Introduction
The Goods and Services Tax (GST) law provides a simplified composition scheme for small businesses. This scheme allows them to pay tax at a lower rate and with fewer compliance requirements. Businesses with a limited annual turnover can benefit from this scheme, but only if they meet specific conditions.
What Is The Eligibility for the Composition Scheme
A registered person can opt for the composition scheme if their aggregate turnover in the previous financial year does not exceed ₹50 lakh. The government, based on the recommendations of the GST Council, can increase this limit to ₹1.5 crore through a notification. To qualify, the person must not supply services, except to a limited extent, either up to 10 percent of their turnover or ₹5 lakh, whichever is higher. They should not supply goods that are exempt from GST. They must avoid making inter-state outward supplies. They cannot make supplies through e-commerce operators who are required to collect tax at source under Section 52. They must also not manufacture any goods that the government has notified as ineligible under this scheme. Additionally, if a taxpayer has multiple GST registrations under one PAN, then all such registrations must collectively opt for the scheme.
What Are The Tax Rates Under the Composition Scheme
Taxpayers who qualify must pay tax at a fixed rate based on their type of business. Manufacturers are required to pay tax at one percent of their turnover in the state or union territory. Businesses that supply food or drinks, except alcoholic beverages, must pay tax at the rate of two and a half percent. Other eligible suppliers must pay half a percent of their turnover within the state or union territory. These rates apply only to intra-state supplies.
What Are The Conditions and Restrictions
Once a registered person opts for the composition scheme, they cannot collect GST from their customers on their outward supplies. They also lose the benefit of claiming input tax credit on their purchases. If their turnover exceeds the prescribed limit during the financial year, their option to pay tax under this scheme lapses immediately. If a person who is not eligible still opts for the scheme, the proper officer can demand payment of the due tax along with a penalty. The proceedings under Section 73 or 74 of the Act will apply in such cases.
Conclusion
Section 10 of GST Act, composition scheme offers a practical and low-tax option for small businesses. It reduces paperwork and simplifies tax calculations. However, taxpayers must carefully assess their eligibility and business model before opting for it. Violating the rules of the scheme can result in tax liability and penalties.
