In India, the Goods and Services Tax (GST) is a significant tax reform that has streamlined the indirect tax system. It has replaced multiple indirect taxes with a single, unified tax structure that is applicable to all goods and services. Under GST, businesses are classified as regular taxpayers and composition dealers. In this blog, we will discuss the concept of a composition dealer in detail.
What is a Composition Dealer?
A composition dealer is a registered taxpayer under GST who has opted for the composition scheme. This scheme is a tax compliance scheme that is designed to simplify the tax filing process for small businesses with an annual turnover of up to Rs. 1.5 crores. It allows them to pay a fixed percentage of their turnover as tax instead of following the regular GST compliance process.
Eligibility Criteria for Composition Dealer
To become a composition dealer, a business must fulfill the following eligibility criteria:
- Annual turnover of up to Rs. 1.5 crores.
- The business should deal only in goods.
- The business should not be engaged in inter-state supplies.
- The business should not be engaged in the supply of non-taxable goods.
- The business should not be engaged in the supply of goods through e-commerce operators.
Advantages of Being a Composition Dealer
There are several advantages of opting for the composition scheme:
- Simplified compliance: Composition dealers have to file quarterly returns instead of monthly returns, which reduces the compliance burden.
- Lower tax rate: Composition dealers are required to pay tax at a lower rate than regular taxpayers. The tax rate for a composition dealer is 1% for manufacturers, 2% for traders, and 5% for restaurants.
- Cash flow management: Since composition dealers pay tax on a fixed percentage of their turnover, it helps them manage their cash flow better.
Disadvantages of Being a Composition Dealer
While the composition scheme has its advantages, it also has a few disadvantages that businesses must consider before opting for it:
- Limited business operations: Composition dealers are not allowed to engage in inter-state supplies, supply of non-taxable goods, or supply of goods through e-commerce operators. This limits their business operations.
- No input tax credit: Composition dealers are not allowed to claim input tax credit on their purchases. This means that they have to bear the entire tax burden, which can increase the cost of goods sold.
- Restricted growth: Since the turnover limit for composition dealers is Rs. 1.5 crores, businesses that want to grow beyond this limit may have to switch to the regular tax compliance process.
Registration Process for Composition Dealer
The registration process for becoming a composition dealer is quite simple. Here are the steps to follow:
- Log on to the GST portal and click on “New Registration.”
- Select “Composition” as the type of taxpayer and fill in the necessary details.
- Provide your PAN, mobile number, email address, and Aadhaar details.
- Upload the necessary documents, such as proof of business address, bank account details, and photograph.
- Submit the application and wait for approval.
Once the application is approved, the business can start paying tax under the composition scheme.
Restrictions for Composition Dealer
Composition dealers are subject to certain restrictions under the GST law. Some of the major restrictions are as follows:
- They cannot issue a tax invoice. Instead, they must issue a bill of supply.
- They cannot charge tax separately on their invoices.
- They cannot claim input tax credit on their purchases.
- They must pay tax on their entire turnover, including exempt supplies.
- They cannot supply goods through e-commerce operators.
- They cannot supply goods outside their state.
Penalties for Composition Dealers
Composition dealers are subject to penalties if they violate any of the rules and regulations under the GST law. Some of the common penalties that composition dealers may face include:
- Late payment of tax: If a composition dealer fails to pay the tax due by the due date, they may be subject to a penalty of 18% per annum. The penalty is calculated from the due date until the date of payment.
- Late filing of returns: If a composition dealer fails to file their returns by the due date, they may be subject to a late fee of Rs. 200 per day, up to a maximum of Rs. 5,000. The penalty is levied separately for each return that is filed late.
- Wrong declaration: If a composition dealer makes a wrong declaration in their returns or invoices, they may be subject to a penalty of 100% of the tax due or Rs. 10,000, whichever is higher.
- Non-maintenance of records: If a composition dealer fails to maintain the necessary records, they may be subject to a penalty of Rs. 10,000 or 2% of turnover, whichever is higher.
It is important for composition dealers to comply with the GST law to avoid penalties and other legal consequences.
Challenges Faced by Composition Dealers
While the composition scheme has its advantages, it also poses certain challenges for businesses. Some of the major challenges faced by composition dealers include:
- Limited business operations: As mentioned earlier, composition dealers are not allowed to engage in inter-state supplies, supply of non-taxable goods, or supply of goods through e-commerce operators. This limits their business operations and may impact their growth.
- No input tax credit: Composition dealers are not allowed to claim input tax credit on their purchases. This means that they have to bear the entire tax burden, which can increase the cost of goods sold.
- Increased compliance burden: Although the compliance requirements for composition dealers are lower than regular taxpayers, they still need to maintain records and file quarterly returns. This may be challenging for businesses that do not have the necessary resources or expertise.
- Higher tax rate for restaurants: The tax rate for restaurants under the composition scheme is 5%, which is higher than the tax rate for manufacturers and traders. This may impact the profitability of restaurants and may discourage them from opting for the composition scheme.
Conclusion
The composition scheme is a beneficial tax compliance scheme for small businesses with a turnover of up to Rs. 1.5 crores. It simplifies the tax filing process and reduces the compliance burden for businesses. However, it also has its limitations and challenges, and businesses must weigh the advantages and disadvantages before opting for the scheme. It is important for composition dealers to comply with the GST law to avoid penalties and other legal consequences.
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Frequently Asked Questions (FAQs)
Q1.) Â What is the composition scheme under GST?
The composition scheme is a simplified tax compliance scheme for small businesses with a turnover of up to Rs. 1.5 crores. Under this scheme, businesses can pay a fixed percentage of their turnover as tax instead of the regular GST rates.
Q2.) Â What are the documents required to register for the composition scheme?
To register for the composition scheme, a business needs to provide their PAN, GSTIN, Aadhaar number, bank account details, and details of their business activities.
Q3.) Â What is the validity of the composition scheme registration?
The registration for the composition scheme is valid for as long as the business meets the eligibility criteria.
Q4.) Â Is a composition dealer required to maintain records?
Yes, a composition dealer is required to maintain certain records, such as a record of all transactions and a stock register.
Q5.) Â What is the penalty for late payment of tax?
If a composition dealer fails to pay the tax due by the due date, they may be subject to a penalty of 18% per annum.
Q6.) Â Can a composition dealer switch to the regular GST scheme?
Yes, a composition dealer can switch to the regular GST scheme at any time by filing a form. However, they will not be able to switch back to the composition scheme for at least one year.
