Analysis of Composition Scheme under GST

Introduction:

Indirect tax is a tax where the incidence of tax is in the hands of the supplier whereas the burden to pay the tax is in the hands of the recipient. Goods and Service Tax (GST), is a destination based consumption tax that is levied on both Supply of Goods and Supply of Services. Hence, it can be inferred that the taxable event under GST is “Supply”. ‘Goods’ and ‘Services’ have been defined in Section 2 of the CGST Act 2017. Any transaction which does not satisfy the conditions prescribed under the provisions of Section 7 (‘Meaning and Scope of Supply under GST’) does not fall within the ambit of Supply to attract GST.

The main objective of GST is to avoid cascading and cross cascading across the supply chain. It aims at ensuring a seamless flow of credit by allowing set-off of input tax (tax paid on Purchases) against output tax (tax payable on Sales). In the GST regime, the Government has introduced a common portal ‘GSTN’ (Goods and Services Tax Network) to facilitate taxpayers in uploading all their inward and outward details online.

Registration under GST:

As mentioned above, GST being a destination-based tax, the revenue has to accrue to the state where consumption happens and in this regard to ensure these principles of GST, registration has been made state-specific. Thus, every supplier is liable to register from the place where he makes the supply of goods and or services, provided his aggregate turnover in a financial year exceeds the prescribed limit.

Below is a table summarizing the current registration requirements.

Type of Supplier	Aggregate turnover in a FY	Registration
Supplier of goods (or) and Services	20 Lakhs (exceeds)	Yes
Supplier of goods (or) and Services [Special category states]	10 Lakhs (exceeds)	Yes
Supplier of goods* (Exclusively)	40 Lakhs (exceeds)	Yes
Supplier of goods* (Exclusively) [Special category states]	10 Lakhs (exceeds)	Yes

* Notified goods such as Ice cream, other edible ice, pan masala, tobacco, and manufactured tobacco substitutes are ineligible under this entry. (Notification 10/2019 CGST)

Charge of GST:

GST was implemented as a dual tax model (Intra and Inter) in India and the provisions of the Act lays down the mechanism to levy such tax. In the case of an Intra-state supply, CGST and SGST have to be charged on the transaction, whereas in the case of an Interstate supply IGST has to be charged and the entire IGST revenue will be collected by the Central Government and will later be apportioned to the respective states.

To classify a transaction as Inter-state or Intra-state, “Location of supplier” and “Place of supply” has to be comprehended. Place of supply has been covered under Chapter V of Integrated Goods and Service Tax Act, 2017 separately for goods and services.

If the “location of the supplier” and “place of supply” is within the same state, the transaction will be called intrastate supply and if the location of the supplier and place of supply are in different states it will be termed as interstate supply.

Objective of Composition scheme (Section 10 of CGST Act, 2017)

It was understood from the above discussion that if a particular transaction falls within the ambit of ‘supply’ and if the same is carried out by a taxable person it is mandatory to collect the tax from the recipient and pay it to the Government.

However, in order to facilitate the small players in the market and to reduce the compliance cost incurred in the maintenance of books of accounts and stock records, the Government has introduced a scheme called “composition levy” to ensure simplicity. A Composition Scheme supplier has to pay tax on a quarterly basis in FORM GST CMP-08 and file returns (GSTR-4) on an annual basis which will, in turn, reduce the compliance cost for such small suppliers.

Analysis of key provisions of composition scheme:

Generally, under the composition scheme, eligible taxpayer’s tax will be paid by the supplier at a pre-determined rate on the turnover made by them without collecting any tax from the customers. It is also to be noted that composition scheme suppliers are not eligible to avail input tax credit on the tax paid on their inward supplies and hence cannot enter into the credit chain of GST.

Under GST, for the purpose of discussion, it can be said that there are two types of composition schemes viz., Primary Composition Scheme and Alternate Composition Scheme.

Primary Composition Scheme:

Initially, the Government introduced only one composition scheme under Section 10 (1) (Primary composition scheme), wherein only manufacturers, traders, and restaurant service providers were eligible to avail composition scheme. Section 10(1) provides for the primary composition scheme and Section 10(2A) provides for an alternate composition scheme.

Alternate Composition Scheme:

To facilitate the small service providers, the Government has introduced a new scheme which provides an option to pay tax at concessional rate and the provisions regarding the same have been contained in the Notification No. 2.2019 dated 07.03.2019 as amended.

Any person who is rendering services other than restaurant services is not eligible for composition scheme. On perusal of the notification, it can be inferred that the clear intent behind the introduction of the aforesaid scheme was to extend the benefit and facilitate the small service providers from compliance cost. However, the restrictions and conditions prescribed are different for a person who wishes to pay tax under the composition scheme (Section 10) and at a concessional rate.

Below is a table which provides for types of suppliers who are eligible to pay tax under the said scheme:

Eligible suppliers under Composition Scheme:

Scheme	A.T (Preceding F.Y)	CATEGORY	% OF TAX
Primary Composition Scheme (PCS)	150 Lakhs (or) 75 Lakhs (Special category States) (Prior to 01.04.19 – 50 Lakhs for both cases)	Manufacturers	0.50% of the turnover in a state/ union territory
		Restaurant Service Providers	2.5% of the turnover in a state/ union territory
		Other suppliers (Traders)	0.5% of the taxable turnover of goods and services in a state/union territory
Alternate Composition Scheme (ACS)	50 Lakhs	Suppliers not eligible for PCS	3% of the turnover in a state/ union territory

Who is ineligible to opt for composition scheme?

• Suppliers rendering services (other than restaurant service) of value more than 10% of the turnover in a state or INR 5lakhs whichever is higher (Applicable only for PCS)
• Supplier who is engaged in the supply of goods* not leviable to tax under the CGST Act
• Supplier engaged in making the supply of goods* through e-commerce operator who is required to deduct TCS under Section 52
• Supplier who is engaged in making Inter-state supply of goods*
• Supplier engaged in making the notified supply of goods or services

(* Includes goods or services in case opted for ACS scheme)

The government has notified the below manufacturers as ineligible to opt both PCS and ACS

• Ice-creams (whether or not containing cocoa)
• Tobacco
• Aerated Waters¹ (Only PCS, however no specific restriction to avail ACS)
• Pan-masala

¹(Notification 18/2019- Central Tax (Rate)

We will discuss the above ineligible categories in detail with the help of examples in the ensuing paras.

Suppliers rendering services (other than restaurant service) of value more than 10% of the turnover in a state or INR 5lakhs whichever is higher (Applicable only for PCS)

Initially, in case of service providers only those persons engaged in making supplies referred to in clause (b) of paragraph 6 of Schedule II (i.e.) ‘restaurant service provider’, was eligible to opt for the said scheme. However, as per (Notification 10/2019),  this limited scope was later expanded by providing a relaxation to provide other than restaurant services within the prescribed limit of 10% of the turnover or Rs. 5 lakhs, whichever is higher. The same can be further comprehended with a practical example:

Below are the details of Mr. A (operating in Bihar) supplying watches and undertaking repair services:

Transaction in bihar	Amount(₹)
Turnover from supply of watches ( Preceding Financial Year)	10,00,000
Turnover from supply of watches ( Current Financial Year)	5,00,000
Turnover from rendering of repair service	1,50,000
Services by way of extending deposit (Interest income)	1,00,000
Percentage of other services (1.5 L / 10L)	15%

In the current scenario, it has become the expectation of the recipient and the habit of the supplier to provide such supply together. Hence, the said supply is done in the ordinary course of business. Thus, in the above scenario, although the % of service is more than 10% since the provision specifically provides for a higher amount, the supplier is still eligible to opt composition scheme (PCS). The said restriction on other services can also be extrapolated to restaurant service providers and manufacturers.

It is pertinent to note that the said 10% has to be applied to the turnover of the preceding financial year made in a ‘state’ and not on the aggregate turnover of the company. The turnover includes both taxable and exempt income made by the taxable supplier in a state.

Also, in calculating the above-said turnover for restricting the other services limit and for calculating eligibility under PCS/ACS, the department has clarified that the income earned by way of interest need not be included (exempt supply).

Thus, it can be clearly inferred that any person who wants to opt for composition scheme can supply any service in the current year and the value of such services should not be more than 10% of the turnover in a state or 5 lakhs whichever is higher.

Hence, we can conclude that if any person’s preceding financial year’s aggregate turnover is INR 1.5 crores he can provide services up to a maximum of INR 15 lakhs and in case if the turnover is within INR 50 lakhs, he can provide services up to INR 5 lakhs in the current financial year. This will widen the scope and many small players in the market will get benefitted.

Analysis of other conditions:

Interstate outward supply of goods:

Any taxable person who is paying tax under the composition scheme should not engage in the interstate outward supply of goods.

The Act has specifically restricted since Section 24 of the CGST Act 2017 also demands compulsory registration for persons engaged in the interstate supply of goods irrespective of their turnover. Relaxation has been provided for a service provider considering the difficulty faced by service industries in widening the market base.

It can be concluded that any person making the following supplies will not be eligible:

• Exports, Supply made to SEZ Unit
• Interstate supply between distinct persons.

E-Commerce operators:

Section 10(2) states that any person supplying goods through an e-commerce operator who is required to collect tax at source under Section 52 is not eligible to opt for composition scheme.

An outright restriction has also been placed for a person supplying goods through an e-commerce operator since in most situations it will result in interstate supply as well. But the restriction is not extended to a person supplying services through an electronic commerce operator.

Non-Taxable Supply:

Any person who is engaged in making non-taxable supply cannot opt for composition scheme.

For example, if a restaurant service provider also serves alcoholic liquor he becomes ineligible.

Drawbacks of composition scheme:

A composition scheme supplier cannot collect tax nor can enter into the credit chain. In the day to day practical situations, the drawback is faced by the recipient. This can be illustrated and understood with the help of a practical example.

Particulars	Mr. A (Trader – Normal registered person)	Mr. B (Trader – Composition scheme supplier)
On Purchase:
Value	100,000	100,000
GST @ 12%	12,000 (Current Asset)	12,000 (Cost)
Cost to party	100,000	112,000
On Sales:
(+)Processing charges	25,000	25,000
(+)Profit	13,700	13,700
Total	138,700	150,700
(+) GST (5%)	6,935	–
Final Selling Price	145,635	150,700*
GST Document Issued	Tax Invoice	Bill of Supply

* Mr. B will pay GST of Rs.1507 (@ 1% on 150,000) from his own account without collecting from the customer and cannot avail of any ITC on his purchase. He has to specifically state that “Composition scheme supplier cannot collect tax”

Mr. B will tend to recover the same cost by increasing the price of the product to 150,700 ( as can be seen in the aforesaid illustration).On the other hand, since Mr. A is eligible to avail input tax credit, the price of the product will be competitively less. The end customer will have to pay a higher price if the said product is purchased from Mr. B and this will lead to a reduction in the economic feasibility.

Hence, it is always beneficial for a normal registered person to purchase products from a registered person. Since a composition scheme supplier has to pay from his own money, this will lead to a blockage in the funds required for working capital.

The main objective of ensuring the seamless flow of credit is getting affected. Any businessman who procures goods from a person paying tax under composition scheme will not be entitled to credit and price charged will be much higher when compared to a person who is supplying the same product and procuring the same from a normal registered person. The said person’s cost will be higher and this will result in losing competitiveness in the market.

Applicability of RCM for composition scheme suppliers:

The provisions have stated that the amount of tax to be paid shall be in lieu of tax payable under Section 9(1). Therefore, it can be inferred that when a composition scheme supplier receives inward supplies subject to RCM under section 9 (3) or (4), he cannot avail the benefit of composition scheme to discharge the liability at a pre-determined rate and has to pay GST at scheduled rates.

Practical scenario:

ABC Garments procures raw cotton (subject to RCM) from an agriculturist for INR 2,500 and pays

5% scheduled rate of tax. If ABC garments were a normal registered person then he will be discharging the liability at scheduled rates and also will avail ITC on the amount of tax paid.

Whereas, If ABC was a composition scheme supplier, he will be discharging the liability at scheduled rates. However, he will not be eligible to avail ITC and the same will be added to the cost of the supplier and this will result in cascading of taxes, a concept which GST envisaged to eradicate.

Conclusion:

Composition scheme is beneficial for persons who deal with the ultimate consumers. i. e (Business to Consumers) since the intention behind purchasing the product is for consumption and not for further supply. Hence, the recipient will not be entitled to credit. The said scheme is not recommended for a person who deals with other businesses and not directly with the consumer.

Any person who has opted for the said scheme cannot expand his business because of the conditions put forth. The charging section of composition scheme states that apart from traders, all the other suppliers have to pay tax on the entire turnover which also includes exempt supply and non-taxable supply so they are deprived of the benefit granted to a normal registered person and they end up paying tax on the goods/services which are exempt.