FAQ on the GST in India

Last updated on 27 October, 2017

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Composition Scheme

Business owners:

Registration

What is the threshold to register for the composition scheme?

To be eligible for the composition scheme, a business must have an annual turnover of less than Rs. 1 crore (less than Rs. 75 lakhs for North Eastern states).

What is the tax rate under the composition scheme? 

The composition rates are different based on the type of business.

  • For traders it’s 1%.
  • For manufacturers it’s 2%.
  • For the restaurant sector it’s 5%. 
If I own multiple businesses registered under a single PAN, do I have to register them all under the composition scheme?

Yes, if you have multiple businesses, you’ll have to register them all under the composition scheme. You can’t register some of your businesses under the composition scheme and pay taxes under the normal tax scheme for others.

If my business venture has multiple branches across India, can I register only one branch under the composition scheme?

No, if you  opt for  the composition scheme, you must register all of your branches under the scheme. 

Can I sign up for the composition scheme if I sell my supplies to other states?

No, the composition scheme is only available if the business is not involved in inter-state sales transactions.

Turnover

How do I calculate my aggregate turnover for the composition scheme?

Businesses’ aggregate turnover is calculated differently under the composition scheme than it is under the normal tax scheme.

Use this formula to find the aggregate turnover of all of the businesses registered under a single PAN:  Aggregate turnover = Value of all supplies (taxable + exempt) - (Taxes + Value of purchases under reverse charge)

What happens if a compounding vendor’s turnover exceeds Rs. 1 crore during a year?

In this case, the business owner should withdraw from the composition scheme by filing the form GST CMP-04 within 7 days from the day on which the turnover threshold was exceeded. They will be liable to pay tax under the normal tax scheme starting  the following day . 

Are businesses under the composition scheme susceptible to audit?

No, audits are for businesses that have turnovers exceeding Rs. 2 crore. Businesses registered under the composition scheme do not fall under this category.

Transactions

Can compounding vendors buy supplies from other states? 

Yes. You can’t sell to other states as a compounding vendor, but you can buy supplies from other states

If a compounding vendor receives services from an unregistered person, are they liable to pay tax under the reverse charge mechanism?

Yes, the compounding vendor is liable to pay tax under the reverse charge mechanism. This can be done by filling Table 4 of form GSTR-4 while filing returns for the next quarter.

Can a compounding vendor supply goods to SEZ? 

No, such supplies are treated as inter-state sales transactions, so a compounding vendor is not allowed to supply goods to SEZ.

Can compounding vendors undertake job work?

No, the composition scheme is only available for suppliers of goods, and job work is categorised under services.  However, services provided by restaurants are excluded from this. 

Taxes and return filing

Can a compounding vendor collect tax from their customers?

No, a compounding vendor cannot collect tax from their customers.

Should I issue tax  invoices  for sales transactions? 

No. Since compounding vendors cannot collect tax from their customers or claim ITC on the supplies, they should issue bills of supply instead of tax invoices. 

How do I report that I’ve completed my tax payments for the quarter under the composition scheme?

You can do so by filing form GST CMP-01 or form GST CMP-02.  

What returns do compounding vendors need to file? 

Each business under the composition scheme will have to file a quarterly return (GSTR-4) [link] and an annual return (GSTR-9)[link]. 

Input tax credit

Can I avail ITC for the goods/services that I purchase/sell?

No, a compounding vendor cannot claim ITC on the goods or services that they purchase or sell. 

How is my ITC calculated if I migrate from the normal tax scheme to the composition scheme?

When a business owner migrates to the composition scheme, they must pay an amount equivalent to the value of the inputs held in stock on the day immediately before the migration. Any ITC remaining in the credit ledger after this payment will  be lapsed . The business owner should file form GST ITC-03 for the credits to be carried forward to the composition scheme.

If I opt for the composition scheme, can I carry forward my excess ITC from the previous tax regime to the GST regime?

No, a business owner opting for the composition scheme will not be able to carry forward excess ITC to the GST regime.

If I opt out of the composition scheme, how is my input tax credit calculated?

If a business owner migrates from the composition scheme to the normal tax scheme, the input tax credit will be calculated based on inputs, semi-finished goods, and finished goods held in stock. This can be done by filing form GST ITC-01 within 30 days of withdrawing from the composition scheme.

Switching between the schemes

Can I opt for the composition scheme at any time of the year?

No, a business owner can only register for the composition scheme during the beginning of the financial year (by filing form GST CMP-02).

Can I opt for the composition scheme when I initially register my business for GST?

The business owner can opt for the composition scheme by filling Part B of form GST REG-01 while registering under the GST regime.

Can a compounding vendor voluntarily opt out of composition scheme? 

Yes, a compounding vendor can voluntarily opt out of the composition scheme. To return to the normal tax scheme, file form GST CMP-04. Log on to your GSTN, navigate to Services, and choose Application for withdrawal from composition levy. Learn more about withdrawing from the composition scheme.

How many times can I switch between the composition scheme and the normal tax scheme?

A business owner can switch between the composition scheme and the normal tax scheme only once during each financial year.

Penalties and disqualification

Can my business be disqualified from the composition scheme?

If tax authorities believe that a business is wrongfully enrolled or not eligible, they may disqualify the business from the composition scheme or demand a penalty equal to the tax amount owed.

What penalties might businesses face under the composition scheme?

In case of late filing of the GSTR-4, the business owner will be fined Rs. 100 per day, up to a maximum of Rs. 5,000/-. Not furnishing returns for 3 consecutive tax periods may result in the business’s registration being cancelled by the tax authorities.

Customers:

How can I find out if a vendor is registered under the composition scheme?

You can log on to your GSTN to check a vendor’s registration. Click Search Taxpayer to search for any registered business owner.

Am I liable to pay tax to a compounding vendor for the supplies I purchase from them?

No, you don’t have to pay tax on supplies purchased from compounding vendors.

Can I avail ITC on supplies purchased from a compounding vendor?

No, you cannot avail ITC on supplies purchased from a compounding vendor.

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