GST India: Composition/Compounding Scheme

Current VAT regime allows for dealers to obtain registration under Composition/Compounding scheme wherein they would be exempted from maintaining books of accounts. This is done to encourage small enterprises with a turnover cap mandated at Rs 50 Lakhs. They would be liable to pay a turnover tax @ 1%. The turnover limit and the tax rate (1% to 4%) vary from state to state. Typical businesses covered under the scheme are:

1. ·         Retailers
2. ·         Hotels / Restaurant / Caterers / Bakery
3. ·         Canteens / Clubs
4. ·         Works contractors
5. ·         Stone crushing units

Salient Features (existing scheme):

• 1.      A composition dealer cannot collect tax from customers meaning he cannot issue a tax invoice.
• 2.      Composition dealer cannot claim input credit on his purchases.
• 3.      Composition dealer cannot obtain CST registration or in other words, cannot trade interstate.
• 4.      Composition dealer cannot import or export goods and services.
• 5.      Regular dealers purchasing from composition dealers also cannot claim input credit.
• 6.      Composition dealer need not maintain detailed books of account as prescribed under VAT.

Composition under GST:

All the salient features of the existing Compounding/Composition scheme are likely to be continued in GST regime. The cap on turnover will be Rs 50 Lakh and suggested floor rate for turnover tax would be 0.5%. However, the pan-India turnover of a legal entity would be considered for opting the scheme (not state-wise).

Salient Features:

• 1. Single registration under both centre (CGST) and state (SGST). Easy migration of existing registration to GST regime.
• 2.      No physical verification of premises and no pre-deposit.
• 3.      Simplified return format and quarterly filing only.
• 4.      Lenient penal provisions and Audit for only 1-2% of the cases.
• 5.      Composition dealers would be moved to regular upon crossing the turnover limit anytime during the financial year. Regular dealer can however opt for composition only at the end of the financial year. 
• (Views expressed are strictly personal in nature)