The State Government may, by a notification in the Official Gazette, provide for a scheme of composition, subject to the tax, conditions and restrictions as may be provided therein, of tax payable by the dealers who are engaged in the business, as prescribed, of reselling at retail, any goods or merchandise. Different types of schemes may be notified for different classes of retailers.
The composition scheme depends on the type of business covered by the Act. The dealers engaged in trading of goods can get the business registered under composition scheme only if the total annual turnover is not exceeding the specified Threshold turnover limits. The tax rates are decided at predefined flat rates (for e.g., 8% on Gross Turnover). These rates differ depending on the type of business.
The Composition dealers also have the option of voluntary registration. They need not maintain books of accounts and documents and are not required to follow rules and procedures for issuing tax invoices and maintaining stocks etc.
The composition dealers cannot collect the tax amounts from their immediate registered/unregistered dealers. The tax amounts also are not to be shown in the invoice. Such tax amount is treated as the expenditure incurred for the business and allowed as business expenditure.
For example, the Karnataka Value added Tax, provides that a dealer whose turnover is between two and fifteen lakhs for four consecutive quarters, like works contractors, hoteliers, crushing units of granites etc., can opt for composition scheme. According to this composition scheme, the rate of tax applicable for other than crushing units is five percent and for crushing units, the tax is to be paid on the basis of crushing machines ranging from Rupees one lakh to two lakhs as applicable from time to time.
The following are the cases how the composition dealers are different from Regular Dealers:
The Composition dealers cannot collect tax separately from the buyers as it is considered as business expenditure, but the Regular dealer can collect tax.
The Composition dealers cannot claim the tax paid on their purchases as Input tax credit whereas the regular dealer can claim Input Tax Credit.
The composition scheme, is generally not applicable to the dealers who are engaged in Inter-state trade or commerce. The Regular dealers can be engaged in inter-state trade.
The dealers registered under Composition Scheme need not maintain books of accounts and documents when compared to Regular dealer.