Under the proposed GST regime, registered persons shall either pay the taxes under normal rates or he may opt to pay tax at special lower rates under composition scheme as specified in the act and rules there under.

Normal rates of taxes under GST is expected to be anywhere between 18% to 24%. However under composition scheme registered person may elect to pay tax between 0.5% to 2.5%. As there is a huge gap between the tax rates under normal provisions and those under composition levy. So many restrictions have also been imposed on the registered person to avail the benefit of paying taxes at these special rates.

Before we go further we must have a look at the benefits or special tax rates as announced by the government under composition scheme.

Rate of Tax under Composition Scheme

Section 10(1) of CGST Act & Rule 5 of Composition Rules

Sl No. Category of registered persons Rate of tax
(1) (2) (3)
1 Manufacturers, other than manufacturers of such goods as may be notified by the Government one per cent.
2 Suppliers making supplies referred to in clause (b) of paragraph 6 of Schedule II i.e. supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption),  here such supply or service is for cash, deferred payment or other valuable consideration. [ SMALL RESTAURANTS, CATERERS ETC.]

Note:

No other service provider is eligible to opt for composition scheme [section 10(2)]

two and a half per cent.
3 Any other supplier eligible for composition levy under section 10 and these rules half per cent.

 Conditions for availing Composition Scheme

1. Aggregate turnover of the registered person during the preceding financial year should not exceed Rs. 50 Lakhs in a year. [Section 10(1)].

The day aggregate turnover exceeds 50 Lakhs the registered person comes out of Composition Scheme [Section 10(3)] and he shall also file intimation for withdrawal from the scheme in FORM GST CMP-04 within seven days of occurrence of such event. [Rule 4(2) of Composition Rules]

Central Government may increase this limit of aggregate turnover up to 1 crore [Proviso to Section 10(1)]

2. Supplier of goods which are not leviable to tax under GST is not eligible to apply for composition scheme. [Section (10)(2)(b)]. As of now alcoholic liquor for human consumption, petroleum crude, high speed diesel, motor spirit (petrol), natural gas and aviation turbine fuel, are kept out of purview of GST.

3. Supplier of inter-State outward supplies of goods is not eligible to apply for composition scheme. [Section (10)(2)(c)]. So there is no restriction on interstate inward supplies.

4. Supplier of goods through a third party electronic commerce operator is not eligible to apply for composition scheme since such electronic commerce operator is required to collect tax at source under section 52. [Section (10)(2)(d)]

5. A manufacturer of such goods as may be notified by the Government on the recommendations of the Council, cannot apply for Composition Scheme. [Section (10)(2)(e)] & [Rule 3(1)(e)]

6. In case more than one registrations are obtained by the same PAN holder, then composition scheme shall be opted PAN India by all the registrations i.e. Supplier cannot opt for composition scheme for some of his registrations e.g. branches etc. and leaving others. [Proviso to section 10(b)]. Any intimation to opt for composition scheme in respect of any place of business in any State or Union territory shall be deemed to be intimation in respect of all other places of business registered on the same PAN. (Rule 1(5) of Composition Rules)

7. Casual taxable person cannot opt for composition scheme (Rule 3(1)(a) of Composition Rules).

8. A non-resident taxable person cannot opt for composition scheme (Rule 3(1)(a) of Composition Rules).

In case you satisfy all the conditioned mentioned above, you are eligible to opt for composition scheme under GST.

How to opt for composition scheme

In case of Migration dealers:

File intimation in FORM GST CMP-01 within 30 days of the appointed day. [Rule 1(1) of Composition Rules]

Furnish the details of stock, including the inward supply of goods received from unregistered persons, held by him on the appointed day in FORM GST CMP-03, within sixty days (Rule 1(4) of Composition Rules).

The goods held in stock by him on the appointed day should 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
  • received from his agent or principal outside the State. (Rule 3(1)(b) of Composition Rules).

Note: no restriction on goods purchased from un-registered dealers

In case of Fresh Registration under GST:

Dealer may exercise his option to pay tax under composition scheme at the time of registration by mentioning the same in FORM GST REG-01 (Rule 1(2) of Composition Rules)

After registration (for both migration dealers and fresh registrations):

In case a dealer is already registered under GST, such registered taxable person may later-on for the next financial years exercise his option to pay tax under composition scheme by filing in FORM GST CMP-02.

He shall also furnish the statement in FORM GST ITC-3 in accordance with the provisions of sub-rule (4) of rule ITC.9 within sixty days from the commencement of the relevant financial year. (Rule 1(3) of Composition Rules).

As per Rule 9(4) of ITC Rules, ITC claimed on stock held as on date of opting composition scheme shall be reversed and shall paid by the supplier as liability of output tax.

The goods held in stock by him on the appointed day should have not been purchased from Unregistered dealer, or in case such goods are purchased from an un-registered  dealer, tax under reverse charge has duly been paid on such goods.(Rule 3(1)(c) of Composition Rules).

Withdrawal from Composition Scheme 

(Rule 4 of Composition Rules)

Suo motto by Dealer

The registered person who is not eligible to continue under composition scheme (may be his aggregate turnover crosses 50 Lakh or for any other reason) shall file an intimation of withdrawal in FORM GST CMP-04 within 7 days of occurrence of such event rendering him ineligible to continue under composition scheme and shall issue tax invoice for every supply made thereafter [Rule 4(2)].

OR

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. [Rule 4(3)]

By Proper Office

Where the proper officer has reasons to believe that the registered person was not eligible to pay tax under composition scheme 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 as to why option to pay tax under composition scheme should not be denied. [Rule 4(4)]

Registered person shall file reply in FORM GST CMP-06 within fifteen days of the receipt of such notice

Within thirty days receipt of such reply, the proper officer shall issue an order in FORM GST CMP-07, either accepting the reply, or denying the option to pay tax under composition scheme from the date of option or from the date of the event concerning such contravention, as the case may be. [Rule 4(5)]

Dealer shall furnish a statement in FORM GST ITC-01 containing 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 (as the case may be), 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.

Any intimation for withdrawal under sub-rule (2) or (3) or denial of the option under sub-rule (5) 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.

Some Important points:

Composition scheme shall be effective only from the beginning of the financial year and cannot be opted in middle of the year, except for new registrations and migration cases. (Rule 2 of Composition Rules). However Composition Scheme may be withdrawn in the middle of the year. (Rule 4 of Composition Rules).

Composition dealer may not file a fresh intimation every year and he may continue to pay tax under composition scheme unless he withdraws from the scheme  or he is prohibited to continue under the scheme due to some provisions of the Act and rules thereunder.  [Rule 3(2) & 4(1) of Composition Rules].

Composition scheme is applicable to person having aggregate turnover not exceeding Rs. 50 Lakhs in a state and as per section 2(6) of CGST Act 2017 “aggregate turnover” means the aggregate value of

  • all taxable supplies.
  • exempt supplies,
  • Less: the value of inward supplies on which tax is payable by a person on reverse charge basis
  • exports of goods or services or both and (Not applicable for composition dealer because composition dealer cannot make inter-state supplies)
  • inter-State supplies (Not applicable for composition dealer because composition dealer cannot make 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.

Here, the value of inward supplies on which tax is payable by a person on reverse charge basis is specifically excluded from the definition of aggregate turnover, creating ambiguity whether other inward supplies are included in aggregate turnover or not. Though there is ambiguity in this section, but in our opinion “taxable supplies” should be understood as “the supplies in respect of which tax is payable by a registered person” for example outward supplies and inward supplies under Reverse charge mechanism. For this reason the value of inward supplies on which tax is payable by a person on reverse charge basis is specifically excluded from the definition of aggregate turnover.

Please note that the word “aggregate turnover” is also used in registration provisions and it includes exempt supplies, so an agriculturist selling agricultural produce for Rs. 18 Lakhs per month and at the same time selling other goods for say Rs. 2 Lakhs per month is required to obtain registration.

Do’s & Donts’

Composition dealer shall not issue tax invoice but shall issue Bill of Supply and 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 (Rule 3 of Composition Rules).

 Composition dealer shall not collect any tax from the recipient on supplies made by him. [Section (10)(4)]

Composition dealer shall not be entitled to any credit of input tax paid on his inward supplies. [Section (10)(4)].

Section 10 starts with a non obstante clause, which states that:

“opting to pay tax under composition scheme does not affect the liability of the registered taxable person to pay tax under reverse charge mechanism u/s 9(3) & 9(4).”

So a registered taxable person opting to pay tax under composition dealer shall not only pay tax under Reverse Charge Mechanism but also such tax shall be paid at normal rates applicable to those supplies and not on rates specified under composition scheme.[Section 10(1)] & [Rule 3(1)(d)].

It is already clear that as per section 2(62) of CGST Act 2017 “input tax” does not include the tax paid under the composition levy i.e. Tax paid under composition levy is not eligible for Input Tax Credit. Composition dealer shall not be entitled to any credit of input tax paid on his inward supplies. [Section (10)(4)].

Also as per section 2(62) of CGST Act 2017 “input tax” includes tax paid under reverse charge mechanism i.e. tax under reverse charge mechanism shall also be treated as input tax and composition dealer can’t even claim the credit of such tax paid under reverse charge mechanism.

So Input Tax = Tax on inward supplies under forward charge + tax paid under reverse charge.

Composition dealer 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. (Rule 3 of Composition Rules).

Composition dealer shall furnish a quarterly return in FORM GSTR-4 (Rule 4 of Return Rules)

Suggestions are invited at khatrimithun@hotmail.com

Disclaimer:

This article includes general information about legal issues and developments in the proposed law of GST in India. Such materials are for informational purposes only and may not reflect the most current legal developments. These informational materials are not intended, and must not be taken, as legal advice on any particular set of facts or circumstances.

We disclaim all liability in respect to actions taken or not taken based on any or all the contents of this article to the fullest extent permitted by law. Do not act or refrain from acting upon this information without seeking professional legal counsel.

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