All you need to know about Composition Scheme under GST

Section 10 of the CGST Act 2017 deals with the Composition Levy Scheme. As Per the Said Section notwithstanding to the contrary contained in the Act but subject to Sec 9(3) & (4) (Which basically deals with the payment of Tax under Reverse charge), a Registered Person, whose aggregate turnover in the preceding financial year does not Exceed Rs. 50 lakhs may opt for Composition Scheme and pay Tax at the following rates: (Section 10(1) of CGST Act,2017)

Note: Effective/Total Rate of Tax Under Composition Levy Scheme

It is worth noting here that there shall be an equivalent rate of SGST/UTGST.As a Result total GST payable shall be double of the above-mentioned rates.

Now Let Us Understand the meaning of Aggregate Turnover

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.

The registered person shall be eligible to opt for the Composition Scheme, if (Section 10(2) of CGST Act,2017):

(a) he is not engaged in the supply of services other than supplies referred to in clause (b) of paragraph 6 of Schedule II; (Analysis: This means that the Composition scheme is available for the service provider only if he is engaged Supply, by way of or as a part of any service or any other manner whatsoever of goods being food or other article for Human Consumption or any drink)

(b) he is not engaged in making any supply of goods which are not leviable to tax under this Act;

(c) he is not engaged in making any inter-State outward supplies of goods;

(d) 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; and

(e) he is not a manufacturer of such goods as may be notified by the Government on the recommendations of the Council.

 Provided that where more than one registered persons are having the same Permanent Account Number (issued under the Income-tax Act, 1961), the registered person shall not be eligible to opt for the scheme unless all such registered persons opt to pay tax under that sub-section.

The threshold of Rs. 50 lakhs would be applicable to a person having the same PAN and should be understood as follows:

i. All taxable persons covered by the same PAN shall be under composition across India. Any intimation of option to avail composition scheme in respect of any place of business in any State or UT shall be deemed to be an intimation in respect of all other places of business registered on the same PAN;

ii. Goods supplied by the person which are chargeable to tax on reverse charge basis will not be includable in computing the aggregate turnover; such inward supplies will be liable to tax in the hands of the composition dealer, as it will be liable to tax when received by non-composition taxable persons.

iii. Will include value of supply of goods in all forms (supply of goods simpliciter and mixed and composite supplies which are taxed as supply of goods);

iv. Will include value of supplies of all business verticals of the same taxable person

(Proviso to Section 10(2) of CGST Act,2017)

In order to avail the benefit of the Composite Levy Scheme, it is necessary that all business verticals/registrations which are separately held by the registered person having same PAN must opt for the Composition levy. Thus a registered person shall not be eligible to opt for the composition scheme only for business vertical/registration out of his multiple business vertical/registrations.

Section 10(3) of CGST Act,2017) Lapse of Option for the Composition Scheme

The option for the Composition Scheme availed by the registered person shall lapse from the Day on which the aggregate turnover during a financial year exceeds Rs. 50 lakhs. It is to be noted carefully that word “day’’ has been used in Section 10(3).

Let us understand Sec 10(3) with the help of an Example.

Assume the aggregate turnover of Ms. Mehak Seth, a registered person during a financial year 2018-19 44.50 lakh. In financial year 2019-20, her aggregate turnover upto 30.12.2019 is Rs.49.80 lakh. Further on 31.12.2019 she supplied goods of Rs.  1 lakh issuing 2 invoices i.e Rs.75000/- and Rs 25000/-. On both the Invoices she shall be liable to discharge GST liability under normal scheme of taxation.

It is Important to note here that as per section 18(1) (c) of the CGST Act 2017, if a person ceases to pay tax under section 10 i.e composition scheme, he shall be entitled to take credit of the Input tax in Respect of Inputs held in stock, Inputs contained in the semi finished goods or the finished goods held in stock and the capital goods on the day immediately preceeding the date on which he is liable to pay tax under the normal scheme. Accordingly, there is no loss of credit to the registered person.

A taxable person who has opted for the composition scheme shall not collect any tax from the recipient on supplies made by him nor shall he be entitled to any credit of input tax. (Section 10(4) of CGST Act, 2017)

If the proper officer has reasons to believe that a taxable person has paid tax under composition scheme despite not being eligible, such person shall, 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. (Section 10(5) of CGST Act, 2017)

Section 73 and 74 of the CGST Act has been reproduced as under: -

Section 73 Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized for any reason other than fraud or any willful misstatement or suppression of facts.

Section 74 Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized due to fraud or any willful mis-statement or suppression of facts.

Intimation of the Composition Levy-Rule 1 of the Composition Rules,2017

Tax payment under this scheme is an option available to the taxable person. This scheme would be available only to certain eligible taxable persons (conditions / criteria discussed). The taxable person should make an application exercising his option to pay tax under this scheme. There are three possibilities in which such option can be exercised:

(a) Taxable Person migrating from existing registration to GST registration: Exercising Option in Form GST CMP 01 prior to appointed date or within 30 days after the appointed date. In this case, the option to pay tax under composition scheme shall be effective from the appointed date. However, in terms of Proviso to Rule1(1) where Intimation in Form GST CMP 01 is filed after the appointed date, the registered person shall not collect any tax from the appointed day but shall issue bill of supply for the supplies made after the said date.

(b) Taxable Person obtaining new registration under GST laws: Such option can be exercised at the time of obtaining registration under section 22 in Part B of Form GSTREG-1. In this case, the option to pay tax under composition scheme shall be effective from the effective date of registration.

(c) Taxable Person paying tax under normal levy in one financial year and wants to opt for composition scheme in next financial year, under the GST regime – Such option can be exercised by filing intimation in Form GST CMP 02 prior to commencement of the year for which the option to pay tax under composition scheme is exercised.

In this case, the option to pay tax under composition scheme shall be effective from the beginning of the financial year. In such case, provisions of section 18(4) shall become applicable and person shall be required to file statement containing details of stock and inward supply of goods received from un-registered persons, held in stock, on the immediately preceding the date from which he opts for composition levy, in Form GST CMP 03 within 60 days of the date from which such option is exercised.

Once granted, the eligibility would be valid unless the permission is cancelled or is withdrawn or the person becomes ineligible for the scheme.

Effective date of the Levy of the Composition Scheme- Rule 2 of the Composition Rules,2017

Conditions and Restrictions for Composition Levy- Rule 3 of the Composition Rules,2017

1) He shall neither be a Casual Taxable Person* nor a Non-Resident Taxable Person.

2) In case of migration of existing registration into registration under GST, option to avail composition scheme under GST can be exercised only if the goods held in stock by such taxable person, 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.

3)  The goods held in Stock by him have not been purchased from an Unregistered Person and where purchased, he pays tax under Sec 9(4) i.e. Reverse Charge.

4) He shall Pay tax under Sec 9(3) & (4) on inward supplies of goods or services or both received from an unregistered person.

5)  Taxable person opting to pay tax under the composition scheme is prohibited from collecting tax on the outward supplies.

6)  The person opting for the scheme should not be a manufacturer of certain goods as are notified in this regard. However, there is no restriction in case the person is engaged in trading of such goods.

7)  A person opting for composition scheme is not allowed to affect any supply of goods through an ecommerce portal, unless such portal is owned by the same person.

8)  The taxable person should not affect any inter-State outward supplies. This means that even stock transfers to branches outside the State would not be permitted. However, insofar as it relates to inter-State inward procurements / receipts, there is no restriction. 

 To explain further, where a taxable person effects inter-State barter transaction (supply) or inter-State warranty contract (supply), he will not be eligible to opt for composition scheme.

Validity of the Composition Levy- Rule 4 of the Composition Rules,2017

1)  The Option Exercised by a Registered Person to Pay Tax under Sec 10 shall remain valid as long as he satisfies all the conditions as mentioned in the said section.

2) The Person mentioned in Sub Rule (1) shall be liable to pay tax under Sec 9(1) i.e the normal charge from the day he ceases to satisfy any of the conditions as mentioned above and shall issue Tax Invoice for every taxable supply made thereafter and he shall also file an Intimation for withdrawal from Scheme in FORM GST CMP-04 within 7 days of occurrence of such event.

3) The registered taxable person who intends to withdraw from the composition scheme shall before the date of such withdrawal, file an application in Form GST CMP 04.

4) Where Proper officer has Reasons to believe that registered person was not eligible to pay tax under sec 10 or has contravened the provision of the act or rules, he may issue SCN in FORM GST CMP-05 to show cause within 15 days of receipt of notice as to why option to pay tax under sec 10 should not be denied.

5)  Upon the receipt of reply of SCN issued under Sub Rule (4) from Registered person in FORM GST CMP-06, the proper officer shall issue order in FORM GST CMP-07 within 30 days of receipt of such reply, or denying the option to pay tax under section 10 from the date of option or from the date of event concerning such contravention, as the case may be.

Various Composition Levy Forms at a Glance

The author can also be reached at rohitkpr1992@gmail.com