The GST Council has decided to make several changes in the GST law in respect of small businessmen and particularly the composition scheme. Small businesses were facing severe problems in complying with the existing GST provisions. Composition scheme is an alternative method of levy of tax on small taxpayers. Dealers opting for composition are required to pay tax at a fixed rate without input tax credit (ITC) and the basic objective of composition scheme is to reduce compliance cost for small businesses. As per the present rules, persons doing supplies only within the same state can opt for composition. Composition tax rate for traders is 1% and for manufactures 2%. In case of restaurants it is 5%. Some manufacturers are not eligible to opt for composition (like makers of ice-cream, pan masala, tobacco products).
Previously, less compliance (regarding billing, record keeping, returns, etc.) was a major factor in favour of composition. However, now that returns to be filed by small taxpayers have been made quarterly instead of monthly, this aspect of less compliance is not much relevant for choosing between regular and composition options by small businessmen.
Changes proposed in composition
Increase in threshold limit: The threshold limit for availing composition option has been increased to annual aggregate turnover up to `1 crore as compared to the earlier turnover threshold of Rs 75 lakh. Similarly, threshold for special category states has been increased from Rs 50 lakh to Rs 75 lakh. This will make it possible for more number of taxpayers to avail the benefit of composition scheme.
Monthly choice: The option of availing composition as per the increased threshold shall be available to all eligible taxpayers (both migrated and new taxpayers) up to March 31, 2018. Previously this was available up to Sept 30, 2017. The option shall become operational from the month succeeding the month in which the option is exercised.
Exempt services eligible: Previously, dealers providing any exempt service were being considered ineligible for composition scheme. Now such persons who are otherwise eligible for availing the composition scheme and are providing any exempt service, shall be eligible for composition scheme.
Reverse charge mechanism on hold: Compliance with reverse charge mechanism under Section 9 (4) of CGST Act was proving very difficult for small businesses. The same has been suspended till March 31, 2018 and will be reviewed by a committee of experts. While the composition scheme is simple, it may not be suitable for businesses with turnover below Rs 1 crore. The main factors to be considered are as follows:
Nature of business: Composition dealer cannot claim input tax credit even if he makes taxable purchases from a regular registered dealer. Moreover, if a composition dealer is working on B2B model, his buyers (who are registered as regular dealers) will also not get any credit of tax paid which will increase their cost. Such buyers will naturally avoid purchases from a composition dealer. Broadly, it can be said that composition is more suitable for retailers supplying to ultimate consumers who are not bothered about ITC on their purchases.
Tax cost impact comparison: The advantage of having a single rate in case of a composition dealer is that he need not worry about taxability/ tax rates for each product. But there is also a disadvantage as composition dealer has to pay tax at fixed percentage on his total sales including exempt goods. If a dealer also supplies goods which are exempt and the proportion of exempt goods is more (milk, curd, salt, bread, printed books, etc.) it may be better for him not to go for composition. If he goes for regular registration, he will pay tax as per rates applicable to each of the goods and hence he will not have to pay tax on exempt supplies. The best way to arrive at a proper decision will be to compare the tax impact for the dealer under the two options—regular and composition.
The author is a chartered accountant. Extracted from Tax Guru