GST Composition Scheme for SMEs in India

In its 32nd GST Council meeting held on January 10, 2019, the government of India increased the turnover limit for availing composition scheme for goods, and expanded the scope of the scheme to include service providers.

The changes will come into effect from April 1, 2019.

Below, we discuss the updated GST composition scheme for businesses, its eligibility criteria, and the challenges and benefits for businesses registering into the scheme.

The GST Composition Scheme

The composition scheme is a system under the Goods and Services Tax (GST) Act that allows suppliers of goods (other than exempt goods), and service providers to file their GST returns at a fixed rate.

Eligibility criteria for the composition scheme

This scheme is of particular interest to small and medium enterprises (SMEs), although it can be accessed by any taxpayer whose turnover on the ‘taxable supplies of goods’ does not exceed INR 1.5 crore (US$ 215,269).

From April 1, 2019, the composition scheme will also be available for suppliers of services, or mixed suppliers of goods and services that meet the prescribed annual turnover threshold.

For Indian states in the northeast and the north Indian state of Uttarakhand, the threshold limit is INR 75 lakh (US$ 107,634).

The turnover of all business verticals under the registered PAN must be taken cumulatively to decide eligibility. The supply of goods must be intra-state and all business verticals be included. The scheme, however, does not impose any restrictions on procuring goods from other states.

Find Business Support

Tax Advisory Services

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.  

To enable easy compliance under composition scheme, the 32nd GST Council meeting has announced filing of one annual GST return. The payment of taxes will remain quarterly.

Taxpayers who fail to meet the criteria for the scheme at any time during the financial year, or wish to opt out of the scheme must file the form GST CMP – 04.

Registered persons who are required to file form 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 must file form GST CMP – 02 with the government, using the online GSTN portal. The indication to remain in the scheme must be made before every financial year (FY). For the FY 2019-20, the last date to apply for the composition scheme is March 31, 2019.

Thereafter, Form GSTR 4 needs to be filed by the 18^th 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: 

• INR 50 (US$0.72) per day; or,
• INR 20 (US$0.29) per day in case of nil returns.

For GSTR 9A, late fees will be charged at:

• INR 200 (US$2.88) per day; or,
• INR 100 (US$1.44) per day for nil returns.

The maximum amount that can be charged for delayed filing is INR 5,000 (US$72). However, an additional 18 percent annual interest on the tax owed is also levied.

The government imposes heavy penalty for tax avoidance under the scheme. That is, when the businesses register under the scheme without meeting the prerequisites. The penalty includes up to 100 percent of the taxes levied on the company. .

Challenges and benefits of the Composition Scheme

Composition Scheme makes filing of GST returns easy for small businesses. Registered taxpayers under the scheme can file returns annually, as opposed to monthly for others, which greatly reduces the compliance burden. It also reduces the need for details such as issuance of invoices, and books of records – making the process of filing the GST returns simpler.

Related Reading

GST Update: Back-Office Support Services to be Taxed in India

Besides, the limited tax liability, and reduced tax rate offer high liquidity that small companies can use to widen their business.

However, the biggest disadvantage of composition scheme is that it does not permit businesses to engage in inter-state sale. The fact that exports of goods is also considered an inter-state sale under GST, the businesses opting for the scheme must supply only within the state they are registered in.  

Besides, the scheme bars taxpayers from availing input tax credit on purchases, which makes selling to larger firms difficult for SMEs.

Other challenges for businesses option for the scheme include non-eligibility to supply exempted goods, as well as non-eligibility to supply goods through e-commerce portals.

Editor’s Note: This article was originally published in April, 2018, and is updated on March 14, 2019 to include the latest developments.

• Previous Article List of Countries That Have a DTAA with India
• Next Article Audit in India – New Issue of India Briefing Magazine Out Now