Contraventions under GST Composition Scheme

Composition Scheme under the Goods and Services Tax (GST) is a simple option for small traders, businesses and startups to transform & switch from unorganized to organized sector under GST. The composition levy is an alternative method of levy of tax designed for small taxpayers whose turnover is up to Rs. 75 lakh (Rs. 50 lakh in case of few specified states). The objective of composition scheme under GST is to bring simplicity and to reduce the compliance cost for the small taxpayers.

Moreover, it is optional and the eligible person opting to pay tax under this scheme can pay tax at a prescribed percentage of his turnover every quarter, instead of paying tax at normal rate. There are about 51 million MSME businesses as per the report of Ministry of Micro, Small and Medium Enterprises who can get benefit of the Composition Scheme under GST.

Let us understand an example regarding the composition scheme under GST as well as the impact of contravention:

Take a Restaurant in Bengaluru whose declared turnover in previous FY is Rs. 65 lakh. It decides to opt for Composition scheme under GST and the Restaurant owner is very happy, as there is:

  • No need to collect GST at 12% from customer (being a non-air-conditioned restaurant) but a flat rate of 5 % on the turnover shall be payable by owner;
  • Since the charges at restaurant are lesser than the competitors, customers are pouring in.
  • No need to file invoice-wise details in GSTR, no monthly returns.

In the above example if the turnover crosses Rs.75 lakhs in the current year they have to withdraw composition scheme and be registered as a normal Tax payer by filing FORM GST CMP-04 & statements of inputs in FORM GST ITC-01.

Oversight of registration as normal tax payer would amount to contravention.

To initiate the process, the officer would first send a show cause notice to the Restaurant in FORM GST CMP-05.The Restaurant would have 15 days to respond in FORM GST CMP-6 and if the restaurant fails to prove that its turnover is less than Rs. 75 lakhs, then the officer would pass an order to withdraw from GST Composition Scheme & the provisions of section 73 & 74 applicable for determination of tax and penalty.

Now from the above example, let us understand the eligibility of the GST Composition Scheme as well as the Contraventions under GST for this scheme:

Conditions to avail GST Composition Scheme

  • The Aggregate Turnover shouldn’t cross Rs. 75 lakh (Rs.50 lakh in case of Arunachal Pradesh,Assam,Manipur,Meghalaya,Mizoram,Nagaland,Sikkim,Tripura,Himachal Pradesh)
  • Intimation for payment of tax under GST Composition scheme needs to be made by the taxable person electronically in FORM GST CMP- 01 or FORM GST CMP- 02.
  • In Form GST CMP-03, a provisionally registered person should furnish details of stock including stock from unregistered person as on day preceding the day to opt for composition scheme. For Ex If a manufacturer whose turnover is Rs. 45 lakh wsihes to opt for composition scheme from 1st August 2017, should furnish the details of stock as on 31st July 2017;
  • Only Restaurant/Caterer services or manufacturer of goods other than Ice cream, Pan Masala or Tobacco products are eligible for composition scheme.
  • Registered Persons shall not make Inter-state supply (Selling to other states), Should not sell through E commerce operator (Like selling through Amazon or Flip kart), Should not be a non-resident, should not supply exempted goods (Like vegetables, Salt, Khadi yarn etc.)

Conditions after registration for Composition Scheme under GST

On top of the bill, they must mention “Composition taxable person, not eligible to collect tax on supplies”.

Also they must mention the words “Composition taxable person” on

  • Every notice or signboard displayed at principal place of business;
  • Every notice or signboard at every additional place of business.

Contraventions in Composition Scheme under GST

  • If any Registered Person mistook the benefits of the Composition Scheme under GST like registering despite turnover crossing 75 lakh or selling through E commerce portal or being a non-resident or who didn’t withdraw voluntarily through FORM GST CMP-04 & statement FORM GST ITC-01 would receive a show cause notice in FORM GST CMP-05 from an officer to respond within 15 days.
  • The Registered person should reply in FORM GST CMP-06 to the said show cause notice.
  • Within 30 days of the receipt of such reply, the officer in FORM GST CMP-07 shall pass an order either accepting the reply or denying the composition scheme for the violation & the provisions of section 73 & 74 applicable for determination of tax and penalty.

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