Details of new composition scheme under MVAT for retailers and analysis whether to opt composition or not?

What is new composition scheme for MVAT dealer and its applicability?

Deputy Chief Minister of the Maharashtra state announced the new composition scheme for retailers in his budget speech. The sales tax department comes with the trade circular No. VAT/AMD/2014/8/ADM-8 dated 20/09/2014 regarding the new retailer’s composition scheme.  The old composition scheme is expired with effect from 30th September 2014. The new composition scheme will be effective from 1st October 2014.

Who is the eligible dealer for the new composition scheme?

Following is the list of the conditions for the eligible dealer for composition scheme.

1. The dealer should be register under MVAT act 2002

2. Applicant dealer should be a retailer, as explain in section 42 (1) (b) of MVAT Act. At least 90% of sales should be to the end user (i.e. to the person who is not dealer)

3. The applicant dealer should not be a manufacture or an importer.

4. The turnover of sales of goods should not exceed rupees fifty lack in the previous year in which new composition scheme is applied.  While calculation the turnover the turnover of sales of goods, turnover of sale of high speed diesel or any other  kind of motor sprit covered by entry 5 and 10 of the SCHEDULE D of the MVAT act and furnishing fabric covered by entry 101 of SCHEDULE C of MVAT act is not considered.

5. The goods should be purchase from register dealer. However, this condition is not applicable to the tax-free goods, packing material used for packing of the goods, resold by him.

6. The dealer who is opt composition scheme from 1st October 2014 should be liable to file six monthly returns during the year 2014-2015. The dealer who is liable to file monthly or quarterly return during the year 2014-15 shall not eligible to opt composition scheme.

What is the rate of Composition amount?

There are two options provided for payment of composition money.

Option 1– If dealer opt to pay composition amount on total turnover of sales, then he shall pay 1% on entire turnover of sales including tax –free goods.

Option 2 – If dealer opt to pay composition amount on turnover of sales of taxable goods only, then he shall pay 1.5% on such turnover of sales.

 What are the consequences after application of composition scheme?

  1. Composition amount or tax shall not be collected separately by composition dealer
  2. Composition dealer cannot issue the tax invoice.  However, he can issue the cash memo, sales bill, etc. if value of goods sold exceeds Rs. fifty.
  3. Composition dealer shall not eligible to claim set-off under MVAT rule 2005 in respect of purchase of goods, for which composition has been availed.  Set-off of packing material used for packing of the goods for which composition scheme is applied is not available. However, it is clarified that dealer can claim set-off on purchase of capital assets,for which benefit of composition is not availed. 
  4. A dealer opting for composition scheme is not eligible for set off. Therefore, dealer opting for composition scheme shall be required to reverse the set off, already claimed, on the purchase of the goods held in stock on the day of opting for new composition scheme.  For example, is there is a closing stock of Rs. 5 lacks and set off of Rs. 25000. The dealer is required to pay Rs.25000 in addition to composition amount in his first composition return.  The reversal of the set-off is required to show in the row (e) of box 14 of the returns in Form 232 or row (e) of box 13 of the returns in Form 233, as the case may be.
  5. The composition dealer is required to file six monthly return.

When and how dealer can join composition scheme?

A dealer can join new composition scheme from 1st October 2014 or from 1st April of any subsequent year.  An eligible dealer, whether old composition dealer or fresh applicant desiring to opt for new composition scheme would be required to upload an application in Form 4A on http://mahavat.gov.in on or before 31st October 2014.

If dealer is desire to opt for new composition scheme for the year 2015-16 or thereafter shall upload an application in Form 4A on http://mahavat.gov.in on or before 30th April of the respective year.  From financial year 2015-16 newly register dealer shall indicate his option in From 101 itself for application of new composition scheme.

Is composition scheme is really beneficially to the dealer?

It is depends upon the dealer’s turnover, gross profit ratio and normal tax rates applicable to the goods.

Lets analysis the scheme with the example…

I have assumed the gross profit rate as 10% but it may be more or less in actual; as it depends upon the business of the dealer. Generally small dealers show the profit to income tax on presumptive basis i.e. 8% of sales. If 8% is net profit, 10% may be gross profit. If we ignore the closing stock then we can calculate the VAT on following basis. I also assumed that dealer has make separation of turnover of taxable and tax free goods so composition rate applicable is 1.5%.

Particulars Case -1 Case-2 Case – 3 Case – 4
Turnover (Rs. in lacks) 10 20 30 40
Composition Money 1.5% of sales (Rs.) 15000 30000 45000 60000
Tax Rate (if No Composition) 5 12.5 5 12.5 5 12.5 5 12.5
Gross Profit say 10% of sales (Impact of stock is
ignored)
100000 100000 200000 200000 300000 300000 400000 400000
VAT (Rs.) 5000 12500 10000 25000 15000 37500 20000 50000
Excess of Composition
money on normal tax
10000 2500 20000 5000 30000 7500 40000 10000

Analysis

If all assumption comes true composition money is always more that regular tax amount. So it is not advisable to opt for composition.There is big jugglery in the 1 % and 1.5 % composition rate.

Example 1:  If dealer’s turnover is 40 lacks. His tax-free turnover is Rs.1000 and taxable turnover is Rs. 39.99 lacks. Then he has to pay 1% of total turnover I.e. Rs.40,000 or 1.5% of taxable turnover i.e. Rs.59,985.

Example 2: If dealer’s turnover is 40 lacks. His tax-free turnover is Rs.39.99 lacks and taxable turnover is Rs.1000. Then he has to pay 1% of total turnover I.e. Rs.40,000 or 1.5% of taxable turnover i.e. Rs.15.

So whether to go for 1% or 1.5 % composition option is depends upon ratio of turnover of tax-free and taxable goods.

This analysis is based on random calculation; other factors like cost of maintenance of books of account etc. can also take into account while making decision.

Suitability of the composition scheme is different for each dealer. Every dealer can make his own calculation and can
take decision to opt or not to opt the composition scheme and for which rate.

Circular

Comments

  1. nivedita says

    if my vendor is opted for composition scheme, can i take credit of MVAT on such Purchases, please give reson

  2. rakesh says

    If a restaurant dealer having opted for composition scheme can availed set-off on cold drinks purchase ? The composition scheme is applicable for the beer,wine & food sale .Hence can he avail input credit on cold drinks purchase ?

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