The goods and services tax (GST) council on Thursday approved changes to the composition scheme for small dealers to ensure a seamless supply chain, make the scheme more attractive and check tax evasion.
The changes will enable large registered dealers to purchase from small composition scheme dealers and still avail of input tax credit, said a person familiar with the development.
At present, small dealers up to a turnover of Rs1.5 crore have the option to go in for the composition scheme wherein they can pay a low fixed rate of tax and face a lesser compliance burden. Under the composition scheme, traders have to pay 1% tax, manufacturers 2% and restaurants 5%.
However, one disadvantage was that input tax credit cannot be availed of by the traders under the scheme. Further, they are also not allowed to raise GST invoice which would help the buyer to take input tax credit.
This meant that large registered dealers were wary of purchasing from such entities registered under the scheme.
As per the decision of the council, large registered dealers can pay the tax equivalent to the composition rate on purchases made from small unregistered dealers.
This mechanism, also known as reverse charge mechanism, will enable the buyer to avail of input tax credit.
At the same time, the composition dealer will be exempt from paying the tax on the purchases made by the registered dealers. To be sure, amendments will have to be made to the GST laws to enable these changes.