INTRODUCTION

In order to provide relaxations to small scale businesses especially MSME’s, Government provides for special optional schemes, especially indirect taxation laws like State level Value Added Tax (VAT) Laws, Service Tax Laws etc. These schemes, normally called, Composition Schemes, provide certain relaxations in so far as these are related to procedural compliance, to be made by the taxpayers in terms of the legal framework provided under the relevant laws.

Even in Income Tax laws, section 44AD, 44ADA, 44AE etc., are the sections which provide for an alternate and simplified taxation mechanism as far as Income tax laws are concerned. Taxpayers opting for these schemes are governed by special procedures, compliance, conditions and restrictions as may be prescribed for exercising the option to go for these schemes.

The very purpose behind introducing these kinds of schemes is to ensure that appropriate tax collection is made by the Government without bothering small scale businesses especially MSME’s with the additional compliances including cost thereof which are required to be made by the taxpayers while following normal provisions of the law.

Like VAT laws, Service Tax laws, Composition scheme has also been provided in terms of the provisions contained under Central Goods and Services Tax Act, 2017 (‘CGST Act’), related notifications and Central Goods and Services Tax Rules, 2017 (‘CGST Rules’).

Benefits of availing composition scheme shall include lesser compliance efforts with related less costs, low tax rates with corresponding lower tax liability, easy to follow mechanism. However, along with the benefits associated with the scheme, there are certain shortcomings as well, like inter-state supplies are not permitted, supplies through e-commerce operator not permitted, no tax credit allowed, no tax collection from the recipients etc. Accordingly, the decision regarding opting for composition scheme is to be made after appropriate evaluation of business scenarios, conditions and/or situation the business is operating in.

Through this article, an attempt has been made to summarize and discuss the intricacies of the provisions relating to Composition Scheme as they exist currently and are contained under CGST Act read with relevant notifications and CGST Rules.

COMPOSITION SCHEME (‘SCHEME’)

Provisions relating to the Scheme have been provided under Chapter III of the CGST Act which provides for the provisions in so far as those relate to levy and collection of tax under GST laws. Section 10 of Chapter III specifically provide for the relevant legal provisions for the Scheme.

Registered person whose aggregate turnover in the preceding financial year did not exceed INR 50 lakh may opt for paying tax under the scheme. Government has been empowered to increase the said threshold of aggregate turnover of INR 50 lakh to a higher amount, but not beyond INR 1.5 crores. By virtue of the exercise of the power conferred to the Government, the Government, vide Notification 14/2019-Central Tax dated March 07, 2019, has extended the said limit of aggregate turnover to INR 1.5 crores effective from April 01, 2019. In respect of State of Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand, the threshold limit of turnover for the Scheme has been prescribed as INR 75 lakh. However, manufacturer of goods like ice cream and other edible ice whether or not containing cocoa, Pan masala, Aerated water, tobacco and manufactured tobacco substitutes, as have been specified by the Government, are not eligible to opt for composition scheme. Restrictions in respect of notified goods is applicable in case of manufacturer of such goods, trader of such goods shall still be eligible for opting the scheme.

For the purposes of aggregate turnover to determining the eligibility for the scheme, such turnover shall be the aggregate of all supplies i.e. taxable outward supplies, NIL rated supplies, exempt supplies, non-taxable supplies, exports and inter-state supplies to be taken on PAN India basis, where there are multiple registration obtained under the same PAN in different states.

Person opting for the Scheme may also supply services (other than those referred to in clause (b) of paragraph 6 of Schedule II i.e. restaurant services) subject to the condition that value of such services shall not exceed 10% of the turnover in the State or Union Territory or INR 5 lakh whichever is higher. In determining the turnover in the State or Union territory for computing the value of services allowed to be supplied in case of composition scheme, the value of exempt supply of services provided by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount shall not be taken into account.

The option to avail scheme is not be available where;

  • the registered person is engaged in making supply of services (except where such services are other than those referred to in clause (b) of Paragraph 6 of Schedule II and value of such services exceeds 10% of turnover in the State or Union Territory or INR 5 lakh whichever is higher);
  • person is engaged in making supply of goods which are not leviable to tax under the Act;
  • person is engaged in making inter-state outward supplies of goods;
  • person is engaged in making supply of goods through e-commerce operator liable to collect tax in terms of section 52 of the CGST Act;
  • person is manufacturer of notified goods; and
  • person is a casual taxable person or non-resident taxable person.

In case of multiple registration being obtained under the same PAN, all registrations (GSTIN) shall be required to opt for the composition scheme. Option availed shall lapse on the day when the aggregate turnover during a financial year exceeds the turnover limit as specified. Once scheme is opted, the person availing the scheme shall not be allowed to collect tax from the recipient of supplies made by it and shall not be entitled to claim input tax credit in respect of inward supplies received by it. Where it is found by the concerned tax officer that the person availing the scheme, is not eligible to do so, person availing the scheme wrongly shall, in addition to the tax payable, be liable to penalty and proceedings under section 73 or section 74 may be initiated against him.

As Section 10 has an overriding effect over the provisions of CGST Act, but it is subject to provisions of section 9(3) and section 9(4) of the CGST Act. Hence, person availing the composition scheme shall be required to comply with the provisions contained under section 9(3) or section 9(4) of the CGT Act. In other words, such person shall be required to pay tax under Reverse Charge Mechanism (RCM) wherever applicable at the applicable tax rates.

Rate of tax applicable in case of composition scheme have been prescribed under Rule 7 of the CGST Rules, 2017. In terms of Rule 7 of the CGST Rules, tax rates have been prescribed as under; 

S. No. Category of Registered Person Rate of Tax
1 Manufacturers, other than manufacturers of such goods as may be notified by the Government 0.5% of the turnover in the State or Union territory
2 Suppliers making supplies referred to in clause (b) of paragraph 6 of Schedule II 2.5% of the turnover in the State or Union territory
3 Any other supplier eligible for composition levy under section 10 and the provisions of this Chapter 0.5% of the turnover of taxable supplies of goods and services in the State or Union territory

In terms of Rule 5 of CGST Rules, following conditions or restrictions shall apply to a person opting for composition scheme;

  • He is neither a casual taxable person nor a non-resident taxable person.
  • 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 in case of registration migrated from erstwhile regime.
  • The goods held in stock by him have not been purchased from an unregistered supplier and where purchased, he pays the tax under section 9(4).
  • He shall pay tax under sub-section (3) or sub-section (4) of section 9 on inward supply of goods or services or both.
  • He was not engaged in the manufacture of goods as notified during the preceding financial year.
  • 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.
  • 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

Any registered person opting to pay tax under composition shall file an intimation in Form GST CMP-02, prior to the commencement of the financial year, in respect of which such option has been exercised. A registered person, already paying tax under composition, may not file a fresh intimation every year and he may continue to pay tax under the scheme, subject to the provisions contained under the Act or Rules.

ALTERNATIVE COMPOSITION SCHEME

In terms of Notification No. 2/2019-Central Tax (Rate) dated March 07, 2019, an alternative scheme of composition was prescribed in respect of registered persons whose aggregate turnover in the preceding financial year was up to INR 50 lakh and  who is not eligible to opt for normal composition scheme as given under section 10(1), wherein tax rate for Central Tax was prescribed at 3%. Hence, the total tax rate applicable to the supplies made under the scheme shall be 6%.

Conditions laid down in the said notification are identical as those prescribed under section 10(1) for normal composition scheme except that this notification allows the supplier, to supply services in excess of the limit as prescribed in normal composition scheme. Hence, this notification may be called as providing a composition facility for service providers supplying intra-state services beyond the maximum ceiling in terms of section 10(1), but subject to a turnover up to INR 50 lakh.

The intent of this notification was introduced by way of insertion of sub-section (2A) to section 10 of the CGST Act. Such amendment was made by Finance (No.2) Act 2019 vide section 93 effective date of which was prescribed as January 01, 2020 vide Notification No. 01/2020-Central Tax dated January 01, 2020.

Notification 2/2019-Central Tax (Rate) dated March 07, 2019 was made effective much more before than the amendment in section 10 was brought in by insertion of sub-section (2A) effective from January 01, 2020, but such notification contains the exact text and intent of section 10(2A).

Hence, it may be viewed that by the introduction of section 10(2A) under the CGST Act, the notification 02/2019 as abovementioned, along with other related notification/circulars prescribing procedure for furnishing returns, payment of taxes etc. applicable to person opting for scheme under the said notification, have become redundant except for the prescription of rate of tax applicable in this case, as all rules and regulations as applicable to composition taxpayers under section 10(1) are equally applicable to for section 10(2A) cases as well.

Conditions attached to opt for this scheme are as under;

  • Aggregate turnover in the preceding financial year should be up to INR 50 lakhs;
  • person should not be eligible for opting composition scheme as per section 10(1) of CGST Act;
  • person should not be engaged in making supplies which are not leviable to tax under the CGST Act;
  • person should not be engaged in making inter-state outward supply;
  • person should neither be a casual taxable person nor a non-resident taxable person;
  • person should not be engaged in making any supply through an e-commerce operator who is required to collect tax at source in terms of section 52;
  • person should not be engaged in making supply of notified goods like Ice cream and other edible ice, whether or not containing cocoa, Pan masala, Tobacco and manufactured tobacco substitutes etc.;
  • All registration under a single PAN shall be required to opt for the scheme collectively;
  • Registered person shall not be entitled to collect any tax from the recipient of supplies nor shall he be entitled to avail any input ta credit;
  • Registered person shall, instead of issuing a tax invoice, issue bill of supply;
  • The registered person shall mention the following words at the top of the bill of apply, namely `taxable person paying tax in terms of Notification No. 2/2019-Central Tax (Rate) dated 07.03.2019, not eligible to collect tax on supplies;
  • Registered person shall be liable to pay central tax at the rate of 3% on outward supplies in terms of the notification;
  • Registered person shall be required to comply with requirements of reverse charge mechanism in terms of section 9(3) and section 9(4) of the CGST Act.
  • Where any registered person who has availed of input tax credit opts to pay tax under this notification, he shall reverse/ pay by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods as if the supply made under this notification attracts the provisions of section 18(4) of the said Act and the rules made there-under and after payment of such amount, the balance of input tax credit, if any, lying in his electronic credit ledger shall lapse.

Tax under this notification shall be payable at the rate of 6% (3% CGST and 3% SGST) on first supply of goods or services or both up to an aggregate turnover of INR 50 lakh made on or after first day of April in any financial year. For the purpose of determining the eligibility of a person to pay tax under the notification, ‘first supply of goods or services or both’ shall include the supplies made from 1st day of April of the financial year to the date when the person becomes liable for registration under the CGST Act.  For the purposes of determining the tax payable under the notification, ‘first supply of goods or services or both’ shall not include the supplies made from 1st day of April of the financial year to the date when the person becomes liable for registration under the CGST Act.

SCHEME VALIDITY

Scheme of composition shall be valid till the conditions attached thereto are complied with by the taxpayer. Where a person ceases to fulfill the conditions and restrictions as are required to be adhered to by a composition taxpayer, he shall file an intimation of opting out of the scheme in Form GST CMP-04 within 7 days from such date and shall issue tax invoice with respect to each supply made after he ceases to fulfill the said conditions and restrictions.

In case of voluntary opting out of the scheme, the taxpayer shall file Form GST CMP-04 before such withdrawal and thereafter, he can proceed to issue tax invoice as a regular taxpayer.

Where the proper officer is of the view that the person is not eligible to avail composition option or he has contravened the provision of the law, the officer may issue a show cause notice in Form GST CMP-05 asking the taxpayer to show cause why the option to avail composition should not be denied to him which shall be replied by the taxpayer within 15 days from the date of receipt of such notice. Reply to such notice shall be made in Form GT CMP-06 against which an order in Form GST CMP-07 shall be issued by the officer within 30 days from the receipt of CMP-06, either accepting the reply or denying the option to pay tax under section 10 from the date of option or date of contravention as the case may be.

COMPLIANCE REQUIREMENTS REGARDING FILING OF RETURNS ETC.

Composition taxpayers to file a statement in Form GST CMP-08 on a quarterly basis, declaring turnover in the state, the amount of tax payable including that under RCM etc. Such statement shall be filed within 18 days from the closed of the quarter concerned.

Composition taxpayers shall file a return in Form GSTR-04 for the financial year concerned by April 30 of the next financial year and such return shall contain the details as may be prescribed. Composition taxpayers are also required to file annual return in Form GSTR-9A.

CONCLUSION

The decision regarding opting for the composition scheme or not opting for the same shall depend upon various factors which inter alia include the decision regarding forgoing the input tax credit on inward supplies, restricted supplies within a state, as no inter-state supplies are allowed, restriction regarding online sales through e-commerce portals etc. Decision shall depend upon the personal choice of the taxpayer considering the various restrictions/conditions as are applicable to composition scheme along with reduced compliance burden with corresponding reduced compliance cost.

There cannot be any thumb rule to decide when to opt for composition and when to opt out of it and such decisions have to be taken depending upon fact of each case separately.

Disclaimer: Views expressed in this article are personal views of the author and are for guidance purposes only. It is advised that the same should not be treated as legal advice and should not be acted upon in business scenarios. It is further advised that appropriate legal/professional advice is taken prior to acting upon the above while undertaking business transactions.

Author Bio

Qualification: CA in Practice
Company: Tanwar Atul & Associates
Location: Delhi, New Delhi, IN
Member Since: 30 Mar 2020 | Total Posts: 10
Chartered Accountant in Practice, having wide experience in diverse business environment especially Indirect Taxes like service tax, VAT and GST View Full Profile

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