Government of India introduced Goods and Services Tax, popularly known as GST to replace all indirect taxes w.e.f. 1st July, 2017. In GST regime, traders and dealers are required to fulfill many formalities and compliance but it is not problematic for small dealers to comply with all norms when compared to large ones. Thus, for the convenience and relaxation of small traders, the concept of composite scheme was introduced. A trader, in this scheme is required to maintain fewer record or books of accounts in comparison to normal GST compliance requirements. Under this scheme, traders no longer have to file monthly returns. They are immune from filing monthly returns, instead they file returns quarterly. However, this scheme is not beneficial for the large scale traders as under this scheme inter-state transactions are not permitted. Thus, whoever wants to expand the business outside the state boundaries should refrain itself from opting this scheme as it is an optional scheme..
Composition scheme is not a new concept, rather it was in the existence under Value Added Tax regime. This is a very easy and hassle free compliance scheme for small taxpayers. Small taxpayers can get rid of tedious formalities of GST and can pay the tax at fixed rate under composition scheme. Section 10 of Central Goods and Services Tax Act (hereinafter referred to as “CGST Act”) 2017 provides composition scheme for dealers having whose annual turnover below Rs. 1.5 crore and below Rs. 75 lakhs for dealers of special states which are Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Himachal Pradesh with the exception of Jammu and Kashmir and Uttarakand whose threshold limit is Rs. 1 Crore. Turnover of all the businesses registered with the same Permanent Account Number (PAN) is taken into account while calculating the turnover.
Following people can not avail the composition scheme even if they have annual turnover of 1.5 crore:
Following are the rates of tax under the composition scheme:
|Type of Business||CGST||SGST||Total|
|Manufacturer and traders(goods)||0.5%||0.5%||1%|
|Restaurant not serving alcohol||2.5%||2.5%||5%|
|Other suppliers(traders and agent)||0.5%||0.5%||1%|
In case two or more registered person are having the same Permanent Account Number, in that case if a single registered person wants to opt this scheme then he can only be eligible for this scheme if all such registered person opt the scheme. If one person opts for normal tax scheme then others become ineligible to opt into this scheme. The composition scheme will be lapsed as soon as the aggregate turnover of the scheme holder during a financial year exceeds specified limit that is 1.5 crore. In this scheme, the supplier is required to issue a bill of supply instead of tax invoice because they cannot charge tax from the buyers. This is due to the fact that they pay GST to the government on their own at a fixed rate owing to this they cannot avail input tax credit also. Further, the supplier should mentioned at the top of the bill of supply that “composition taxable person, not eligible to collect tax on supplies”.
Furthermore, it is categorically provided under CGST Act that if a proper officer has reason to believe that an ineligible person has opted this scheme fraudulently and is taking the advantage of the same, the person in addition to any tax that may be payable by him, would also be liable to a penalty provided under section 73 and 74 of the CGST Act.
Amendments to the Composition Scheme
Initially composition scheme was designed only for goods’ suppliers and service providers were kept out of the ambit of composition scheme except restaurant service providers. They were not given any concession under the GST regime. Finally, GST Council felt the need to bring the small service providers under the ambit of scheme so that they can also take advantage or get benefitted from this scheme. Accordingly, composition scheme was amended by virtue of Notification No. 14/2019 dated 7-3-2019 –Central Tax .Under this amendment, two changes were brought. First the threshold limit under section 10(1) was raised from 1 crore to 1.5 crore and second, that manufacturers and traders having a “turnover of services” up to INR 5 lakhs or 10% of total turnover could opt the composition scheme.
However, a person who is only a service provider other than a restaurant service provider cannot avail this scheme, hence such dealers remained deprived of benefit of composition scheme. Subsequently, in order to provide the benefit of composition scheme only to service providers, GST council in its 32nd meeting held on 10th Jan 2019 decided that the service providers whose annual turnover is below 50 lakhs rupees can opt to pay the tax at the rate of 6% (3% CGST and 3% SGST) under notification no. 02/2019-Central Tax Rate dated 7th March 2019 ( hereinafter referred to as “notification”).As per the notification person whose aggregate turnover is up to Rs. 50 lakh and also who is not eligible to pay tax under section 10 (1) of the CGST act can opt this scheme.
The turnover limit under the notification scheme is 50 lakh whereas under composition scheme it is 1.5 crore. The difference in the threshold limit is owing to the fact that in case of service provider the input is very less and profit margin is high with less turnover. Moreover, as there is no chain of supply in case of supply of service, customer and service provider has direction relation whereas in case of supplier of goods, goods flow from a chain e.g. manufacture to retailer that makes the price of goods high and profit margin less. Therefore, there is this much gap in threshold limit in both the scheme.
The method for opting into the scheme under the notification is similar to that of an existing composition taxpayer. However, these taxpayers fall under the ‘any other supplier eligible for composition levy’ category This notification, however, creates an ambiguous situation among the suppliers as it is unclear whether this notification is an amendment to Section 10 or it is an optional scheme added for service provider in CGST Act. It was always an issue that whether a person who is supplier of goods and also a service provider can opt for both the composition scheme and notification no. 02/2019-Central Tax Rate dated 7th March 2019 simultaneously or they are alternative schemes.
In this regard the Advance Authority Ruling, Karnataka has given some clarity in the case of M/S Empathic Trade Center.In this case, the court held that notification no. 02/2019-Central Tax Rate dated 7th March 2019 prescribes the rate of tax whose aggregate turnover of fifty lakh rupees and this notification can be availed by the person who is not eligible to pay tax under section 10 (1) of the CGST act 2017. Hence it is not composition scheme but is an optional scheme.
In the above mentioned case the Authority for Advance ruling has categorically states irrespective of number of businesses, the trader has to opt one scheme either the notification scheme or the composition scheme and that scheme will be applicable to all his businesses. He cannot claim both the scheme simultaneously, One for one business and other for other business. He has to choose one single scheme and that single scheme would be applicable to all the business be it is supply of goods or services.
Composition scheme was essentially introduced for the convenience of small traders. It has an upper hand over the conventional method in a way that it provides lesser tax rates and higher liquidity to small traders. At the same time, the biggest disadvantage of this scheme is that it is restricted to intrastate trade only and traders cannot avail input tax credit. With time, the scheme has evolved and it was assured that the scheme would reach every small trader and they should get benefit of it. Still, there are some unanswered questions which require attention. In this scheme, threshold limit has two compliances e.g. one for all over India i.e. 1.5 crore and second above mentioned nine states i.e. 75 lakhs. It may be due the fact that traders have small businesses in these states. There is also a separate limit for normal states and special states in case of mandatory registration as the normal states’ annual threshold turnover is Rs. 40 Lakhs as compared to special states’ turnover of Rs. 20 Lakhs. This has essentially been done to benefit the customers living in these areas as the implementation would mean the removal of cascading effect and the customers wouldn’t have to pay taxes over the same product again and again.
However, this benefit is not at all in line with the composition scheme as the threshold limit for the special states should have been more than the normal ones in order to provide benefit to the shopkeepers. Instead, it has been kept at Rs. 75 lakhs which is exactly the half of the normal states’ turnover threshold. This leads to the point of discrimination among traders when they have same turnover as a trader having a turnover of Rs 1 Crore in a special state cannot opt composition scheme whereas trader of a normal state can opt the scheme with the same turnover. Further, few of these special states are tourist places and they have even more business than the normal states e.g. Himachal Pradesh.
Thus, it should be ensured that the benefit of the composition scheme must reach equally to everyone since the very reasoning behind this difference in the composition scheme threshold limits for special and normal states remains a mystery to the public sphere as this very question still remains unanswered as of now.
Lower GST Rate Composition Scheme for Service Providers, Cleartax (Jun 05, 2020, 04:05:49 PM), https://cleartax.in/s/gst-composition-scheme-service-providers.
Central Goods and Services Tax Act, 2017, No. 16, Acts of Parliament, Sec 10(1) (India).
Central Goods And Services Tax Act, 2017, No. 16, Acts of Parliament, Sec 10(1) (India).
Central Goods And Services Tax Act, 2017, No. 16, Acts of Parliament, Sec 10 (2) (India).
Central Goods And Services Tax Act, 2017, No. 16, Acts of Parliament, Sec 10 (3) (India)
Central Goods And Services Tax (CGST) Rules, 2017, Rule 5(India).
Central Goods And Services Tax Act, 2017, No. 16, Acts of Parliament, Sec 10(5) (India).
Author Details :
1. Anshika Vashishtha | College: Institute of Law, Nirma University, Ahmedabad | Year: 5th year
2. Varun Mishra | College: Balaji Law College Pune | Year: 4th Year