How to Switch to Composition Scheme | Tally Solutions

Switch to Composition Scheme

  • 1. What is GST composition scheme?
  • 2. What is composition levy?
  • 3. Switch to composition scheme
    • Process and Procedures
    • Effect on input tax credit while switching to composition scheme

1. What is GST composition scheme?

Goods and Service Tax composition scheme is a scheme for payment of GST available to small taxpayers whose aggregate turnover in the preceding financial year did not cross ₹ 1.5 Crores. In the case of 9 special category States, this limit is ₹ 75 Lakhs in the preceding financial year, namely [ Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Himachal Pradesh.]

However, if a taxable person is a manufacturer of ice-cream, pan masala or tobacco or tobacco products or if he is a service provider for services other than a restaurant, then such taxable person is not eligible for composition scheme.

2. What is composition levy?

Composition levy is an alternative method of levy of tax designed for small taxpayers whose turnover is up to ₹ 1.5 crores (Rs.75 lakhs for special category States, excluding J&K and Uttrakhand). It is a kind of turnover tax.

The prime motive of the scheme is to provide a simplified tax payment regime for the small tax payers. It is optional and is mainly for small traders, manufacturers and restaurants.


3. Switch to composition scheme

Process and Procedures :

To understand this firstly we have to understand the transition process under GST. The transition provision comes into effect only and only because of the Input tax credit which the tax payer have left over and carried in his tax returns filed by him in the last return filed by him for the month of June i.e., before the date of July 1 (the day of implementation of GST).


One could have filed his return for the month of June with Cenvat credit balances (in case of manufacturer) or a tax payer could have also filed his VAT return with Input Tax Credits lying for the stocks purchased in the month of June and remaining unsold or there may be even stock lying in the taxpayers place of business against which taxes have been paid, returns have been filed but all these under earlier tax regime.


But now since GST is totally different tax structure it has to carry the tax payers data right from the registration process till carrying of Credits from the returns filed under previous tax regime or from the documents that justifies the taxes paid on the closing stock by the tax payers which are intended to be used for sale or furtherance of business even after implementation of GST tax law.


While switching from normal tax payer to Composition scheme, the following situations may arise:

  • The goods or services or both supplied by him become wholly exempt, on switch over date
  • Where the taxpayer has availed input tax credit, opts to pay tax under Composition scheme



Effect on input tax credit while switching to composition scheme :


On the date of Switching from normal scheme to composition scheme, taxpayer shall be liable to pay an amount equal to the credit of input tax by way of debiting in the electronic credit /cash ledger in respect of inputs held in stock on the day immediately preceding the date of such switch over. Any residual input tax credit after payment of such amount, if any lying in the credit ledger shall lapse.

The person opting to switch to composition scheme would also have to furnish the statement in FORM GST ITC-03 which is a declaration for intimation of ITC reversal/payment of tax on inputs held in stock, inputs contained in semi-finished and finished goods held in stock and capital goods within a period of sixty days from the commencement of the relevant financial year.



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