All about Composition Levy under GST

Section 10 and its related draft composition rules of CGST bill talks about the composition levy. The basic principle underlying the composition scheme is, to minimize the burden of compliance for small taxpayers. There are around 8 million taxpayers that are expected to be migrated from the current laws into the GST regime, however many of these taxpayers will have limited turnover and may not have requisite resources and expertise to comply with all the procedures envisaged under the GST. Under the proposed GST regime, a small supplier of goods can opt to pay the GST levy under composition scheme. Important provisions regarding composition levy is as follows.

Rates under Composition Scheme

Basic Conditions for Composition Levy

1. He shall be a registered person under GST. (Refer section 2 (94) and 25 for the detailed information on Registered person)
2. His aggregate turnover in the preceding financial year should be less than INR 50 lakhs.

Note: Aggregate Turnover means aggregate value of all supplies of persons having same PAN number computed on all India basis.

Aggregate Turnover as per Composition Levy

Note: This levy is linked to your PAN. So, if you have opted it for a business with a particular PAN, composition levy shall apply to all your businesses with the same PAN.

Prohibited Activities

Section 10 (2) of the CGST Act talks about the Prohibited activities for composition levy.

• Supply of Services: He is not engaged in the supply of services other than supplies referred to in paragraph 6 (b) of Schedule II.
• Goods not Covered under GST: He is not engaged in making any supply of goods which are not leviable to tax under this Act. Example: Liquor
• Inter-State Supply: He is not engaged in making any inter-State outward supplies of goods.
• Supply through e-Commerce Operator: He is not engaged in making any supply of goods through an electronic commerce operator who is required to collect tax at source under section 52.
• He is not a manufacturer of such goods as may be notified by the Government on the recommendations of the Council.

Conditions and Restriction for Composition Levy (Draft Rule 3)

Section 10 reads with Draft rule 3 of the Composition Levy Rules lays down conditions for the person who is exercising the option to pay tax under composition levy.

a. He is neither a casual taxable person nor a non-resident taxable person.

b. The goods held in stock by him on the appointed day have not been purchased in the course of -

• inter-State trade or commerce or
• imported from a place outside India or
• received from his branch situated outside the State or
• from his agent or principal outside the State,

Where the option is exercised under rule 1 (1)

Reverse Charge Mechanism:

• The goods held in stock by him have not been purchased from an unregistered person and where purchased, he pays the tax under section 9 (4) on RCM basis.
• He shall pay tax under section 9 (3) or 9 (4), on RCM basis, on inward supply of goods or services or both received from un-registered persons.

He was not engaged in the manufacture of goods as notified under section 10 (2) (e) during the preceding financial year.

Display of Composition Levy:

• He shall mention the words "composition taxable person, not eligible to collect tax on supplies" at the top of the bill of supply issued by him.
• He shall mention the words "composition taxable person" on every notice or signboard displayed at a prominent place at his principal place of business and at every additional place or places of business.

Intimation for Composition Levy (Draft Rule 1)

Intimation for Opting Composition Scheme (First Time)

• As per Draft Rule 1 (1), any person who has been granted registration on a provisional basis under rule 16 (1) of Registration rules and who opts to pay tax under section 10, shall electronically file an intimation in FORM GST CMP - 01.
• The application must be duly signed by the registered person and it shall be electronically filled either directly or through a facilitation Centre notified by the commissioner.
• The application shall be submitted prior to the appointed day, but not later than 30 days after the said day, or such further period as may be extended by the Commissioner in this behalf.

Granting an Option for Composition Scheme:

Any person who applies for opting composition scheme may give an option to pay tax under section 10 in Part B of FORM GST REG - 01, which shall be considered as an intimation to pay tax under the said section.

Intimation for Opting Composition Scheme (Subsequent Time)

• Any registered person who opts to pay tax under section 10 shall electronically file an intimation in FORM GST CMP - 02.
• The application must be duly signed by the registered person and it shall be electronically filled either directly or through a facilitation Centre notified by the commissioner.
• The application shall be submitted prior to the commencement of the financial year for which the option to pay tax under the aforesaid section is exercised.
• The registered person shall also require to furnish the statement in FORM GST ITC - 3 in accordance with the provisions of rule 9 (4) of ITC within 60 days from the commencement of the relevant financial year.

Details of Inputs Held

• Any person who files an intimation first time to pay tax under section 10 shall require to furnish the details of stock, including the inward supply of goods received from unregistered persons, held by him on the day preceding the date from which he opts to pay tax under the said section, in FORM GST CMP - 03.
• The application shall be electronically filled either directly or through a facilitation Centre notified by the commissioner.
• The application shall be submitted within sixty days of the date from which the option for composition levy is exercised.

Deemed Intimation

• Any intimation under to pay tax under section 10 in respect of any place of business in any State or Union territory shall be deemed to be an intimation in respect of all other places of business registered on the same PAN.

Effective date for composition levy (Draft Rule 2)

The option to pay tax under section 10 shall be effective from the beginning of the financial year, where the intimation is filed is a subsequent time and the appointed date where intimation is filed first time.

Validity of composition levy (Draft Rule 4)

The option exercised by a registered person to pay tax under section 10 shall remain valid so long as he satisfies all the conditions mentioned in the said section and these rules.

Withdrawal from Composition Levy

• The registered person shall be liable to pay tax under section 9 (1) from the day he ceases to satisfy any of the conditions mentioned in section 10 or these rules
• He shall issue tax invoice for every taxable supply made thereafter
• He shall also file an intimation for withdrawal from the scheme in FORM GST CMP-04 within 7 days of occurrence of such event.

Voluntarily Withdrawal of Composition Levy

• The registered person who intends to withdraw from the composition scheme shall, before the date of such withdrawal, file an application in FORM GST CMP-04, duly signed, electronically on the Common Portal.

Withdrawal by Proper Officer

• Where the proper officer has reasons to believe that the registered person was not eligible to pay tax under section 10 or has contravened the provisions of the Act or these rules, he may issue a notice to such person in FORM GST CMP-05 to show cause within 15 days of the receipt of such notice as to why option to pay tax under section 10 should not be denied.
• The registered person is required to reply to the show cause notice issued in FORM GST CMP - 06.
• The proper officer shall issue an order in FORM GST CMP-07 within 30 days of receipt of such reply, either accepting the reply, or denying the option to pay tax under section 10 from the date of option or from the date of the event concerning such contravention, as the case may be.

Details of Inputs Held

Every person,

• who has furnished an intimation or
• filed an application for withdrawal or
• a person in respect of whom an order of withdrawal of option has been passed in FORM GST CMP-07

may electronically furnish a statement in FORM GST ITC-01 at the Common Portal, either directly or through a Facilitation Centre notified by the Commissioner.

The statement shall contain details of the stock of inputs and inputs contained in semi-finished or finished goods held in stock by him on the date on which the option is withdrawn or denied.

The registered person shall require to submit statement within 30 days, from the date from which the option is withdrawn or from the date of order passed in FORM GST CMP-07, as the case may be.

Deemed Withdrawal

• Any intimation for withdrawal under or denial of the option in respect of any place of business in any State or Union territory, shall be deemed to be an intimation in respect of all other places of business registered on the same PAN.

Summary of Forms under Composition Levy

Returns under Composition Levy

The taxpayer under the composition scheme is required to furnish quarterly return and annual return making total 5 returns during the year. Quarterly Return

Inward Supply: The details of inward supply made during the quarter is required to file in Form No. GSTR - 4A. It is an auto populated form as it contains the details of purchase made by the taxpayer under composition scheme.

Outward Supply: The details of outward supply made during the quarter is required to file in Form No. GSTR 4. It contains the details of outward supply and inward supply made and tax payable.

Annual Return

The taxpayer under composition scheme is required to submit annual return also. It is nothing but the consolidation of quarterly returns.

Penal Provision

Contravention: Paid tax under composition scheme despite not being eligible Who shall be penalized? Such defaulting Person Quantum of Penalty: In addition to any tax that may be payable by him under any other provisions of this Act, be liable to a penalty and the provisions of section 73 or section 74 shall, mutatis mutandis, apply for determination of tax and penalty. Note: If the taxpayer who has previously been given registration under composition scheme is found to be not eligible to the composition scheme or if the permission granted earlier was incorrectly granted, then such taxpayer will be liable to pay the differential tax along with a penalty which can extend up to the amount of total tax liability i.e. 100%.

Advantages of Composition Scheme

Limited Compliance

A normal taxpayer is required to submit a minimum of 3 returns on monthly basis and 1 yearly consolidated return. Thus, in a complete year he is required to furnish 37 returns to the government. Non-compliance of which will attract penalty. Further to furnish these returns, a small supplier is bound to maintain detailed books of accounts and keep records of all transactions along with supporting documents. However, under the composition scheme, taxpayer is required to furnish quarterly return and annual return only, thus he need not worry on record keeping and can focus on his business more rather than being occupied in compliance procedures.

Limited Tax Liability

Another benefit of getting registered under the composition scheme is that the tax rate for such taxpayer is nominal under the Model GST Law. Tentatively this rate is expected to be not less than 1% for manufacturer and 0.5% in any other cases instead of a standard rate of 18%.

Level Playing Field

Just because a taxpayer has chosen to get registered under the composition scheme, doesn't necessarily mean losing the competitiveness. Since the profit margin of a supplier in composition scheme is more than a large taxpayer, such supplier can outplay the economies of scale of large enterprises by offering competitive prices and key hold the local market of supply. Thus, composition scheme ensures the interest of small suppliers carrying out intrastate transactions and provides with a sustainable and competitive supply market.

Drawbacks of Composition Levy

Limited Territory for Business

A taxpayer registered under the composition scheme is barred from carrying out inter-state transactions. Thus, he is compelled to carry only intra-state transaction and limits the territory of his business. Furthermore, this section is in contradiction of "One nation One tax" as this section limits the benefit only to the boundary of the state.

No Credit of Input Tax

There has been no provision of input credit on B2B transactions. Thus, if any taxable person is carrying out business on B2B model, such person will not be allowed the credit of input tax paid from the output liability. Also, the buyer of such goods will not get any credit of tax paid, resulting in price distortion and cascading. This will further result into a loss of business as a buyer registered as a normal taxpayer will not get any credit when buying from a person registered under composition scheme. Eventually such buyers might avoid purchases from a taxpayer under composition scheme.

No Collection of Tax

Though the rate of composition tax is kept very nominal at 1% or 2.5%, a taxpayer under composition scheme is not allowed to recover such tax from his buyer, as he is not allowed to raise a tax invoice. Consequently, the burden of such tax is kept on the taxpayer himself and this has to be paid out of his own pocket. Thus, the fundamental principle of limited compliance and tax burden on small taxpayer is defeated here.

The author is a practising Chartered Accountant and has authored a book on Companies Act, 2013 with a renowned publisher. He can also be reached at ca.jainam@gmail.com.