Composition Levy under Revised Model GST Law

1) What is Composition Levy ?

Under the proposed GST regime, tax will be payable at every point of supply where value is added to the value of supplies. It will never be levied on the value of the entire turnover. However, in order to simplify the tax issues for small businessmen , it is proposed that specified classes of businessmen may be permitted to opt to remain outside the value addition chain and instead pay a lump sum tax on the entire value of the turnover. This type of tax will be called Composition Tax which would be in of the GST payable by them. Some of the questions concerning this levy are discussed hereinunder:

2) What is the Turnover limit for eligibility under composition scheme ?

All registered taxable persons, whose aggregate turnover in the preceding financial year does not exceed fifty lakh rupees are eligible under this scheme.

3) What is included in the aggregate turnover in the preceding financial year?

Aggregate turnover include the aggregate value of all

a. taxable supplies,

b. exempt supplies,

c. exports of goods and/or services and

d. inter-State supplies

to be computed for each taxable person having the same PAN, on all India basis and excludes taxes, if any, charged under the CGST Act, SGST Act and the IGST Act, as the case may be;

It is clarified that aggregate turnover does not include the value of inward supplies on which tax is payable on reverse charge basis. For example if a businessman buys supplies on which he does not pay GST to the supplier but includes it in the value of his outward supplies for the payment of GST, then such value of inward supply on which the businessman pays the GST shall not be included in the value of aggregate turnover.  

4) Who are ineligible ?

a. A registered taxable person who is engaged in the supply of services only is not eligible.

b. A registered taxable person who makes any supply of goods which are not leviable to tax under this Act; or i.e. exempt supplies.

c. Who makes any inter-State outward supplies of goods; or

d. Who makes any supply of goods through an electronic commerce operator who is required to collect tax at source under section 56; or

e. who is a manufacturer of such goods as may be notified on the recommendation of the Council:

5) What is the Rate of GST under composition Scheme ?

The rate of composition tax shall not less than two and a half percent in case of a manufacturer and one percent in any other case, of the turnover in a State during the year. This will be prescribed , by notification, from time to time by the government on the recommendation of the GST Council

6) Can a taxable person opt for composition for some of his business and not for some of his other business ?

No. permission shall not be granted to any taxable person unless all the registered taxable persons, having the same PAN as held by the said taxable person, also opt to pay tax under the provisions of this sub-section.

7) What will happen when the aggregate turnover during a financial year exceeds fifty lakh rupees ?

The permission granted to a registered taxable person for payment under composition scheme shall stand withdrawn from the day on which his aggregate turnover during a financial year exceeds fifty lakh rupees.

8) Can a composition dealer collect any tax from the recipient on supplies made by him ?.

A taxable person who has opted for payment of tax under this scheme shall not collect any tax from the recipient on supplies made by him

9) On which turnover the composition tax will be charged ?

Composition tax will be charged on the “turnover in a State” during the year. “turnover in a State” means the sum  total of the aggregate value of all:

a. taxable supplies,

b. exempt supplies,

c. exports of goods and / or services made within a State by a taxable person and

d. inter-state supplies of goods and /or services made from the State

10) Does the value of turnover include any taxes , if any charged in the bill ?

The taxes paid under the CGST Act, SGST Act and the IGST Act, as the case may be shall be excluded. All other taxes charged in the invoice shall be included in the value of turnover.

11) Does the value of aggregate turnover include the value of inward supplies on which tax is payable on reverse charge basis?

The value of aggregate turnover does not include the value of inward supplies on which tax is payable on reverse charge basis?

12) Can the composition tax be paid out of input tax credit ?

No. Composition tax has to be paid in cash and the input tax credit can’t be utilised for payment of composition tax. This is so because by definition, composition tax is a tax which is not of the nature of GST but is ,in lieu of the GST payable by a dealer whereas  input tax credit means GST levied on the supply of goods and/or services under this Act and therefore it does not include composition tax.

13) Can a composition dealer be entitled to any credit of input tax.?

No . He shall not be entitled to any credit of input tax , because as stated in (11) above,  composition tax is a tax which is not of the nature of GST but is ,in lieu of the GST payable by a dealer. Input tax credit is allowed only of CGST, SGST and IGST paid on the inward supplies.

14) Clarifications required !

a. Turnover on which composition tax will be chargeable

It is provided that Composition tax will be charged on the value of “turnover in a State” during the year. By definition the value of “turnover in a State” includes exempt supplies and also exports of goods and / or services made within a State by a taxable person. This means that exempt supplies and exports will also be charged with composition tax unlike GST which zero rates all exports.

b. Rate of composition tax

It is provided that the rate of composition tax shall not less than two and a half percent in case of a manufacturer and one percent in any other case, of the turnover in a State during the year. It is not clear whether the rate of 2.5% or 1% includes bothe tahe rates for CGST and SGST or it will be doubled to 5% or 2% to provide for both CGST and SGST separately.

c. Composite Supplier

The Scheme does not apply to a  registered taxable person who is engaged in the supply of services only. What about a person who is engaged in supply of goods and services both. If the value of goods and services is separable, will it be permitted that composite tax is paid only on the value of goods and GST is paid on the value of services ? Question will be more complicated if the single outward supply is a composite supply consisting partly of goods and partly of services which are inseparable.

For example if a businessman has 3 types of supplies the total value of which during a year is less than Rs. 50 Lakhs.

1. Local supply of goods 25 Lakhs

2. Local supplies Services 10 Lakhs

3. Interstate supply of goods 05 Lakhs

a. Whether the supplier is eligible for composition scheme .

b. If yes, then how will the tax be calculated ?. Composition tax on local supplies , GST on local services and IGST on interstate supply of goods?. Nothing is clear from the model draft law.

Thus everything will depend on the provisions of the notification which will be notified to give effect to the proposal of composition scheme of taxation