What is the composition scheme that the government claims has brought in an ‘early Diwali’ for firms

The composition scheme allows simpler taxation and compliance for small businesses but it hasn’t found many takers.

Faced with growing concerns about problems small businesses faced with regard to the compliance requirements of the new Goods and Services Tax regime, the GST Council, which is headed by Finance Minister Arun Jaitley, had announced a few revisions on October 6.

Among other things, Jaitley announced that firms with an annual turnover less than Rs 1 crore will now be eligible for the composition scheme. The earlier threshold was Rs 75 lakh a year. By opting for this scheme, small businesses can avoid tedious paperwork and pay GST charged at a fixed rate on their turnover.

Billed as India’s biggest tax reform, GST subsumes all the indirect taxes that businesses earlier paid the Centre and states separately with the aim of creating a common market. It involves a complete overhaul of the tax filing system.

There are five tax slabs under the normal GST regime – No tax, 5%, 12%, 18% and 28%. Under this regime, an enterprise with a presence in all of India’s states and Union Territories can be required to file up to 1,332 returns a year.

The composition scheme provides a simpler and narrow rate slab across all commodities traded or produced. Under it, summary returns have to be filed only once every three months. But it comes with restrictions. For one, enterprises opting for this scheme are not eligible to claim input credit – a reduction in the tax paid on their output, equivalent to the tax paid by previous rungs in the value chain. But this also means that they are saved the hassle of continuously linking up taxes paid on all inputs to the tax collected from their customers in the GST portal in order to claim input credits.

What is the composition scheme and who can opt for it?

There are four major conditions that an enterprise must meet to be eligible for the composition scheme.

  1. Businesses must have a turnover less than Rs 1 crore a year.
  2. The firms cannot engage in any inter-state business.
  3. Only manufacturing, trading and restaurant businesses are eligible. Services businesses, manufacturers of pan masala, ice-cream, tobacco and tobacco substitutes are ineligible.
  4. Firms cannot purchase goods from an unregistered supplier, and if they do, they have to pay tax on the goods purchased as per GST slabs.

Once an enterprise opts for the scheme, it follows a different indirect tax regime than others. Under this scheme, traders must deposit tax at 1% of their total revenues, while manufacturers are charged a flat rate of 2%. Restaurants that do not serve alcohol deposit tax at the rate of 5%.

The enterprise then files a return every quarter outlining the details of its turnover and how much tax it has deposited over the three-month period. This makes life easier for small and medium enterprises such as grocery stores or bakeries as they do not have to file multiple returns. However, there are a couple of disadvantages too.

What are the disadvantages of the composition scheme?

For one, enterprises are only eligible for the scheme if they restrict their operations to the state the business is registered in.

Additionally, under the composition scheme, firms cannot claim any input credits on the tax they paid on goods purchased from suppliers. For instance, if a bakery buys flour to make biscuits from a GST registered supplier and pays tax on it, it cannot claim input tax credit under the GST system when it sells the biscuits to its customers since it is registered under the composition scheme.

The enterprise is not permitted to charge GST from its customers either.

Additionally, the scheme also limits the number of ways in which goods can be sold, said Archit Gupta, founder, ClearTax.

“You cannot sell goods through online sellers such as Amazon or Flipkart if you have opted for the composition scheme as e-commerce has to be mandatorily registered under the normal GST regime,” he said.

Scope for misuse?

In the GST Council meeting on October 6, the government revised another aspect of the composition scheme. This relates to firms that are otherwise eligible for the scheme but supply GST-exempt goods. These firms were earlier not eligible for the composition scheme, but now they are.

“It has been decided that such persons who are otherwise eligible for availing the composition scheme and are providing any exempt service, shall be eligible for the composition scheme,” a government press release stated.

However, there is also a possibility that a businessman, in order to avail of the composition scheme, may set up multiple companies and can claim benefits under the scheme.

“Technically, the law does not stop a person from setting up multiple companies with different Permanent Account Numbers, which makes them different entities and would have separate GST registration,” said Prashanth Agarwal, Partner-Indirect Tax at the consulting firm PwC. “Entities with distinct registrations can run as separate businesses with their respective limits under the composition scheme.”

What happens if, towards the end of the financial year, the enterprise realises that its turnover is going to cross the Rs 1 crore mark?

It needs to exit the composition scheme. For this, the enterprise needs to file an application to move to the regular GST system within seven days of its revenues breaching the Rs 1 crore mark in a financial year, said Gupta.

Few takers for the composition scheme

The Union government has claimed that many of the taxpayers in the system do not contribute much to the new GST system because of the cost of compliance. This is what perhaps prompted the GST Council – as highlighted in this column in the Business Standard – to increase the eligibility threshold for businesses for the composition scheme to Rs 1 crore turnover a year.

But so far, only 15.5 lakh enterprises have opted for the scheme.

In a report published in December 2015, Chief Economic Advisor Arvind Subramanian said that there are more than 81 lakh enterprises that have a turnover of less than Rs 1 crore every year. Out of these 79.32% are small enterprises, which have a turnover of less than just Rs 10 lakh. All these could potentially have joined the composition scheme but they have not.

“There clearly hasn’t been much take off just yet, which is why the government has pushed the deadline [for registering for the composition scheme] till March 2018,” said Gupta. “But the composition scheme is a win-win for both parties as businesses get easier compliance and the government gets to pocket all input tax credit which these businesses do not get to avail.”

Business owners claim the scheme has not found favour among the business community because of the restrictions it comes with.

“The composition scheme disallows people from doing inter-state trade,” said Praveen Khandelwal, National Secretary General of the Confederation of All India Traders. “Much of trade is inter-state so there is no way traders can enter the scheme and avail its benefits.”

However, he conceded that the easing up of GST returns filing requirements for businesses with annual turnover less than Rs 1.5 crore is likely to help the industry.

He was referring to a move aimed at easing the burden of compliance for smaller businesses, which Jaitley had also announced on October 9. Jaitley said that businesses with revenues of less than Rs 1.5 crore a year will be allowed to file only quarterly returns instead of monthly returns, and still avail of the input tax credit. Such businesses comprise nearly 90% of all assesses.

“We welcome the government taking note of traders’ concerns and easing up the filing requirements to just quarterly returns,” said Khandelwal. “Many traders are likely to take benefit of this move.”

The next few months will tell if the Union government’s decision relaxing filing requirements for smaller businesses will come at the cost of the composition scheme or if different businesses will look at the costs and benefits of each option with more nuance.

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“My body instantly craves chai and samosa”

German expats talk about adapting to India, and the surprising similarities between the two cultures.

The cultural similarities between Germany and India are well known, especially with regards to the language. Linguists believe that Sanskrit and German share the same Indo-Germanic heritage of languages. A quick comparison indeed holds up theory - ratha in Sanskrit (chariot) is rad in German, aksha (axle) in Sanskrit is achse in German and so on. Germans have long held a fascination for Indology and Sanskrit. While Max Müller is still admired for his translation of ancient Indian scriptures, other German intellectuals such as Goethe, Herder and Schlegel were deeply influenced by Kalidasa. His poetry is said to have informed Goethe’s plays, and inspired Schlegel to eventually introduce formal Indology in Germany. Beyond the arts and academia, Indian influences even found their way into German fast food! Indians would recognise the famous German curry powder as a modification of the Indian masala mix. It’s most popular application is the currywurst - fried sausage covered in curried ketchup.

It is no wonder then that German travellers in India find a quite a lot in common between the two cultures, even today. Some, especially those who’ve settled here, even confess to Indian culture growing on them with time. Isabelle, like most travellers, first came to India to explore the country’s rich heritage. She returned the following year as an exchange student, and a couple of years later found herself working for an Indian consultancy firm. When asked what prompted her to stay on, Isabelle said, “I love the market dynamics here, working here is so much fun. Anywhere else would seem boring compared to India.” Having cofounded a company, she eventually realised her entrepreneurial dream here and now resides in Goa with her husband.

Isabelle says there are several aspects of life in India that remind her of home. “How we interact with our everyday life is similar in both Germany and India. Separate house slippers to wear at home, the celebration of food and festivals, the importance of friendship…” She feels Germany and India share the same spirit especially in terms of festivities. “We love food and we love celebrating food. There is an entire countdown to Christmas. Every day there is some dinner or get-together,” much like how Indians excitedly countdown to Navratri or Diwali. Franziska, who was born in India to German parents, adds that both the countries exhibit the same kind of passion for their favourite sport. “In India, they support cricket like anything while in Germany it would be football.”

Having lived in India for almost a decade, Isabelle has also noticed some broad similarities in the way children are brought up in the two countries. “We have a saying in South Germany ‘Schaffe Schaffe Hausle baue’ that loosely translates to ‘work, work, work and build a house’. I found that parents here have a similar outlook…to teach their children to work hard. They feel that they’ve fulfilled their duty only once the children have moved out or gotten married. Also, my mother never let me leave the house without a big breakfast. It’s the same here.” The importance given to the care of the family is one similarity that came up again and again in conversations with all German expats.

While most people wouldn’t draw parallels between German and Indian discipline (or lack thereof), Germans married to Indians have found a way to bridge the gap. Take for example, Ilka, who thinks that the famed differences of discipline between the two cultures actually works to her marital advantage. She sees the difference as Germans being highly planning-oriented; while Indians are more flexible in their approach. Ilka and her husband balance each other out in several ways. She says, like most Germans, she too tends to get stressed when her plans don’t work out, but her husband calms her down.

Consequently, Ilka feels India is “so full of life. The social life here is more happening; people smile at you, bond over food and are much more relaxed.” Isabelle, too, can attest to Indians’ friendliness. When asked about an Indian characteristic that makes her feel most at home, she quickly answers “humour.” “Whether it’s a taxi driver or someone I’m meeting professionally, I’ve learnt that it’s easy to lighten the mood here by just cracking a few jokes. Indians love to laugh,” she adds.

Indeed, these Germans-who-never-left as just diehard Indophiles are more Indian than you’d guess at first, having even developed some classic Indian skills with time. Ilka assures us that her husband can’t bargain as well as she does, and that she can even drape a saree on her own.

Isabelle, meanwhile, feels some amount of Indianness has seeped into her because “whenever its raining, my body instantly craves chai and samosa”.

Like the long-settled German expats in India, the German airline, Lufthansa, too has incorporated some quintessential aspects of Indian culture in its service. Recognising the centuries-old cultural affinity between the two countries, Lufthansa now provides a rich experience of Indian hospitality to all flyers on board its flights to and from India. You can expect a greeting of Namaste by an all-Indian crew, Indian food, and popular Indian in-flight entertainment options. And as the video shows, India’s culture and hospitality have been internalized by Lufthansa to the extent that they are More Indian Than You Think. To experience Lufthansa’s hospitality on your next trip abroad, click here.


This article was produced by the Scroll marketing team on behalf of Lufthansa as part of their More Indian Than You Think initiative and not by the Scroll editorial team.