Analysis and Procedural Aspects for Composition Levy under GST in India

Goods and Services Tax is a new system of taxation in which legal formalities for compliance of law are such that a normal registered person has to file monthly return and one annual return at least. The monthly return that is to be filed under GST is also in three different parts, i.e. on three different dates in a month, a regular registered person has to use computer for the purpose of filling of GST Return for that month. As in GST many new persons who operate at a very small scale will be registered after it is implemented who may feel it difficult to comply with these legal formalities on monthly basis, the Government has come up with a very good scheme that we commonly call Composition Scheme. Main benefit of this scheme is that a person opting for Composition Scheme has lesser legal formalities to follow. We are here discussing this scheme in detail. The information in this write-up is for informative purpose only, kindly go through GST Law thoroughly before you take any legal or financial decision relating to GST.

It is to be noted that a person opting for Composition Scheme has to pay GST at the above rates only, though the products in which he is dealing may be taxable at any GST rate of tax like, 5%/12%/18% or 28%.

For example, items like stationary or cosmetics may be taxable at 18% or 28% but the person who is trader if opts for Composition Scheme, shall be required to pay GST @ 1% of the total turnover.

It is to be further noted that a person opting for Composition Scheme shall not eligible for any credit of tax paid on the goods, capital goods purchased or services received.

Further, this tax of 1%/2% or 5% as the case may be shall be payable out of its own pocket and such person cannot charge tax the recipient.

Composition Scheme under present Tax Regime:

Under the Present VAT Laws in most of the states Composition Scheme is available for Small Scale VAT dealer which is normally with the condition that a person opting for Composition cannot import any goods from out of state.

In GST regime a person opting Composition Scheme shall be eligible to even receive Inter-state supplies of goods and Services. Thus it will be beneficial for a person opting for Composition levy to receive Inter-state Supplies and make Local Supplies.

Composition Scheme is an optional scheme with many conditions which are to be adhered by such person otherwise penalty under Section 73 or 74 may be imposed as pre Law.

1. What is Composition Scheme under GST?

The Composition scheme is made for the benefit of small dealer, small manufacturer and small restaurants by reducing their burden of compliances. The dealers and manufacturers, who are supplying goods and whose aggregate turnover does not exceed Rs. 75 Lakh in the preceding financial year can opt for composition scheme. For service providers, no benefit is given to them but there is an exception for the restaurant service providers, if restaurant service provider is providing services and aggregate turnover does not exceed Rupees 75 lakh in the preceding financial year, he is entitled to opt for composition scheme.

2. Who can opt for Composition Scheme under GST?

i. Manufacturers (other than manufacturers of such goods as may be notified by the Government).
ii. Suppliers making supplies referred to in clause (b) of Paragraph 6 of Schedule II i.e. Restaurants
iii. Any other supplier eligible for composition levy like traders.

3. Manufacturers of goods who will not be eligible for composition levy?

4. What is rate of tax for a composition dealer?

It is to be noted that a person opting for Composition Scheme has to pay GST at the above rates only, though the products in which he is dealing may be taxable at any GST rate of tax like, 5%/12%/18% or 28%. For example, items like stationary or cosmetics may be taxable at 18% or 28% but the person opting for Composition Scheme shall be required to pay GST @ 1%/2% or 5% of the total turnover.

It is to be further noted that a person opting for Composition Scheme shall not eligible for any credit of tax paid on the goods, capital goods purchased or services received. Further, this tax of 1%/2% or 5% as the case may be shall be payable out of its own pocket and such person cannot charge tax the recipient.

5. Returns to be filled by a composition dealer?

Quarterly Return in FORM GSTR-4
Annual Return in FORM GSTR-9A

6. Can a composition dealer claim ITC of Inward Supplies?
No, the composition dealer cannot take ITC of the Inward Supplies.

7. Can a composition dealer issue Tax invoice or charge GST from its customers?
No, a composition dealer cannot issue Tax Invoice nor he can collect GST from his customer.

8. Whether Reverse Charges is applicable in case of Composition dealer?
Yes, the Reverse Charge as mentioned in Section 9(3) i.e. on Notified Inward Supplies and 9(4) i.e. Inward Supplies from Unregistered Dealer, is applicable to a composition dealer.

9. What are the conditions for opting Composition Levy?

Conditions and restrictions to opt for composition scheme:

i. Aggregate Turnover in the preceding financial year does not exceed Rs. 75 Lakh. This is aggregate turnover of that person (PAN) on in all over India.

ii. Please note that in the following states the limit of aggregate turnover is Rupees 50 Lakh;

Arunachal Pradesh,
Assam,
Manipur,
Meghalaya,
Mizoram,
Nagaland,
Sikkim,
Tripura,
Himachal Pradesh

In case of the state of Uttarakhand also, limit shall be Rupees 75 lakhs though it is special category state.

iii. A person opting for Composition Scheme can have composition registration in more than one states also but the condition shall be such that his Aggregate Turnover in the preceding financial year is below Rs. 75 Lacs/or Rs. 50 Lacs as above as the case may be. Further, he should be registered in each of the state in which such person is registered under Composition Scheme only and not as regular registered person.

iv. Such person shall not be allowed to make supply to other states.

v. Such person can purchase goods etc from other states and sell/supply locally. It is a great benefit given in Composition Scheme, kindly note that in all the previous schemes of the Government like Rahat Scheme etc., a person could not purchase from other states for his business.

vi. Supplies are taxable under GST and are not the supplies of non-taxable items like crude petroleum, natural gas, petrol, diesel, aviation turbine fuel, liquor/alcohol for human consumption.

vii. Person should not be manufacturing Ice Cream, Edible Ice, Pan Masala, Tobacco and manufactured Tobacco substitutes;

viii. Person cannot make supply through that E-Commerce Operator who is required to collect tax at source. It means a person opting for Composition Scheme cannot supply the goods through those websites which collect the sale price of goods on behalf of the seller from the customers. He can supply through websites if collection of sales price is made by the seller directly from the customer.

ix. Supplier is not a Casual Taxable Person or Non-resident Taxable Person;

x. The goods held in stock by him have not been purchased from an unregistered supplier and where purchased, he pays the tax under sub-section (4) of section 9;

xi. He shall pay tax under sub-section (3) or sub-section (4) of section 9 on inward supply of goods or services or both;

xii. 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 sub-rule (1) of rule 1;

xiii. 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; and

xiv. 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.

10. What is Aggregate Turnover?

As per Section 2(6) of the CGST Act, 2017 The term '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;

11. How a person already registered under VAT/EXCISE/SERVICE TAX can opt for composition scheme?

i. Complete Provisional Registration
ii. File intimation in FORM GST CMP-01 with in thirty days.
iii. File the details of stock, including inward supplies of goods received from Unregistered Dealers, in FORM GST CMP-03 within sixty days

12. How a Taxable person can directly register under GST with composition Scheme?
The person shall at the time of filing FORM GST REG-01 in Part-B of the Form shall opt for the option to pay GST under composition scheme.

13. How a regular taxable person under GST can opt for composition scheme?

i. File FORM GST CMP-02 before the commencement of financial year for which the dealer wants to opt for Composition Scheme.

ii. File FORM GST ITC-03 within sixty days to reverse the ITC of the stock of inputs and inputs contained in semi-finished or finished goods and Capital Goods. The amount to be reversed is to be calculated in the manner prescribed in Rule 9 sub-rule (1).

14. Does a composition dealer need to regularly intimate to the department regarding opting for composition scheme?
No, the supplier does not need to file the intimation every year

15. What if a composition dealer breaks any condition of being a composition dealer?

i. File FORM GST CMP-04 with seven days from the occurrence of the event.
ii. File FORM GST ITC-01 within thirty days to claim ITC of the stock of inputs and inputs contained in semi-finished or finished goods.

16. What if the composition dealer wants to become regular dealer?

i. File FORM GST CMP-04 for withdrawal from composition scheme.
ii. File FORM GST ITC-01 within thirty days to claim ITC of the stock of inputs and inputs contained in semi-finished or finished goods

17. What are the legal consequences if a person not eligible for composition scheme opts for and pay tax under composition scheme?

i. The proper officer will issue a Show Cause Notice to the dealer in FORM GST CMP-05 to reply within 15 days from the receipt of Notice.
ii. The dealer may submit the reply in FORM GST CMP-06
iii. The officer will issue an order in FORM GST CMP-07 either accepting or denying the composition scheme to dealer.
iv. The officer if denies the availability of composition scheme then the dealer will have to:-

- File FORM GST CMP-04 with seven days from the date of order.
- File FORM GST ITC-01 within thirty days to claim ITC of the stock of inputs and inputs contained in semi-finished or finished goods

18. For whom this scheme shall be beneficial?

Composition Scheme shall be beneficial for the person who is supplying goods to the ultimate consumers who are not in business as they do not require the credit of tax they pay on their purchases. In a lighter tone, I must share here that this scheme shall also be beneficial for the foodies who go to small restaurants. The restaurants who opt for Composition Scheme will not charge any tax from them.

Happy Tax Free Dining!

The author can also be reached at rks9814214503@gmail.com

The writer of this article is a Chartered Accountant having more than 17 years of experience in the field of indirect tax. He has authored a book on Punjab Value Added Tax, ‘Law and Practice of Punjab VAT’. He has to his credit many papers, published in National Level reputed tax publishers and presented at various National and State Level Forms.