7.
Explanation
The Composition Levy Scheme is a simplified taxation scheme under the Goods and Services Tax (GST) system, primarily designed for small businesses with a turnover below a specified threshold. Here are the key provisions for the Composition Scheme and the payment of tax under it:
Provisions for Composition Scheme:
1. Eligibility: To be eligible for the Composition Scheme, a business must have a turnover below a prescribed threshold, which varies by country. In India, as of my last knowledge update in September 2021, the threshold was Rs. 1.5 crores (for special category states, it was Rs. 75 lakhs).
2. Limited Tax Liability: Businesses under the Composition Scheme are subject to a lower rate of GST compared to the regular taxpayers. They pay a fixed percentage of their annual turnover as GST instead of tax on individual transactions.
3. No Input Tax Credit (ITC): One of the trade-offs of this scheme is that businesses registered under composition are not allowed to claim Input Tax Credit (ITC) on the GST paid on their purchases. This simplifies the compliance process but may result in higher costs for them.
4. Limited Compliance: The compliance requirements are reduced for businesses under the Composition Scheme. They need to file simplified quarterly returns, instead of the detailed monthly returns required for regular taxpayers.
5. Not for All Businesses: The scheme is not available to all businesses. Certain categories, like service providers, are typically not eligible for the Composition Scheme.
Payment of tax under the Composition Scheme follows specific provisions:
1. Quarterly Payments: Businesses registered under the Composition Scheme pay GST on a quarterly basis. They must file quarterly returns and pay taxes by the prescribed due dates.
2. Fixed Percentage: The GST rate for businesses under the Composition Scheme is a fixed percentage of their annual turnover. This percentage varies by country and may be subject to change as per government regulations.
3. No ITC: As mentioned earlier, businesses opting for this scheme cannot claim Input Tax Credit, meaning they cannot offset the tax paid on their purchases against the tax they collect on sales.
4. No Inter-State Supply: Under the Composition Scheme, businesses are not allowed to engage in inter-state supplies. They can only make intrastate supplies.
5. Threshold Turnover Limit: The Composition Scheme is available to businesses with an annual aggregate turnover below a specified threshold. This threshold may vary from country to country and can be revised periodically. In India, for example, the threshold for the Composition Scheme was Rs. 1.5 crore (or Rs. 75 lakhs for special category states) as of my last knowledge update in September 2021.
6. Ineligibility for Certain Businesses: The Composition Scheme is generally not available to all types of businesses. Certain categories, like service providers or those engaged in making inter-state supplies, may be ineligible for the scheme. It’s important for businesses to check their eligibility
before opting in.
7. No Collection of Composition Tax: Businesses registered under the Composition Scheme cannot collect composition tax separately from their customers. The composition tax is to be borne by the business owner.
8. No Input Tax Credit on Previous Stock: When a business opts for the Composition Scheme, it cannot claim Input Tax Credit (ITC) on the stock of goods held as of the effective date of composition. This is to prevent double taxation.
9. Continuous Compliance: Businesses under the Composition Scheme must continue to file quarterly returns and pay taxes for as long as they remain eligible. If they exceed the turnover threshold, they must transition to regular GST compliance.
10. Cancellation of Scheme: Tax authorities have the right to cancel a business’s composition scheme if they find that the business is not eligible or has violated the scheme’s provisions.
Adhering to these provisions is crucial to avoid penalties and maintain compliance.