Feb 252017

What is composition?

Composition means to receive less than for what a person or authority entitled for. Composition provisions under taxing laws are made to give relief to the small traders from the tactical booking keeping and return formalities of the law so that to ensure that no person is given undue hardship.

Who are small traders for composition scheme?

As per section 8(3) only those registered taxable persons are eligible for the scheme whose aggregate turnover in the preceding financial year did not exceed Rs 50,00,000/-.  Thus, only those traders can take benefits of this scheme whose aggregate turnover is either less than or equal to Rs 50,00,000/-. Under this scheme trader shall pay an amount at the maximum rate of 1% (2.5% in case of manufacturer) and relived of maximum of his compliance burden under the act.

Silent features of the scheme:

  1. Composition of one out of three business of a person is not possible. The objective of this scheme is to provide relief from compliance over burden. Hence, composition scheme would become applicable for all the business verticals/registrations which are separately held by the person with same PAN.
  2. The taxable person engaged in interstate supply of goods / services can not opt for composition scheme.
  3. Taxable person opting for this scheme is not eligible for inter tax credit (ITC).
  4. Composition scheme supplier cannot issue a tax invoice and hence cannot pass forward the ITC.
  5. The composition supplier has to pay tax on all his purchases as a normal taxable person on all of his purchases made by him.
  6. The customer who buys goods from taxable person who is under composition scheme is not eligible for composition input tax credit because as mentioned above composition scheme supplier cannot issue a tax invoice.
  7. The taxable person under composition scheme is restricted from collecting tax.
  8. The term aggregate turnover is defined under sec 2(6) of model law. Accordingly aggregate turnover means – “the aggregate value of all taxable supplies, exempt supplies, exports of goods and/or services and inter-State supplies of a person having the same PAN, to be computed on all India basis and excludes taxes, if any, charged under the CGST Act, SGST Act and the IGST Act, as the case may be. Further, aggregate turnover does not include the value of inward supplies on which tax is payable by a person on reverse charge basis or value of inward supplies.
  9. Penal consequences: Taxable person who was not eligible for the composition scheme would be liable to pay tax, interest and in addition he shall also be liable to a penalty equivalent to the amount of tax payable.

Who could actually take benefit of composition scheme?

Now the important question arises is that who could actually take benefit of this scheme? Certainly any taxable person whose turnover is more than Rs 50,00,000/- cannot avail this scheme. Now other taxable person should carefully analyze the impact of this scheme on the sale price their product. In case difference between tax rate of purchase and tax on sale is more than 1%, than under normal provisions his products are costlier under normal provisions and composition scheme is batter in this case if he is dealing with ultimate customer.

While making selection for the scheme the customer with which he is dealing with should also be kept in mind if the person to whom sale is being made is not an ultimate customer.

Further, analysis shall be made with respect to all business held under the same PAN number and all his business verticals. As the scheme will either apply to all or to none. Hence, a very careful study needs to be made before selection of the scheme.