The objective of the composition scheme is to bring simplicity and to reduce the compliance cost for the small taxpayers. The composition scheme under GST is similar to the composition schemes available to small taxpayers in the erstwhile laws such as Excise, Service Tax, and VAT. This scheme allows small taxpayers to pay a fixed percentage of turnover as fees in lieu of tax and be relieved from the detailed compliance provisions. This is similar to the presumptive taxation in the direct tax regime. This ensures the government regulates the small taxpayers without much burden on such taxpayers in terms of compliance requirements.
In this article, we would like to cover the following :-
Turnover Limit for Composition Levy
- As per Section 10(1) of the CGST Act read with Notification No 14/2019 – Central Tax dated 7th March 2019, a registered person whose aggregate turnover in the preceding financial year does not exceed one crore fifty lakhs may opt for composition scheme. However for special category states (i.e. Arunachal Pradesh, Assam, Manipur, Mizoram, Meghalaya, Nagaland, Sikkim, Tripura, Himachal Pradesh, instead of the limit of one crore fifty lakhs, the limit is seventy-five lakhs.
- As per proviso to Section 10(2) of the CGST Act, all registered persons having the same PAN have to opt for composition scheme for all the units. If one of the units opts for the normal scheme, then other units shall be ineligible for opting for a composition scheme.
Analysis of Term Turnover
- As per Section 2(6) of CGST Act, “aggregate turnover” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis but excludes central tax, State tax, Union territory tax, integrated tax, and cess.
- Basis the definitions provided in the law, the inclusions and exclusions while ascertaining the limit of one crore fifty lakhs (seventy-five lakhs in case of special category states) are tabulated below: –
|Of persons having the same PAN to be computed on all India basis.|
- As per Order No. 01/2017-Central Tax – Removal of difficulties order, 2017, in computing the aggregate turnover, the value of supply of any exempt service, including services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount, shall not be taken into account.
Who can Opt for Composition Levy
As per Section 10(2) of CGST Act, a registered person shall be eligible to opt for the scheme if: –
- Service element does not exceed ten percent of turnover or five lakhs whichever is higher;
- Not engaged in making supplies not leviable to GST;
- Not engaged in making inter-state supplies;
- Not engaged in making supplies requiring TCS u/s 52;
- Not a manufacturer of ice cream, pan masala, tobacco, aerated waters;
- Not a casual taxable person or non-resident taxable person;
- Service provider of restaurant and outdoor catering services.
Note: – As per Order No. 01/2017-Central Tax – Removal of difficulties order, 2017, if the taxpayer supplies any exempt service the value of which is more than ten percent of the turnover or five lakhs as the case may be shall continue to be eligible for opting for composition scheme.
Rates of Tax Defined Under the Law
The amount of tax to be paid by the taxpayer opting for composition scheme depends upon the rate of tax provided under Rule 7 of CGST Rules, however, the maximum rate of tax has been defined under Section 10 of CGST Act as under: –
|Category of Taxpayer||
Rate of Tax
|Manufacturer eligible to opt for the scheme||
|Restaurant or outdoor caterer||
|Traders eligible to opt for the scheme||
|Service Providers availing the scheme as per Section 10(2A)||
- The rate of tax shall be applied to the turnover in the state or union territory in the case of a manufacturer and restaurant.
- The rate of tax shall be applied only on the taxable turnover of traders eligible to opt for the scheme.
- In the case of a restaurant, there is no point in opting for the scheme as the rate of tax applicable otherwise is 5% too. The only benefit being paying tax on a quarterly basis. However, those restaurants who are into the business of franchising their brands cannot opt for the scheme.
Types of Composition Scheme
- There are types of composition scheme provided in the law: –
- Scheme as per Section 10(1) – Applicable to manufacturers, restaurants/caterers, and Traders.
Limits the amount of service portion to higher of the below:-
10 % of turnover or;
INR Five Lakhs.
- Scheme as per Section 10(2A)
Service providers who are not eligible for composition scheme due to service portion limits as defined in Section 10(1) explained above. Other restrictions of availing the scheme are the same and the only difference is the limit of service portion of 10 % of turnover or five lakhs as the case may be.
Returns in Relation to Composition Scheme
The taxpayer opting for composition scheme is required to file GSTR 4 on a quarterly basis. Under the normal scenario, a taxpayer under GST has to file a minimum of 3 returns monthly and one annual return. To be precise, he is compelled to file 37 returns in a year or penalty will be levied for non-compliance. For small suppliers and manufacturers, it is quite difficult to maintain so detailed books of accounts on a daily basis and record every transaction with supporting documents. Whereas, in a composition scheme, only a quarterly return will be uploaded under GSTR-4 by:
- 18th July – 1st quarter;
- 18th October – 2nd quarter;
- 18th January – 3rd quarter;
- 18th April – 4th quarter.
Additionally, an annual return GSTR-9A has to be filed by 31st December of the next financial year. As per the 39th Council Meeting held on 14th March 2020, the due date for filing the annual return for FY 2018-19 has been extended till 30th June 2020
Intimation of Opting for Composition Levy
The procedure for intimation of opting for the scheme is provided in Rule 3 and Rule 4 of CGST Rules which are explained hereunder: –
- Intimation at the time of application for registration: – Any person who opts for composition scheme, is required to mention in Part B of the registration form REG-01.
- Intimation after obtaining registration: – A registered person who opts for composition scheme, is required to electronically file an intimation on the GSTN portal, prior to the commencement of the financial year for which said option is exercised
- The option exercised shall remain valid so long as he satisfies all the conditions of Section 10 as explained above.
- The option shall lapse from the day on which his aggregate turnover during the financial year exceeds the specified limit (one crore fifty lakhs / seventy-five lakhs as the case may be).
- Such a person is required to pay tax under the normal scheme from the day he ceases to satisfy the conditions and shall be required to issue a tax invoice instead of a bill of supply.
- He is required to file an intimation for withdrawal from the scheme within 7 days of the occurrence of such an event.
- He will be eligible to claim ITC on stock on inputs and inputs contained in semi-finished or finished goods held in stock and on capital goods held in stock on the date of withdrawal from the scheme.
The person registered as a composition taxpayer has the following advantages
- Quarterly compliance instead of monthly compliance as required by normal taxpayers.
- No requirement of maintaining records with respect to outward supplies to registered and unregistered persons separately, maintenance of books with specific requirements as in case of a normal taxpayer
- A flat rate of taxation irrespective of the actual rate of tax prevailing in the market.
- No requirement of maintaining rate wise break up of sales
Composition scheme levies numerous restrictions on the taxpayer opting for the scheme. Persons opting for composition scheme has to comply with the following conditions: –
- A person opting for the scheme shall not be entitled to take ITC and shall not levy any tax on the invoice.
- He cannot make non-taxable supplies or inter-state outward supplies. This restriction includes the restriction on stock transfers to own branches outside the state.
- He cannot make supplies through an E-Commerce operator who is liable to collect tax at source u/s 52. Please note that he is still allowed to make supplies through an E-Commerce operator. He has only been barred from making supplies through an E-Commerce operator who is liable to collect tax at source u/s 52.
- He shall continue to pay tax under RCM wherever applicable as per provisions of Section 9(3) and 9(4) of CGST Act.
If a taxable person pays tax under composition scheme wherein he was not ineligible for the scheme, he shall be required to pay penalty under section 73 or Section 74 of the CGST act as may be applicable.
He may be issued a show-cause notice by the government officials if such officer has reasons to believe that the person is not eligible to opt for the scheme but has actually opted for the scheme.