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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The next Industrial Revolution is here – driven by the digitalization of manufacturing processes

Technologies such as Industry 4.0, IoT, robotics and Big Data analytics are transforming the manufacturing industry in a big way.

The manufacturing industry across the world is seeing major changes, driven by globalization and increasing consumer demand. As per a report by the World Economic Forum and Deloitte Touche Tohmatsu Ltd on the future of manufacturing, the ability to innovate at a quicker pace will be the major differentiating factor in the success of companies and countries.

This is substantiated by a PWC research which shows that across industries, the most innovative companies in the manufacturing sector grew 38% (2013 - 2016), about 11% year on year, while the least innovative manufacturers posted only a 10% growth over the same period.

Along with innovation in products, the transformation of manufacturing processes will also be essential for companies to remain competitive and maintain their profitability. This is where digital technologies can act as a potential game changer.

The digitalization of the manufacturing industry involves the integration of digital technologies in manufacturing processes across the value chain. Also referred to as Industry 4.0, digitalization is poised to reshape all aspects of the manufacturing industry and is being hailed as the next Industrial Revolution. Integral to Industry 4.0 is the ‘smart factory’, where devices are inter-connected, and processes are streamlined, thus ensuring greater productivity across the value chain, from design and development, to engineering and manufacturing and finally to service and logistics.

Internet of Things (IoT), robotics, artificial intelligence and Big Data analytics are some of the key technologies powering Industry 4.0. According to a report, Industry 4.0 will prompt manufacturers globally to invest $267 billion in technologies like IoT by 2020. Investments in digitalization can lead to excellent returns. Companies that have implemented digitalization solutions have almost halved their manufacturing cycle time through more efficient use of their production lines. With a single line now able to produce more than double the number of product variants as three lines in the conventional model, end to end digitalization has led to an almost 20% jump in productivity.

Digitalization and the Indian manufacturing industry

The Make in India program aims to increase the contribution of the manufacturing industry to the country’s GDP from 16% to 25% by 2022. India’s manufacturing sector could also potentially touch $1 trillion by 2025. However, to achieve these goals and for the industry to reach its potential, it must overcome the several internal and external obstacles that impede its growth. These include competition from other Asian countries, infrastructural deficiencies and lack of skilled manpower.

There is a common sentiment across big manufacturers that India lacks the eco-system for making sophisticated components. According to FICCI’s report on the readiness of Indian manufacturing to adopt advanced manufacturing trends, only 10% of companies have adopted new technologies for manufacturing, while 80% plan to adopt the same by 2020. This indicates a significant gap between the potential and the reality of India’s manufacturing industry.

The ‘Make in India’ vision of positioning India as a global manufacturing hub requires the industry to adopt innovative technologies. Digitalization can give the Indian industry an impetus to deliver products and services that match global standards, thereby getting access to global markets.

The policy, thus far, has received a favourable response as global tech giants have either set up or are in the process of setting up hi-tech manufacturing plants in India. Siemens, for instance, is helping companies in India gain a competitive advantage by integrating industry-specific software applications that optimise performance across the entire value chain.

The Digital Enterprise is Siemens’ solution portfolio for the digitalization of industries. It comprises of powerful software and future-proof automation solutions for industries and companies of all sizes. For the discrete industries, the Digital Enterprise Suite offers software and hardware solutions to seamlessly integrate and digitalize their entire value chain – including suppliers – from product design to service, all based on one data model. The result of this is a perfect digital copy of the value chain: the digital twin. This enables companies to perform simulation, testing, and optimization in a completely virtual environment.

The process industries benefit from Integrated Engineering to Integrated Operations by utilizing a continuous data model of the entire lifecycle of a plant that helps to increase flexibility and efficiency. Both offerings can be easily customized to meet the individual requirements of each sector and company, like specific simulation software for machines or entire plants.

Siemens has identified projects across industries and plans to upgrade these industries by connecting hardware, software and data. This seamless integration of state-of-the-art digital technologies to provide sustainable growth that benefits everyone is what Siemens calls ‘Ingenuity for Life’.

Case studies for technology-led changes

An example of the implementation of digitalization solutions from Siemens can be seen in the case of pharma major Cipla Ltd’s Kurkumbh factory.

Cipla needed a robust and flexible distributed control system to dispense and manage solvents for the manufacture of its APIs (active pharmaceutical ingredients used in many medicines). As part of the project, Siemens partnered with Cipla to install the DCS-SIMATIC PCS 7 control system and migrate from batch manufacturing to continuous manufacturing. By establishing the first ever flow Chemistry based API production system in India, Siemens has helped Cipla in significantly lowering floor space, time, wastage, energy and utility costs. This has also improved safety and product quality.

In yet another example, technology provided by Siemens helped a cement plant maximise its production capacity. Wonder Cement, a greenfield project set up by RK Marbles in Rajasthan, needed an automated system to improve productivity. Siemens’ solution called CEMAT used actual plant data to make precise predictions for quality parameters which were previously manually entered by operators. As a result, production efficiency was increased and operators were also freed up to work on other critical tasks. Additionally, emissions and energy consumption were lowered – a significant achievement for a typically energy intensive cement plant.

In the case of automobile major, Mahindra & Mahindra, Siemens’ involvement involved digitalizing the whole product development system. Siemens has partnered with the manufacturer to provide a holistic solution across the entire value chain, from design and planning to engineering and execution. This includes design and software solutions for Product Lifecycle Management, Siemens Technology for Powertrain (STP) and Integrated Automation. For Powertrain, the solutions include SINUMERIK, SINAMICS, SIMOTICS and SIMATIC controls and drives, besides CNC and PLC-controlled machines linked via the Profinet interface.

The above solutions helped the company puts its entire product lifecycle on a digital platform. This has led to multi-fold benefits – better time optimization, higher productivity, improved vehicle performance and quicker response to market requirements.

Siemens is using its global expertise to guide Indian industries through their digital transformation. With the right technologies in place, India can see a significant improvement in design and engineering, cutting product development time by as much as 30%. Besides, digital technologies driven by ‘Ingenuity for Life’ can help Indian manufacturers achieve energy efficiency and ensure variety and flexibility in their product offerings while maintaining quality.


The above examples of successful implementation of digitalization are just some of the examples of ‘Ingenuity for Life’ in action. To learn more about Siemens’ push to digitalize India’s manufacturing sector, see here.

This article was produced on behalf of Siemens by the marketing team and not by the editorial staff.