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Normally a VAT Dealer pays tax as follows

Output VAT-Input VAT=VAT Payable

 

Hence,a VAT dealer needs to do proper accounting, maintain proper records and documents to correctly compute VAT liability

 

A small dealer may not be able to do so much compliance.

 

Features of Composition Scheme

 

For small dealers, Composition scheme is introduced where

  • Dealer pays VAT at lower rate as compared to normal rate
  • But he does not get any input
  • Hence, he does not need to maintain proper records to claim input
  • Person purchasing the goods do not get input of same

 

 

This scheme is for

  • Registered Dealers

(While applying for registration, dealer has to mention that he is taking registration as registered dealer)

  • Who have low turnover upto a threshold limit

  (This limit is normally 50 lacs but may be different from state to state)

  • Who make all purchase and sales within state

(If dealer has CST sales, he cannot apply for composition scheme)

  • Such purchase and sales must be taxable

(if he is making exempt sales only, there is no need to apply for registration)

 

Who cannot apply for composition scheme?

Dealer who makes

interstate sales

or

interstate purchases

or

export

or

wants to do stock transfer outside state

or

wants to issue VATABLE Invoice (on which his customer can claim Input)

 

Advantages of Composition Scheme

  • Simple Return
  • Simple tax calculation
  • Minimum Records to be maintained

 

Disadvantages

  • Input tax credit can not be taken on purchase
  • Input tax credit can not be passed to seller and hence Vat chain gets broken

 

Exam Questions

Question 13
Lee Traders, a registered dealer having stock of goods worth Rs. 30,000, purchased from
outside the State, wishes to opt for Composition Scheme. Advise the dealer whether it is
possible.

-a-

If a dealer wishes to opt for Composition Scheme, he should not have any stock of goods
which are brought from outside the State on the day he exercises the option to pay tax by way
of composition. Hence, it is not possible for Lee Traders to opt for Composition Scheme as it
has goods worth Rs. 30,000 purchased from outside the State on the day it wishes to opt for the
Composition Scheme.

  1. Indirect Tax
  2. Vat
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About the Author

CA Maninder Singh's photo - Expert in Practical Accounts, Taxation and Efiling
CA Maninder Singh
CA Maninder Singh is a Chartered Accountant for the past 6 years. He provides courses for Practical Accounts, Taxation and Efiling at teachoo.com .
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