MCQs on Composition Scheme | Introduction to GST

The Composition Scheme under the Goods and Services Tax (GST) is designed to simplify tax compliance for small taxpayers. Here’s a detailed explanation based on the content from the provided document:

Overview of the Composition Scheme

Purpose:

The Composition Scheme aims to reduce the compliance burden on small taxpayers by allowing them to pay tax at a fixed rate on their turnover instead of the regular GST rates. This is particularly beneficial for small businesses that may struggle with the complexities of the GST system.

Eligibility:

• A registered person can opt for the Composition Scheme if their aggregate turnover does not exceed specified limits in the preceding financial year:
• ₹75 lakh for North Eastern states and Himachal Pradesh.
• ₹150 lakh for other states.
• Certain categories of businesses, such as manufacturers of specific goods (e.g., ice cream, tobacco), are not eligible for the scheme, even if they fall within the turnover limits.

Tax Rates:

• The tax rate under the Composition Scheme is lower than the standard GST rates. For manufacturers (excluding those of notified items), the rate is 1% (0.5% CGST and 0.5% SGST/UTGST).

Key Features of the Composition Scheme

Simplified Compliance:

• Taxpayers opting for the Composition Scheme are not required to maintain detailed records of input tax credits, which reduces the administrative burden.
• They are required to file fewer returns compared to regular taxpayers.

Restrictions:

• Taxpayers under the Composition Scheme cannot make inter-state outward supplies. If they do, they must switch to the regular GST scheme.
• They cannot claim input tax credit on purchases, which means their cost of goods sold may be higher compared to those under the regular scheme.

Withdrawal from the Scheme:

• If a taxpayer's turnover exceeds the prescribed limit, they must withdraw from the Composition Scheme and start paying tax under the regular scheme. They are required to file an intimation about this withdrawal within 7 days.

Composite Supply vs. Mixed Supply

Composite Supply:

• Defined under Section 2(30) of the CGST Act, 2017, a composite supply consists of two or more taxable supplies that are naturally bundled and supplied together in the ordinary course of business. One of these supplies is considered the principal supply.

Conditions:

• There must be two or more taxable supplies.
• The supplies must be naturally bundled (e.g., a meal that includes food and drink).
• One supply must be the principal supply (e.g., the main dish in a meal).

Mixed Supply:

• A mixed supply consists of two or more individual supplies of goods or services that are not naturally bundled and can be supplied separately. Each component may attract a different rate of tax.
• Example: A gift pack containing chocolates, flowers, and a greeting card, where each item can be sold separately.

Practical Implications

Cost Analysis: Businesses must analyze the cost implications of opting for the Composition Scheme versus the regular scheme. For instance, while the overall cost to consumers may remain the same, the profit margins for businesses can differ significantly based on the ability to claim input tax credits.

Decision Making: Businesses need to assess their sales structure, turnover, and the nature of their supplies to determine whether opting for the Composition Scheme is beneficial. For example, a retailer with low margins and high compliance costs may find the Composition Scheme advantageous.
Conclusion

The Composition Scheme under GST is a valuable option for small taxpayers, providing a simplified tax structure and reduced compliance requirements. However, businesses must carefully evaluate their eligibility, the nature of their supplies, and the financial implications of choosing this scheme versus the regular GST framework. Understanding the distinctions between composite and mixed supplies is also crucial for proper tax compliance and planning.


Here are 25 important multiple-choice questions (MCQs) related to the Composition Scheme under GST, designed from an examination perspective:

MCQs on Composition Scheme under GST

What is the maximum aggregate turnover limit for a taxpayer to opt for the Composition Scheme in most states?
A) ₹50 lakh
B) ₹75 lakh
C) ₹1 crore
D) ₹1.5 crore
Answer: B) ₹75 lakh


Which of the following is NOT eligible to opt for the Composition Scheme?
A) A manufacturer of readymade garments
B) A supplier of restaurant services
C) A supplier of ice cream
D) A small retailer
Answer: C) A supplier of ice cream


What is the tax rate applicable under the Composition Scheme for manufacturers?
A) 0.5%
B) 1%
C) 2%
D) 5%
Answer: B) 1%


Which of the following statements is true regarding the Composition Scheme?
A) Taxpayers can make inter-state supplies.
B) Taxpayers can claim input tax credit.
C) Taxpayers must file fewer returns.
D) Taxpayers are required to maintain detailed records.
Answer: C) Taxpayers must file fewer returns.


If a taxpayer's aggregate turnover exceeds the limit during the financial year, what must they do?
A) Continue under the Composition Scheme
B) Withdraw from the Composition Scheme
C) Pay a penalty
D) Notify the GST Council
Answer: B) Withdraw from the Composition Scheme


Which of the following is a condition for a supply to be classified as a composite supply?
A) Supplies must be separately priced.
B) Supplies must be naturally bundled.
C) All supplies must be of the same nature.
D) Supplies must be made by different suppliers.
Answer: B) Supplies must be naturally bundled.


What is the tax rate for a supplier of restaurant services under the Composition Scheme?
A) 1%
B) 2.5%
C) 5%
D) 12%
Answer: C) 5%


Which of the following is a feature of the Composition Scheme?
A) Higher compliance burden
B) Fixed tax rate on turnover
C) Input tax credit available
D) Mandatory inter-state supply
Answer: B) Fixed tax rate on turnover


A taxpayer under the Composition Scheme cannot supply which of the following?
A) Goods
B) Services
C) Inter-state supplies
D) Exempt supplies
Answer: C) Inter-state supplies


What is the time frame within which a taxpayer must notify withdrawal from the Composition Scheme?
A) 3 days
B) 7 days
C) 15 days
D) 30 days
Answer: B) 7 days


Which of the following is considered a principal supply in a composite supply?
A) The supply that is ancillary
B) The supply that is bundled
C) The predominant element of the supply
D) The supply with the highest tax rate
Answer: C) The predominant element of the supply


What is the aggregate turnover calculation for a taxpayer?
A) Only taxable supplies
B) Taxable supplies + exempt supplies + exports
C) Only inter-state supplies
D) Taxable supplies + exempt supplies + exports - input tax credit
Answer: B) Taxable supplies + exempt supplies + exports


Which of the following is NOT a restriction for a taxpayer under the Composition Scheme?
A) Cannot supply inter-state goods
B) Cannot supply services other than restaurant services
C) Cannot maintain records
D) Cannot supply notified goods
Answer: C) Cannot maintain records


What happens if a taxpayer under the Composition Scheme makes an inter-state supply?
A) They can continue under the scheme
B) They must switch to the regular scheme
C) They will be penalized
D) They will be exempt from tax
Answer: B) They must switch to the regular scheme


Which of the following is a benefit of opting for the Composition Scheme?
A) Higher tax rates
B) Simplified compliance
C) Mandatory detailed record-keeping
D) Input tax credit on purchases
Answer: B) Simplified compliance


What is the tax rate for a supplier of goods under the Composition Scheme?
A) 0.5%
B) 1%
C) 2%
D) 3%
Answer: B) 1%


Which of the following supplies can be classified as a mixed supply?
A) A meal package
B) A gift basket with chocolates and flowers
C) A bundled software package
D) A car with free insurance
Answer: B) A gift basket with chocolates and flowers


What is the consequence of exceeding the turnover limit for a taxpayer under the Composition Scheme?
A) They can continue under the scheme
B) They must pay a penalty
C) They must switch to the regular scheme
D) They will be exempt from tax
Answer: C) They must switch to the regular scheme


Which of the following is a requirement for a composite supply?
A) Supplies must be separately invoiced
B) Supplies must be made by different suppliers
C) One supply must be the principal supply
D) All supplies must be of the same nature
Answer: C) One supply must be the principal supply


What is the main objective of the Composition Scheme?
A) To increase tax revenue
B) To simplify tax compliance for small taxpayers
C) To promote inter-state trade
D) To provide input tax credit
Answer: B) To simplify tax compliance for small taxpayers


Which of the following is true about the input tax credit for a taxpayer under the Composition Scheme?
A) It is fully available
B) It is partially available
C) It is not available
D) It is available only for capital goods
Answer: C) It is not available


What is the aggregate turnover limit for taxpayers in North Eastern states to opt for the Composition Scheme?
A) ₹50 lakh
B) ₹75 lakh
C) ₹1 crore
D) ₹1.5 crore
Answer: B) ₹75 lakh


Which of the following is a condition for a supply to be classified as a mixed supply?
A) Supplies must be naturally bundled
B) Supplies can be supplied separately
C) One supply must be principal
D) All supplies must be of the same nature
Answer: B) Supplies can be supplied separately


What is the penalty for a taxpayer who fails to notify withdrawal from the Composition Scheme?
A) No penalty
B) A fine of ₹10,000
C) A fine of ₹25,000
D) A fine of ₹50,000
Answer: A) No penalty


Which of the following is a characteristic of a composite supply?
A) Each supply is priced separately
B) Supplies are not bundled
C) One supply is the principal supply
D) All supplies are of different nature
Answer: C) One supply is the principal supply