MEANING

   
 

WHAT IS A COMPOSITION SCHEME?

  1. Regular VAT dealers require maintaining detailed accounting records.

  2. Every sale/ purchase and the VAT shown separately on it has to recorded.

  3. Apart from that, as given under Rule 53, details of reduction of set-off and as given under Rule 54, details of non-eligibility of set-off on purchases has to be recorded. 

  4. Several other details like sale/ purchase returns within 6 months and those beyond six months have to be recorded.

In order to get relief from this need to maintain detailed records, the law provides for a simpler method of calculating VAT. This is known as the composition scheme.

  • To explain in brief, the composition scheme requires only the Total Sales and Purchase Turnover, the VAT liability calculation depending on just these two amounts. 

WHO MAY JOIN A COMPOSITION SCHEME?

The composition scheme, on satisfying certain terms and conditions, is available to the following dealers:

  1. Retailers

  2. Bakers

  3. Restaurants & other such Eating Houses and Caterers

  4. 2nd Hand Motor Vehicle dealers

  5. Dealers engaged in executing Works Contracts

CERTAIN BASIC RULES COMMON TO ALL COMPOSITION DEALERS EXCEPT WORKS CONTRACTOR:

  1. Composition Dealers must not use TAX Invoice

  2. Composition Dealers do not recover the VAT amount separately from the customers

WHY THEN WOULD EVERYONE NOT WANT TO OPT FOR SUCH A SCHEME?

  1. If the idea is to just escape the cost of labour for maintenance of proper accounting records, thenů

    1. Under the Income Tax Act (Refer Section 44), the following are to compulsorily maintain proper books of accounts, records and documents: (extracts from the section)

      1. A person carrying out business or profession

        1. Having a Gross Sales Turnover of above 10 Lakhs OR

        2. His income exceeds Rs.1,20,000

    2. Under the same Act, the following have to compulsorily get their books audited and thus, need to maintain proper records in any case:

      1. A person carrying out business or profession (other than retailers) if the Gross Sales Turnover exceeds 40 Lakhs

      2. If it is a retailer who is declaring a profit of Less Than 5 % of his Gross Sales Turnover. 

  2. One must remember that no SET-OFF of VAT paid on purchases from registered dealers is available under composite scheme. Thus, a dealer must carefully calculate whether he is gaining any advantage with respect to his VAT liability before opting for either scheme.
    Example: Lets take the following case where the dealer selling goods falling under Schedule C (VAT Rate of 4%) opts for a composition scheme of being taxed at 5%.

   Particulars Amount (Rs)
Composite Scheme 
   Sales Turnover 30,00,000
   Purchase Turnover 22,00,000
   Balance 8,00,000
   VAT Liability @ 5% 40,000
Regular Scheme (Without any Set-Off on Purchase being reduced or not Eligible)
        VAT (Rs.)
   Sales Turnover (VAT @ 4%) 30,00,000 1,20,000
   Purchase Turnover (VAT @ 4%) 22,00,000 88,000
   VAT Liability    32,000
Thus, here the dealer will NOT go for composite scheme
             
* In Above ( Set-off on purchase is reduced or not eligible)
         VAT (Rs.)
   Sales Turnover (VAT @ 4%) 30,00,000 1,20,000
   Purchase Turnover (VAT @ 4%) 22,00,000 88,000   
Less: Example of Set-off reduced or not eligible Good Purchased used as Fuel 2,50,000 10,000    
   Net Set-Off on Purchases      78,000
   VAT Liability      42,000
Thus, here the dealer will go for composite scheme