GST Composition Scheme for SMEs in India
The composition scheme is a system under the Goods and Services Tax (GST) Act that allows suppliers of goods, other than exempt goods, and restaurant related service providers to file their GST returns at a fixed rate.
Eligibility criteria for the composition scheme
This scheme is of particular interest to SMEs, although it can be accessed by any taxpayer whose turnover on the ‘taxable supplies of goods’ does not exceed Rs 15 million (US$230,100).
For Indian states in the northeast and the north Indian state of Himachal Pradesh, the threshold limit is Rs 7.5 million (US$115,050).
The turnover of all business verticals under the registered PAN has to be taken cumulatively to decide eligibility. The supply of goods also needs to be intrastate and all business verticals must be included when applying for the scheme. However, there are no restrictions on procuring goods from other states.
If the turnover of the business exceeds the threshold amount during the financial year, the benefits of the composition scheme cannot be used, and the firm needs to file simple GST returns from this point onwards.
Taxpayers needs to file the form GST CMP – 04 if they want to opt out of the composition scheme or if they fail to meet the criteria for the scheme at any time during the financial year.
Registered persons who need to file GSTR 5, 6, 7, or 8 are not eligible for this scheme.
Form GSTR 4 and GSTR 9A
To opt into the scheme, the business needs to file form GST CMP – 02 with the government through the online GSTN portal. The indication to remain in the scheme needs to be made before every financial year.
This had to be done by March 31, 2018 for the financial year (FY) 2018-19.
Thereafter, Form GSTR 4 needs to be filed by the 18th of the month succeeding the quarter for which GST is being paid.
GSTR 9A is the form for annual returns for taxpayers under this scheme. Submission of this form is required by December 31 of the next financial year.
For GSTR 4, delayed filing will incur late fees charged at:
- Rs 50 (US$0.77) per day; or,
- Rs 20 (US$0.31) per day in case of nil returns.
For GSTR 9A, late fees will be charged at:
- Rs 200(US$3.07) per day; or,
- Rs 100 (US$1.53) per day for nil returns.
The maximum amount that can be charged for delayed filing is Rs 5,000 (US$76.70). However, an 18 percent annual interest on the tax owed also has to be paid.
Tax avoidance under the scheme – by registering when the business does not fit the prerequisites – is heavily penalized. Up to 100 percent of the taxes levied on the company can be charged as penalty.
Challenges and benefits of the composition scheme
Since taxpayers under this scheme have to file their returns quarterly, as opposed to monthly for others, it greatly reduces the compliance burden for SMEs. The details required to be furnished to file the GST returns are also simpler.
Although input credit cannot be claimed on purchases, and the tax liability rests solely on the supplier, the high liquidity and reduced tax rate make it an attractive option for SMEs.
However, the popularity of this scheme is questionable. Data from the latest economic survey found that 54.3 percent of businesses eligible for the composition scheme chose to be regular filers instead. Since businesses under this scheme are not eligible for input credit, it makes selling to larger firms difficult for them, which in turn prompts them to file under the regular GST rules.
India Briefing is published by Asia Briefing, a subsidiary of Dezan Shira & Associates. We produce material for foreign investors throughout Eurasia, including ASEAN, China, Indonesia, Russia, the Silk Road, & Vietnam. For editorial matters please contact us here and for a complimentary subscription to our products, please click here.
Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout India and the Asian region. We maintain offices in Delhi and Mumbai and throughout China, South-East Asia, India, and Russia. For assistance with India investment issues or into Asia overall, please contact us at firstname.lastname@example.org or visit us at www.dezshira.com.