects the growing popularity among the small and medium enterprises (SMEs).

All the traders and businesses who have registered in second window, they will have to follow the normal GST processes till 30^th September and would be only taken under the scheme effective 1^st October.

Every 6^th Tax payer coming from the Composition Scheme

Total GST tax payers are 8.9 million and 1.5 million are under GST Composition Scheme roughly one-sixth. Among the states Uttar Pradesh (2,91,552), Rajasthan (151,432), Maharashtra (1,45,055) and Gujarat (1,09,516) account for more than 50% of the tax payers under the scheme.

BJP Government thinking to raise the limit to INR 1 Cr.

The scheme, first was launched in July and government had to extend the deadline from 21^st July to 15^th August due to poor registration of only 1 lac traders. Post the meeting of the GST council in Hyderabad on Sep 9, government had decided to re-open the window till 30^th September as challenges related to registration were highlighted in the meeting.

The government is planning to increase the turnover limit to INR 1 cr. from INR 75 lacs today along with a few changes in condition to expand the net.

Central Board of Excise and Customs (CBEC) Chairperson Vanaja Sarna said, “the recommendation of raising the threshold would be taken to the law committee, which has officials of both the Centre and states.”

She added, “The small and medium sector is facing difficulties. You need to have both the Centre and states on board. Taking all that into account, it would definitely be taken up.”

Experts & Analysts bet for extending the deadline and reduce the conditions for eligibility  

Experts & Analysts have called out for the need to extend at least this window by 2-3 months pointing to the rising popularity among the SMEs thereby increasing the taxpayer base for the government.

Pratik Jain of PwC India said, “In absolute terms, the number looks good. But whether there is still potential for more people to come in is debatable because there is no benchmark for comparison. A few people earlier were still evaluating whether they should opt for the normal scheme or go for less paperwork.”

MS Mani of Deloitte said, “the government should extend the scheme to December 31. It will expand the database of GST taxpayers. More entities will come under the tax net. These composition dealers could become normal taxpayers.”

Bipin Sapra of EY said, “The scheme is not available for manufacturers of tobacco and tobacco substitutes, pan masala, and ice cream. A lot of people were waiting for the new window to open. More people would have opted for it had it been simpler. Composition dealers buying from unregistered dealers need to pay reverse charge. Secondly, the scheme is not applicable for dealers making inter-state sales.”

GST Composition Scheme: What is it?

It is a scheme for SMEs that have a turnover of INR 75 lacs in a year wherein they are required to pay a flat tax rate of their turnover with just one quarterly form(GSTR-4) and one form(GSTR-9A) on annual basis under GST making the compliance quite easy.

The limit is only INR 50 Lacs for North Eastern States and Himachal Pradesh.

Tax applicable as below,

• 1% for Traders
• 2% for manufacturers
• 5% for restaurants

The other conditions to be eligible for scheme

• No Input Tax credit can be claimed by such a trader
• The trader can only do intra-state business i.e. within the same state
• It cannot sell goods that are exempted under GST
• If there are multiple businesses such as textile, electronics, restaurant, all should be registered together as one under the scheme
• ‘Composition Taxable Person’ should be put up on every signboard on the business as well as printed on every invoice generated.

Benefits of the Scheme

• Lesser Compliance Requirement (1 form on a quarterly basis and 1 form on annual basis) instead of three forms every month.
• Limited Tax liability
• High liquidity due to flat tax rates which are also low.

Short comings in the Scheme

• The trader will have to have taxes at normal rates for the goods that it buys from unregistered dealers under the Reverse Charge Mechanism.
• Inter State & e-commerce sales are not included thereby limiting the scope of businesses that can be covered.
• No Input Tax Credit available however tax rates are low.
• Service providers except Restaurants are kept out of the scheme

Indeed, this scheme looks attractive if looked at overall scheme of things for all the SMEs as they would be saving big on tax compliance, would find that tax rates are low and for government will bring a lot of traders/businesses under the tax regime giving a big push to its tax collections.

Government should work with industry representatives to popularize the scheme highlighting the merits of the scheme for SMEs. At the same time, they should look at increasing the businesses eligible for the scheme, increase the revenue turnover to INR 1 Cr. and include the inter-state & e-commerce players as well.