Introduction to composition scheme under GST
Section 10 of the CGST Act, 2017 deals with the Composition Scheme that is a concept for concessional taxation which is provided for small taxpayers, allowing the registered persons with an aggregate turnover not exceeding the prescribed limit of ₹1.5 crore (₹ 75 lakhs in special category states) in most states for manufacturers to pay tax at a prescribed lower rate instead of the normal rate.
With an intent to reduce compliance burden and simplify the tax structure, It allow the eligible registered persons to pay tax at a prescribed percentage of turnover instead of the regular GST rates on outward supplies.
Key benefits of Composition scheme
It helped small taxpayer with lower tax liability, introduced the simplified return filing through GSTR-4, with no requirement to maintain detailed records, and also provided the immunity from the rigours of ITC matching and reversal.
What is Turnover?
Before we move further, I want to discuss with you all legal definition of turnover. “Turnover” means the aggregate value of all taxable supplies, exempt supplies, exports of goods or services or both, and inter-State supplies of persons having the same PAN, to be computed on an all-India basis.
Few believed that the tax is payable at the composition rate on the aggregate turnover (including exempt, taxable, and inter-state supplies made from the same PAN within India) and few believed why tax is to be paid on exempt supplies.
I want to bring emphasis on “exempt supplies” that is included in the turnover calculation, but does not imply that tax is to be paid on exempt supplies, hence it brought confusion amongst taxpayers
Legal Foundation
The central enabling provision is Section 10(1) of the CGST Act, which empowers the Government, on the recommendations of the GST Council, to notify the rate composition tax as well as the conditions for specified categories of registered persons.
Also using these powers, the Central Government issued Notification No. 8/2017- Central Tax, dated 27th June 2017, prescribing composition rates for manufacturers, traders (suppliers of goods), as well as restaurants not serving alcohol.
Hence this was amended by Notification No. 1/2018- Central Tax, dated 1st January 2018, dueto which I decided to write this article.
To avoid litigations and disputes, GST council came up with above notification, which stated two amendments:
Amendment 1 was introduced to reduce the tax rates for manufacturers:
Original Provision (under Notification No. 8/2017) was Clause (i): Manufacturers had to pay 1% of turnover in the State/UT which was revised vide Notification No. 1/2018, by Replacing “1%” with “0.5%”, effectively lowering the tax rate.
Hence it reduced the tax burden on small manufacturers opting for the scheme and improves cash flow efficiency. It aligns with the policy of providing relief to MSMEs under the GST regime.
Amendment 2 was related to the clarification for traders (Clause iii):
Original Provision (under Notification No. 8/2017) was Clause (iii): Traders had to pay 0.5% of turnover in the State/UT which was revised vide Notification No. 1/2018 by replacing this with “0.5% of the turnover of taxable supplies of goods”.
The scope of levy is now limited to taxable goods only, thereby excluding exempt supplies from the composition tax base. This has a material impact on dealers involved in mixed supplies that is both taxable and exempt. It ensures a fairer tax calculation, and eliminated scope of taxation on non-taxable components.
Why I stated mixed supplies?
Those who are dealing only with exempt supplies are even not required to register under GST, and there is no doubt regarding taxable person, hence the doubt is restricted to the people dealing with both taxable and exempt supplies and are registered under composition scheme.
That is the reason the notification stated by me above is restricted to the scope of levy of GST under composition scheme that is limited to taxable goods only, thereby excluding exempt supplies from the composition tax base. This made up a huge impact on composition dealers involved in mixed supplies i.e. both taxable and exempt ensuring a fairer tax calculation, as well as elimination of GST on non-taxable supplies.
Let’s discuss the post-amendment composition tax rates which are effective 01.01.2018
| Category | Rate under CGST | Rate under SGST | Effective Total Rate |
| Manufacturers | 0.5% of turnover | 0.5% of turnover | 1% |
| Traders (Dealers in Goods) | 0.5% of taxable turnover | 0.5% of taxable turnover | 1% |
| Restaurants (not serving alcohol) | 2.5% of turnover | 2.5% of turnover | 5% |
I am restating that the definition of turnover in State/UT as per Section 2(112) includes exempt supplies. However, this notification supersedes it by restricting the rate to taxable supplies only for traders.
That clearly specified that for the Manufacturers and Restaurants that are not serving Alcohol are taxed in both taxable and exempt sales
Let’s understand this by an example:
Case: A registered trader, Say AR Ventures in Ajmer, Rajasthan has the turnover of INR 60 lakhs in which taxable supplies are INR 50 lakhs and exempt supplies are INR 10 Lakhs
Pre-amendment Tax Liability:
It is calculated as follows:
0.5% of INR 60 Lakhs which is the total turnover of AR Ventures in the State pertaining to the liability of INR 30000 each for CGST and SGST. Total Tax liability will be INR 60000
Post-amendment Tax Liability:
It is calculated as follows:
0.5% of INR 50 Lakhs which is the taxable turnover of AR Ventures that is liability of INR 25000 each for CGST and SGST. Total Tax liability will be INR 50000
Resulting in total savings of INR 10000, this reflects the policy intent to avoid taxing exempt goods under composition.
What are the compliance considerations for the same?
Composition taxpayers are required to mention “composition taxable person” on their invoices (which must be a bill of supply and not a tax invoice). Also, they cannot collect any tax from customers or claim input tax credit for the tax paid by them, also they must file Form GSTR-4 quarterly and GSTR-9A annually (till FY 2018–19).
Restrictions on composition scheme
As we have discussed one restriction previously stating non requirement of registeration i.e. supply of exclusively exempt goods or services, but here I am going to discuss about the certain persons who are not eligible for the composition scheme.
They are the service providers (except restaurant services and, later, notified services given as per Section 10(2A)), Suppliers of non-taxable goods, Inter-State suppliers, E-commerce operators liable to collect TCS, and Manufacturers of notified goods (e.g., pan masala, tobacco, ice cream, etc.)
Conclusion
My main focuss in this article was on the “Notification No. 1/2018- Central Tax” which is a beneficial amendment aimed at rationalising the tax structure for small manufacturers and traders under GST. It is an example of responsive tax administration, theoretically reflecting the GST Council’s effort to ease the burden on SMEs and improve compliance, practically how easy is GST compliance we all know, hence don’t want to go deeper in that thing.
For professionals and businesses alike, a clear understanding of this notification helps in effective tax planning, especially for clients eligible for the composition scheme but having mixed supply profiles.
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Author can be contacted at aman.rajput@mail.ca.in
Author Bio
sir,
A registered composition dealer
sales turnover taxable rs:80 lacs
agriculture income rs:4 lacs
purchase goods from un registered dealers rs:50,000/-
freight charges and advertising expenses rs:21,000/- f.y.24-25
question:
1.dealer agriculture income rs:4 lacs exempted show in gstr-4 annual returns
2.purchases goods from un registered dealers rcm applicable or not
3.freight charges and advertising expenses rcm applicable or not f.y.24-25 show in gstr-4 annual returns compulsory