Every tax system requires compliance with statutory provisions in a timely manner. It may be periodic tax payments, filing of returns, maintenance of prescribed records, etc., which, many a time, pose a challenge to small businesses. In order to protect the interest of such small businesses, a Special Scheme called Composition Scheme is often found in the taxing statutes.
The word ‘composition’ comes from the Latin ‘componere’, meaning "put together". It is a feature of Indirect Tax laws that in order to provide a comfort to assessee from complying with the requirement of paying tax on value addition by maintaining detail of ‘inputs’ and ‘outputs’, a option is provided to go for a put together scheme.
As per the scheme the assessee is made free from maintaining complete details of its inputs and outputs and by merely making payment of single put-together amount better known as ‘composition fees’ the assessee is allowed to carry on its business.
Presently, several State Governments have provisions for payment of a Composition levy of VAT for specified small businesses which make compliance of tax laws easier without having to maintain copious records, registers and returns. A similar provision, however, exists under the Service Tax Law only for specified cases like Life Insurance Business, Air Travel Agent, Promotion or Marketing etc. of Lottery.
Composition Scheme is an option and eligible tax payer needs to inform the Government of his option for the Scheme.
The scheme of VAT proposes one treatment to all types of transactions. However, due to practical issues in India where many of the small businessmen are not educated and there are cases where the nature of business is such that elaborate records are not possible to be maintained. So in order to reduce compliance burden for small businesses Composition Scheme was introduced.
Every registered dealer who is liable to pay tax under the respective State VAT Acts and whose turnover does not exceed 50 lakhs in the last financial year is generally entitled to avail this scheme.
A dealer, who is availing this scheme at present, need not maintain any statutory records as prescribed under the Act. Only the records for purchase, sales, and inventory should be maintained. However, if a dealer does not avail the scheme, he has to maintain the prescribed statutory records as per the respective State VAT Acts.
Also, the dealer should also not claim input tax credit on the inventory available on the date on which he opts for composition scheme.
In the present scenario, a dealer who avails composition scheme cannot avail Input Tax Credit in respect of Input paid. Hence the dealer will be losing the Input Tax Credit on the purchases made by him. Also, the purchaser of the goods from Composition dealer does not get any VAT credit on purchases from a dealer operating under the Composition Scheme.
To conclude, in composition scheme, you pay a fixed rate of tax that is lower than what others would pay, you are not required to file monthly forms and can instead opt for a form that covers a quarter or even a year, depending on the business you’re in.