7 Mistakes to avoid under GST Composition Scheme
Section 8 of the Model GST law contains provision for composition scheme permitting the tax payer to opt for payment of GST as a fixed percent on turnover instead of paying tax under regular provisions of law. It is applicable to a registered taxable person having aggregate turnover of less than Rs. 50 lakh. It is advisable to make the application under GST even where the person is under composition under the current VAT law. Reverse charge mechanism u/s 7(3) would apply even for such persons. Presently, several state VAT laws permits composition, but not available for services.
Mistakes to avoid under GST Composition scheme-
- Making any interstate sale
The composition scheme is only available to GST registrants operating within a single state. As per law, as soon as you make the interstate sale, the composition benefits cease to exist and you are now liable to the standard tax rate.
Now, the total amount shall be in accordance with section 66/67, which would require you to pay higher taxes and a penalty may also apply. All traders, must therefore, be wary before making such deals.
- Not seeking permission
If you want to avail the benefits of composition scheme i.e. lower tax rate and lesser compliance, then you should first apply for it. Also once you have applied, you cannot change the process during the year. You can only choose to avail or not to avail the benefit at the beginning of the year, and after that to continue throughout the years.
- Casual registration
Many times, people start their business by just taking local registrations such as shop and establishment, service tax, then will apply for GST in future they think.
As per law, they are not mandatorarily covered under GST and hence, they are not liable for the composition scheme. So startups for the easy option under GST, we have bad news for you.
- Composition limit
The limit for the GST composition is Rs. 50 lakh. Anything above that amount is liable to be taxed at the standard rate.
For example, suppose the total supply made during the year comes to around Rs. 48 lakh. You also happen to provide goods, at no cost, to your family to the amount of Rs. 4 lakh. While you may not take into account the free services you provided to your family, your total supply turnover, for the government, stands at Rs. 52 Lakh. The amount is liable to be taxed under the standard rate. If you would be in default for not filing returns properly and be levied with a maximum penalty of Rs. 5,000.
- Reverse charge mechanism
Under goods and services tax, there is a concept of reverse charge. The reverse charge brings in the new rule of the payment coming from the supplier of goods and services. This makes the person covered under GST composition scheme to be liable to pay taxes at the standard rate, rather than at the discounted composite rate. The standard rate would mean that it adds to the cost of the person paying it, since they cannot claim the same as input tax credit.
- No input tax credit
If you avail the GST composition benefits, there can be no availing of input credit.
- Not filing returns on time
While this has been a rule, which many startups and other businesses floundered, the same is set to invite a heavily penalty under GST. The government, in a move marked to stamp the success of the GST scheme, would charge Rs, 100 per day as the late charges, which is subject to maximum penalty of Rs. 5000 per return.
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