GST Composition Scheme for Small Businessmen : Analysis

By | October 1, 2016
(Last Updated On: April 27, 2017)

GST Composition Scheme

Section 8 of Model GST law deals with  GST Composition Scheme

{ Read GST Composition Scheme Analysis after CGST Act 2017 ]

Key Points about GST Composition Scheme

(a)         GST Composition Scheme is based on recommendations of the GST Council

(b)         GST Composition Scheme is subject to prescribed conditions and restrictions (to be prescribed)

(c)          The proper officer of CGST/SGST shall permit the taxpayer to pay/assessee under this GST Composition Scheme instead of paying at full rate. In existing VAT laws or service taxes, this condition of officers permission is not there.

(d)         Such permission will be granted only to the registered person and not to unregistered person. Because of this registration is pre-condition to avail of the GST Composition Scheme .

(e)          The threshold limit for eligibility of this GST Composition Scheme is Rs. 50 Lakhs. Here again clarity is missing in the section whether said turnover limit refers to previous/preceding year which is similar to existing indirect tax laws or it refers to expected turnover in the current financial year, which makes practically scheme unattractive/unworkable owing to heavy financial/penal implications even for small deviations, etc.,

(f)          The exact tax rate is not specified in the section. Only minimum rate of 1% is mentioned in the section. The exact rate will be prescribed (may be by way of notification/rules)

(g)         Whether aforesaid rate is only CGST or combined rate of both CGST/SGST is not clear. However, it can be inferred that since the rate is mentioned in CGST law, it refers to only CGST rate. However, this would be clear only when SGST law is out or any clarification in this regard is issued.

(h)          Tax rate shall be applied on turnover. Section simply refers to ‘turnover’ and not to the ‘taxable turnover’. Because of this GST may have to be paid under this GST Composition Scheme even on non-taxable supplies. This lapse may be unintended and can expect replacement with ‘taxable turnover’.

(i)           Sometimes it may happen that total turnover is Rs.40 Lakhs, out of which majority of turnover is exports or is exempted but there will be some local sales like old furniture or scrap sales, etc., which may come around Rs.1 lakh; then GST payable thereon would be rate around Rs. 40,000/- (assuming 1% rate) thereby making effective tax rate at 40%, which would be more than expected regular rate of GST.

(j)           Permission to assess under this GST Composition Scheme  is not eligible for the persons effecting any inter-State supplies of goods/services. Section says ‘effects inter-State supply’ which implies that both, output & input should be within one State to avail of this GST Composition Scheme . As a result, person who has opted for ‘composition scheme’ shall not make any sales/render services to outside the State and simultaneously, shall not procure goods/services from outside the State.

(k)          The scheme is PAN based, i.e., all the units having same PAN shall assess under this scheme, that is, if any one of the units wishes to assess under regular scheme not under this scheme then all other units would be ineligible for composition scheme under GST.

(l)           Person assessing under this GST Composition Scheme shall not collect any tax from the recipient of supplies. Consequently, recipient will not get any credit of tax paid under this GST Composition Scheme (by supplier).

(m)        Similarly, supplier assessing under this GST Composition Scheme is not eligible for any input tax credit on his procurements (goods/services). As a result, total tax dues shall be paid in cash.

(n)         In case GST Composition Scheme is wrongly availed, then proper officer can demand differential tax (difference between tax at regular scheme & under this scheme) along with equal penalty. This is too harsh & heavy. For instance, person availed this GST Composition Scheme on notion that there would not be any inter-State supplies (both procurements & output) but during later part of the year such inter-State supplies are made for whatever reasons; it may be (like urgent business need or customer specification to use particular State raw materials, etc.,) then the implications are heavy as he has to pay GST on all his supplies at full rate of GST along with 100% penalty, apart from obvious interest liability. Further, this differential tax may have to be paid from his own pocket as might have missed to collect from his customers (because he is under this scheme at that time).

(o)          Such penalty shall be levied only after affording a reasonable opportunity of being heard to the taxable person being penalized.

(p)         In addition to the above, liability under reverse charge may exist. This is because GST Composition Scheme overrides all provisions of law, except reverse charge that is levied under section 7(3) of the GST law.

(q)          Tax period & return period under GST Composition Scheme  are on a quarterly basis. The due date for payment of tax & filing of return is 18th of month succeeding the particular quarter. For example, for the quarter ending 30th June (Apr-Jun) due date is 18th July.

(r)         GST Composition Scheme is mainly beneficial for the persons making direct sales/services to end consumer, who cannot avail of any input tax credit.



Education Guide on Goods & Service Tax (GST)


S. No. Title of the Post
1. Goods and Services Tax (GST): An Overview
2 Levy of GST & Exemption from Tax
3. GST Registration
4. Meaning and Scope of Supply
5 Time of Supply
6 Valuation in GST
7. GST Payment of Tax
8 Electronic Commerce under Goods & Service Tax (GST)
9 Job Work under Goods & Service Tax (GST)
10 Input Tax Credit under Goods & Service Tax (GST)
11 Concept of Input Service Distributor in Goods & Service Tax (GST)
12 Returns Process and matching of Input Tax Credit under GST
13 Assessment and Audit under GST
14 Refund under GST
15 Demands and Recovery under GST
16 Appeals, Review and Revision in GST
17 Advance Ruling in Goods and Service Tax (GST)
18 Settlement Commission in Goods and Service Tax (GST)
19 Inspection, Search, Seizure and Arrest under GST
20 Offences, Penalty, Prosecution & Compounding in GST
21 Integrated Goods & Service Tax (IGST) Act Overview
22. Place of Supply of Goods and Service under GST
23. Frontend Business Process on GST Portal
24. Transitional Provisions in Goods & Service Tax (GST)


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