Composition scheme or normal tax rates, a thought on GST impact on small business

Goods and Services Tax (GST) to be rolled out from July 2017, will have major impact on business practices as well as economy. Big companies have hired top consultants for smooth transition.

Small business owners, however will face many issues. First issue for small businesses will be to digest the fact that tax rates will be as high as 18% to 40%.

A large chunk of unorganized sector will become mainstream, however transition will not be so easy. Non-compliance could go up, as first time  filers have their own issues.

Here are some issues that small businesses may face at initial stage of GST roll out.

1. Complying with regulatory requirements such as monthly returns, sales, purchase uploads etc.
2. Reconciliation of input tax credit,
3. Reconciliation of sales and purchase data,
4. Handling E-way bills for transportation goods,
5. Accounting and audit compliance

These are some of the initial hurdles, however in long run GST is going to be a boon for everyone.

Deciding between composition scheme VS adopting normal provisions

Existing indirect tax laws such as VAT and Service tax have the concept of composition scheme, where a tax payer having turnover below certain limit can pay tax on invoice amount at a rate as law as 1%. Under composition scheme, tax payers have lesser compliance and returns in case of VAT laws are quarterly.

Similar provisions are contained under GST Law. Small supplier having supplies upto 75 Lakhs can use these provisions to pay tax at lower rates fixed by the act.

Reading of section 10 of CGST ACT, 2017 will give more idea on how composition levy will be handled under GST Law. This section contains provisions related to applicability and tax rates.

Further a reading of Chapter IX and its section will give more insights into procedural compliance of returns and supplies, purchase uploads.

Analysing section 10 - Composition levy of CGST Act, 2017

Section 10 contains the provisions applicable to composition scheme and tax rates are also fixed under this section.

Sub-section (1) and (2) of section 10 prescribe that a person can pay tax at rates prescribed in lieu of tax payable by him (instead of normal rates at composition rates), subject to:

• Supplies made must not exceed 75(changed to 150 lakhs) Lakhs in a financial year,
• Sub-sections (3) and (4) of section 9 ( reverse charge mechanism ) are still applicable.
• supplier is not engaged in the supply of services other than supplies referred to in clause (b) of paragraph 6 of Schedule II
• supplier is not engaged in making any supply of goods which are not leviable to tax under this Act
• supplier is not engaged in making any inter-State outward supplies of goods (changed)
• supplier is not engaged in making any supply of goods through an electronic commerce operator who is required to collect tax at source under section 52; and
• supplier is not a manufacturer of such goods as may be notified by the Government on the recommendations of the Council
• Provided that where more than one registered persons are having the same Permanent Account Number (issued under the Income-tax Act, 1961), the registered person shall not be eligible to opt for the scheme under sub-section (1) unless all such registered persons opt to pay tax under that sub-section. - A person if having more than one supply location, all such registered locations should opt under this scheme, it cannot be adopted selectively.

It is clear that persons engaged in Inter state trades are not allowed to opt in this scheme. Even E-commerce operators cannot opt in this scheme.

Rates prescribed under clauses of sub-section (1) of section 10 are:

(a) one per cent. changed to half percent of the turnover in State or turnover in Union territory in case of a manufacturer,
(b) two and a half per cent. of the turnover in State or turnover in Union territory in case of persons engaged in making supplies referred to in clause (b) of paragraph 6 of Schedule II, and
(c) half per cent. of the turnover in State or turnover in Union territory in case of other suppliers,

The option availed of by a registered person under sub-section (1) shall lapse with effect from the day on which his aggregate turnover during a financial year exceeds the limit specified under sub-section (1) - Limit as of now is Rs. 75 Lakhs, however government can increase it upto 1 Crore.

A taxable person to whom the provisions of sub-section (1) apply shall not collect any tax from the recipient on supplies made by him nor shall he be entitled to any credit of input tax.

If the proper officer has reasons to believe that a taxable person has paid tax under sub-section (1) despite not being eligible, such person shall, in addition to any tax that may be payable by him under any other provisions of this Act, be liable to a penalty and the provisions of section 73 or section 74 shall, mutatis mutandis, apply for determination of tax and penalty.

Analysing Chapter IX of CGST Act, 2017 and implications on supplier opting composition levy

Chapter IX of CGST ACT, 2017 deals with Returns. It contains following sections:

• Section 37 - Furnishing details of outward supplies
• Section 38 - Furnishing details of inward supplies
• Section 39 - Furnishing of returns
• Section 40 - First return
• Section 41 - Claim of input tax credit and provisional acceptance thereof
• Section 42 - Matching, reversal and reclaim of input tax credit
• Section 43 - Matching, reversal and reclaim of reduction in output tax liability
• Section 44 - Annual return
• Section 45 - Final return
• Section 46 - Notice to return defaulters
• Section 47 - Levy of late fee
• Section 48 - Goods and services tax practitioners

Lets check what each section imposes or provide relief to suppliers opting composition levy scheme of the Act.

Section 37 - Furnishing details of outward supplies

37. (1) Every registered person, other than an Input Service Distributor, a non-resident taxable person and a person paying tax under the provisions of section 10 (Composition scheme) or section 51 or section 52, shall furnish, electronically, in such form and manner as may be prescribed, the details of outward supplies of goods or services or both effected during a tax period on or before the tenth day of the month succeeding the said tax period and such details shall be
communicated to the recipient of the said supplies within such time and in such manner as may be prescribed:

Supplier opting composition scheme are not required to file the details of outward supplies (Sales). Every registered supplier need to furnish outward supplies details other than exempted above and it includes suppliers opting composition levy.

Section 38 - Furnishing details of inward supplies

38. (1) Every registered person, other than an Input Service Distributor or a non-resident taxable person or a person paying tax under the provisions of section 10 or section 51 or section 52, shall verify, validate, modify or delete, if required, the details relating to outward supplies and credit or debit notes communicated under sub-section (1) of section 37 to prepare the details of his inward supplies and credit or debit notes and may include therein, the details of inward supplies and credit or debit notes received by him in respect of such supplies that have not been declared by the supplier under sub-section (1) of section 37.
(2) Every registered person, other than an Input Service Distributor or a non-resident taxable person or a person paying tax under the provisions of section 10 or section 51 or section 52, shall furnish, electronically, the details of inward supplies of taxable goods or services or both, including inward supplies of goods or services or both on which the tax is payable on reverse charge basis under this Act and inward supplies of goods or services or
both taxable under the Integrated Goods and Services Tax Act or on which integrated goods and services tax is payable under section 3 of the Customs Tariff Act, 1975, and credit or debit notes received in respect of such supplies during a tax period after the tenth day but on or before the fifteenth day of the month succeeding the tax period in such form and manner as may be prescribed:

Section 38 exempts supplier opting composition levy scheme from filing the details of inward supplies and matching credits against outward supplies uploaded or furnished by his seller.

Section 39 - Furnishing of returns

 (2) A registered person paying tax under the provisions of section 10 shall, for each quarter or part thereof, furnish, in such form and manner as may be prescribed, a return, electronically, of turnover in the State or Union territory, inward supplies of goods or services
or both, tax payable and tax paid within eighteen days after the end of such quarter.

Every registered supplier is required to file monthly returns, however suppliers opting composition scheme are required to file quarterly  returns. This is a benefits given only to composition levied suppliers.

Above mentioned benefits are only available to suppliers registered under composition levy scheme.

Actually its not a scheme but special provisions contained in CGST act to give relief to small business owners.

Depending on these benefits you should decide whether you would like to opt for composition levy or would like to be taxed under normal provisions.

However there are also certain disadvantages of choosing composition provisions such as non availability of input credits on inward taxable supplies and also you cannot issue invoices with tax.

An invoice without tax, will be not be entertained by big companies and thus limiting your client base.