GST Composition Scheme is an option available to a registered taxpayer who needs to inform the tax authorities of his intention to be registered under the scheme. In case the registered taxpayer fails to comply with the same he would be treated a normal tax payer and administered accordingly. Such option needs to be for all business of the tax payers is both for goods as well as services

Turnover and Rate of Tax under GST Composition Scheme

A registered taxpayers, whose aggregate turnover does not exceed Rs. 75L in the preceding financial year pay tax at a rate more than 1% for Manufacturer, 2.5% for Restaurant Sector and 0.5% for other Suppliers of turnover.

Turnover Limit of Rs. 50L for Special Category States

The GST Council has decided that Following Special Category States will have a Rs. 50 Lakhs turnover limit for Composition Levy for CGST and SGST purpose

Arunachal Pradesh Assam Manipur
Meghalaya Mizoram Nagaland
Sikkim Tripura Himachal Pradesh

 For the State of Jammu & Kashmir the turnover limit for the Composition levy has not yet been decided and will be decided in due course.

Taxable Persons Excluded from the Composition Scheme

Following Taxable persons are not granted permission to opt for the scheme who:

  • Supplies goods not leviable under the Act
  • Supplies Services
  • Makes a supply of goods other than Intra State i.e. Interstate or Import/Export
  • Makes a supply of goods through Electronic Commerce Operator i.e. Ecommerce and liable to Collect Taxes
  • Manufactures such goods as may be notified

Manufactures NOT Eligible for Composition Levy

Further, it is also if in case a taxable person has different business segments having same PAN as held by the taxable person, he must register all such business under the scheme.

If an individual has different business segments such as:

1. Textile

2. Electronics and Accessories

3. Groceries

4. Ice cream and other edible ice, whether or not containing cocoa

5. Pan Masala

6. Tobacco and manufactured tobacco substitutes

Person Not Eligible to pay tax under Composition Scheme

  • Supplier making inter-state outward supplies of goods
  • Supplier engaged in making supply of goods through Electronic Commerce Operator (It appears to be against the vision of digital India)
  • Manufacturer of such goods as may be notified by the Government
  • Casual taxable person or a non-resident taxable person
  • Supplier of services other discus in above table i.e. food/restaurants service
  • Supply of goods which are not leviable to tax under this act

 Rate of Tax under GST Composition Scheme

The GST rate of tax for those registered under GST Composition Scheme is as follows:

  • Manufacturers, other than manufacturers of such goods as may be notified by the Government Rs. 1%
  • Suppliers making suppliers referred to in clause (b) of paragraph 6 of Schedule II – 2.5%
  • Any other supplier eligible for composition levy under section 10 and these rule – 0.5%

Rate of Tax

The Rate of tax under composition scheme would be as under:

Categories of registered person Central Rate State/UT GST Rate Total Rate
Manufacturer other the goods notified 1.00% 1.00% 2.00%
Other Supplier Like Agent, Traders 0.50% 0.50% 1.00%
Composite supply of food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption) Example: Restaurants, Eating Joints, Mess, Canteens, Outdoor, Caterer etc 2.50% 2.50% 5.00%
Service Provider NA NA NA

No Tax, No Credit

  • No Credit of Input Tax there has been No provision of input credit on B2B transactions. Thus, if any taxable person id carrying out business on B2B model, such person will not be allowed the credit of input tax paid from the output liability. Also, the buyer of such goods will not get any credit of tax paid, resulting in price distortion and cascading. This will further result into a loss of business as buyers might avoid purchase from a taxpayer under composition scheme. Scheme holder cannot claim input tax credit input tax credit even if he makes taxable purchase from a regular taxable dealer. Ideally, the taxable amount would be added to the composite tax payer’s cost.
  • No Collection of Tax Though the rate of composition tax is kept very nominal at 0.5% or 1% or 2.5%, a taxpayer under composition scheme is not allowed to recover such tax from his buyer, as he is not allowed to raise a tax Invoice. Consequently, the burden of such tax is kept on the taxpayer himself and this must be paid out of his own pocket, Thus, the fundamental principal of limited compliance and tax burden on small taxpayer is defeated here.

Conditions for opting to pay tax under Composition Scheme

  • Composition dealer shall not collect any tax from the recipient on supplies made by him
  • Composition dealer shall not be entitled to any credit of input tax paid on his inward supplier

Lesser Compliance

A normal taxpayer is required to submit a minimum of three returns (3 Returns) on monthly basis and one yearly consolidated rate i.e. 37 returns in a whole year non-filing of which will attract penalty. Under the scheme a tax payer is required to file one return in each quarter, he need not worry on record keeping and focus more on his business. Since a scheme holder is not register to pay taxes at regular rate, he is not liable to issue a Tax Invoice rather issue a Bill of Supply making this a more convenient option as lesser details are required.

Strict Penal Provisions

Under GST if in the opinion of proper office, it is found that a taxable person not being eligible for the scheme have opted for the scheme, he shall be liable to pay differential taxes along with penalty and provisions of demand and recovery will apply to him.

This means that before opting for the scheme a taxable person must be free from any all doubts of his eligibility for the scheme to avoid such penal provisions. However, if a small taxpayer who has limited knowledge of tax laws and compliance makes any mistake under composition scheme, he shall be liable to pay tax at standard rate on his total turnover along with a penalty which will be equal to the total tax liability.

Merits of the Scheme

Below are some of the prominent reasons why you should choose to get registered as a supplier under the composition scheme:

  • Limited Compliance: Lesser compliance w.r.t. furnishing of returns, maintenance of books of records, issuance of invoices more focus on business
  • Limited Tax Liability: On comparison with regular taxpayers, person taxed under Composite Scheme will be liable to pay tax at a rate not more than 2.50% instead of standard rate of 18%
  • High Liquidity: Unlike normal tax payers, tax payers under Composite Scheme will be liable to pay taxes at a lower rate resulting in lesser chunk on his working capital

Demerits of the Scheme

The demerits of registering under composite scheme by a taxable person are as follows:

  • Limited Territory for Business: A taxpayer registered under the composition scheme is barred from carrying out inter-state transactions and can-not affect import-export of goods and services.
  • No credits of Inputs Tax: Under the scheme, the credit of input tax paid on the purchase of inputs from a normal tax payer will not be allowed The buyer of goods supplier by scheme holder will also not enjoy Input tax credit resulting in price distortion, cascading, loss of business to scheme holders.
  • No Collection of Tax: Though the rate of tax for a scheme holder is lower the burden of such tax is kept on the taxpayer himself, leading to higher cost of sales.
  • Penal Provision: As per the Model GST Law, if the taxpayer who has previously been given registration under composition scheme is found to be not eligible to the composition scheme or if the permission granted earlier was incorrectly granted, then such taxpayer will be liable to pay the differential tax along with a penalty
  • Not applicable to the supplier supplying goods through E-Commerce

Return Compliance under Composition Scheme 

From GSTR-4 Section: 39(2) Composition Dealers

Due date for payment of Tax: On or before the due date of filing of return i.e. 18th

Due date for filing of return: Within 18th Days after end of such Quarter

Period: Quarterly

Form GSTR-4A Section: 39(2) Composition Dealers

Due date for filing of return: Auto-Populated details of Inwards suppliers made available to the recipient registered under composition scheme on the basis of Form GSTER-1 furnished by the supplier.

Form GSTR-9A Section: 44(1) Composition Dealers

Due date for filing of return: 31st December of next fiscal year

Periodicity: Annual

Bill of Supply

A Bill of Supply is a document of transaction that is different from a normal tax Invoice. There bills do not contain any Tax amount, as Input Tax Cannot be charged in these cases.

A bill of supply is issued in cases when a registered person is a supplier of exempted goods/Services, or, if they have opted to pay GST under the composition scheme. In either of these cases, the registered person cannot charge GST to the buyer, and hence there is no tax amounts listed on the bill”

Content of Bill of Supply

If a registered taxable person supplying exempted goods/services or paying tax under composition scheme (Section-10), then the supplier shall issue bill of supply instead of Tax Invoice which shall contains the following details:

Name, Address & GSTIN of Supplier Yes
A Consecutive serial number, can be in one or more multiple series but unique for a FY

(Not Exceeding Sixteen Character)

Yes
Date of Issue Yes
Name, Address & GSTIN/UIN of the recipient Yes
HSN Code or SAC Yes
Description of goods or Services Yes
Total Value Yes
Discount or Abetment Yes
Taxable Amount Yes
Signature or Digital Signature of Supplier or his authorised representatives Yes

Important Fields in a Bill of Supply

It should have the following details:

1.) Name, address and GSTIN of the supplier

2.) Bill of supply number (it must be generated consecutively and each bill of supply will have a unique number for that financial year)

3.) Date of Issue

4.) If the recipient is registered then the name, address and GSTIN of the recipient

5.) HSN Code of goods or Accounting Code for services**

6.) Description of goods/Services

7.) Value of the goods/services after adjusting any discount or abatement

8.) Signature of the Supplier

Reasons to Not issue a Bill of Supply

The registered person might not issue a bill of supply if the value of supply is less than Rs. 200.00

He may also decide not to issue when:

1. The recipient is not a registered person AND

2. The recipient does not require such bill of supply

The registered person shall issue a consolidated bill of supply for such suppliers at the end of each day in respect of all such supplies.

HSN Code

  • Turnover less than 1.5 Crores – HSN code is not required to be mentioned
  • Turnover between 1.5 Crores – 5 Crores can use 2-Digit HSN code
  • Turnover above 5 Crores must use 4- digit HSN Code

FORM UNDER COMPOSITION SCHEME

Form GST CMP-01

Intimation to pay tax under Section 10 (Composition Levy)

(Only for persons registered under the existing law migrating on the appointed day)

Form GST CMP-02

Intimation to pay tax under Section 10 (Composition Levy)

(For persons registered under the Act)

Form GST CMP-03

Intimation of details of Stock on date of opting for composition levy

(Only for persons registered under the existing law migrating on the appointed day)

Form GST CMP-04

Intimation/Application for withdrawal from composition Levy

Form GST CMP-05

Notice for denial of option to pay tax under Section 10

From GST CMP-06

Reply to the notice to Show Cause

Form GST CMP-07

Order for acceptance/rejection of reply to show cause notice

QUESTIONS

Question: 1 Who can opt for Composition Scheme?

Ans.: Business dealing only in goods can only opt for composition scheme. Services providers have been kept outside the scope of this scheme. However, restaurant Sector taxpayers may also opt for the scheme.

This holds true if your annual turnover is below Rs. 75 Lakhs

This holds true if your annual turnover is below Rs. 50 Lakhs (Specified States)

Question: 2 Must a Composition Dealer maintain detailed records?

Ans..: No, a dealer registered under composition scheme is not required to maintain detailed records as in the case of a normal taxpayer.

Question: 3 What is the tax rate applicable on a composition dealer?

Ans..: A registered taxpayer, who is registered under the Composite Scheme, will pay tax at rate not more than 1% for manufacturer, 2.5% for restaurant sector and 0.5% for other supplier of turnover.

1.) Manufacturers (Other than manufacturers of notified goods)

Rate of Tax CGST @1%

Rate of Tax SGST @1%

Total Rate of Tax @2%

2.) Suppliers (Food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption)

Rate of Tax CSGT @2.5%

Rate of Tax SGST @2.5%

Total Rate of Tax @5%

3.) Other Suppliers

Rate of Tax CGST @0.50%

Rate of Tax SGST @0.50%

Total Rate of Tax @1%

Question: 4 Do Composition Dealers have the option to avail Input Tax Credit?

Ans.: No, A Composition Dealer is not allowed to avail Input Tax Credit of GST paid to their supplier

Question: 5 Can a Composition Dealer Issue Tax Invoice?

Ans..: No, since a Composition Dealer is not allowed to avail Input tax credit, such a dealer cannot issue a tax invoice as well. A buyer from composition dealer will not be able to claim input tax on such goods.

Question: 6 Which returns are required to be filed by a taxable person registered under Composite Scheme?

Ans..: The taxable person is required to furnish only one return i.e. GSTR-4 on a quarterly basis and an annual return in Form GSTR: 9A

Question: 7 Is liability to pay taxes under Reverse Charge Mechanism covered under the Composite Scheme?

Ans..: Any tax payable under Reserve Charge Mechanism will not be covered under the scheme. These taxes will be liable to be paid as a normal tax payer.

Question: 8 Can a Composition dealer collect composition tax separately?

Ans..: No, A Composition Dealer is not allowed to collect composition tax from the buyer.

Question: 9 What is the threshold limit to be eligible for Composition Scheme?

Ans..: Any dealer whose aggregate turnover in the financial year does not exceed Rs. 75 Lakh can opt for composition scheme.

Question: 10 Can a dealer involved in interstate suppliers opt for Composition Scheme?

Ans..: No, Composition Scheme is available only for Intra-State-Supplies. If a dealer is involved in Inter-State supplies, then he cannot opt for the scheme.

Question: 11 What are the penalties applicable on composition dealer in case of any default in tax payment?

Ans..: If the tax administration has reason to believe that a composition dealer has wrongly availed the benefit under the composition scheme, then such a person shall be liable to pay all the taxes which he would have paid under the normal scheme. Also, he will be liable to pay a penalty equivalent to an amount of tax payable. This penalty will not be levied without giving a show cause notice to the dealer.

Question: 12 What is the transition provision if a business transits from Composition Scheme under current regime to Regular Taxation Under GST?

Ans..: Taxpayer registered under composition scheme under the current regime will be allowed to take credit of input held in stock, or in semi0finished goods or in finished goods on the day immediately preceding the date from which they opt to be taxed as a regular tax payer.

Question: 13 What are the conditions for availing input credit on Stock lying at the time of transition?

Ans..: Following are the conditions which must be addressed by the taxpayer to avail credit on input at the time of transition from composition scheme to the normal scheme:

1. Such inputs or goods are intended to be used for making taxable supplies under GST law.

2. Taxpayer was eligible for CENVAT credit on such goods under the previous regime, however, couldn’t claim it being under composition scheme.

3. Such goods are eligible for Input tax credit under GST regime.

4. The taxpayer has legal evidence of input tax paid on such goods.

5. Such invoices were issued within a period of 12 month from GST applicable date

Question: 14 What is the treatment for Input Credit availed when transitioning from normal scheme to Composition scheme?

Ans..: When switching from normal scheme to composition scheme, the taxpayer shall be liable to pay an amount equal to the credit of input tax in respect of inputs held in stock on the day immediately preceding the date of such switch over. The balance of Input Tax Credit after payment of such amount, if any lying in the credit ledger shall lapse.

Author Bio

Qualification: CA in Job / Business
Company: Deepak Kumar & Company
Location: Faridabad, Haryana, IN
Member Since: 18 Sep 2017 | Total Posts: 5
I'M Deepak Kr Gupta From Faridabad-Haryana, My profession is Accounts, Banking Finance, Taxation (Direct-GST), ROC, Labour Law/Payroll, Audit & Other Compliance etc. View Full Profile

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One response to “All about Composition Levy under GST”

  1. O. M. JAIN says:

    Under ‘Demerits of the Scheme’ – Limited Territory for Business: A taxpayer registered under the composition scheme is barred from carrying out inter-state “transactions” .. I am of the view that only outward supply is barred and inward inter-state purchases are not barred. I do not find any provision barring inter-state purchases from registered dealers or unregistered dealers. I hope I am right.

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