Composition Scheme under GST- Brief Analysis

Composition scheme under the GST law is for small businesses where they can opt to pay a fixed percentage of turnover as tax in lieu of standard rate of tax and be relieved from the detailed compliance of the provisions of law. Section 10 of CGST Act deals with composition levy.

Section 10 is an overriding section which overrides contrary provisions of Acts subject to provisions of sub section (3) and (4) of section 9, which means a composition dealer is also required to pay tax under reverse charge.

Who can opt for composition scheme:

A registered person, whose aggregate turnover in the preceding financial year did not exceed Rs.75 lakhs (limit increased from 50 lakh to 75 lakh vide Notification No. 8/2017-Central Tax) may opt to pay a fixed percentage of turnover as tax in lieu of lieu of standard rate of tax.

Provided that if a person is registered in below mentioned states then the aggregate turnover in the preceding financial year shall not exceed Rs.50 lakhs:

1. Arunachal Pradesh,

2. Assam,

3. Manipur,

4. Meghalaya,

5. Mizoram,

6. Nagaland,

7. Sikkim,

8. Tripura,

9. Himachal Pradesh

Tax rates of Composition Levy

Under composition scheme registered persons are classified under three categories, a registered person needs to pay tax on the turnover in State or U.T. at a rate not more than 1% for manufacturer, 2.5% for restaurant sector and 0.5% for other suppliers.

Sr. No.	Category of registered person	Rate of CGST	Rate of SGST	Total rate of Tax
1	Manufacturer	1%	1%	2%
2	Suppliers of food or other article for human consumption or any drink (other than alcoholic liquor for Human consumption). For e.g. Restaurants or Hotels	2.5%	2.5%	5%
3	Other Suppliers (Traders)	0.5%	0.5%	1%

Registered person who can’t opt for Composition Scheme:

Following taxable person are not permitted to opt for the scheme if they are:

• Engaged in supply of services other than Suppliers of food or other article for human consumption or any drink;
• Making supply of goods that are not leviable to tax under the this Act;
• Making interstate OUTWARD supplies;
• Making a supply of goods through Electronic Commerce Operator who is required to collect tax at source;
• Engaged in manufacturing of such goods as may be notified, [vide Notification No. 8/2017-Central Tax, Government has notified following goods: (1) Ice cream and other edible ice, whether or not containing cocoa, (2) Pan Masala, (3) All goods, i.e. Tobacco and manufactured tobacco substitutes]

Conditions and restrictions for composition levy:

The person exercising the option to pay tax under section 10 shall comply with the following conditions:

1. he is neither a casual taxable person nor a non-resident taxable person;

2. In case of person registered under earlier law and migrated under GST, the goods held in stock by him on the appointed day (i.e. 1^st Day of July, 2017) 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; [For e.g. a person registered under HVAT migrated under GST have stock of Rs. 5,00,000 as on 30/06/2017 and out of this stock goods worth Rs. 50,000 were of purchases made from Delhi, then that person is not eligible to opt Composition scheme under GST Act]

3. he shall pay tax under sub-section (3) or sub-section (4) of section 9 on inward supply of goods or services or both;

4. he shall issue bill of supply instead of Tax Invoice and 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;

5. he shall mention the words “composition taxable person” on every notice or signboard displayed at his principal place of business/ every additional place or places of business

6. All the registered persons having same PAN shall have to opt for composition scheme

Please note:

• There is no restriction of making Inter-state purchase for composition dealer.
• The option under composition scheme shall lapse w.e.f. day on which registered person aggregate Turnover exceeds Rs.75 lakh.
• As per press release dated 9^th September, 2017 GST council in its 21^st meeting recommended that a registered person (whether migrated or new registrant), who could not opt for composition scheme, shall be given the option to avail composition till 30^th September 2017.

No Tax, No Credit

A person registered under composition scheme is neither allowed to take Input tax credit on inward supplies of goods and/or services nor he is allowed to collect tax from recipients on outward supplies, he has to bear burden of tax himself and must be paid out of his own pocket.

Penal Provisions:

If proper officer is of the opinion that a taxable person not being eligible for the scheme have opted for the scheme, he shall be liable to pay differential taxes (tax at standard rate less tax at composition rate) on his total turnover along with penalty and provisions of demand and recovery will apply to him.

GST Returns for Composition dealer:

• Like regular dealer, Composition dealer is not required to file monthly statements of Inward or Outward supplies.
• Composition dealer shall furnish Quarterly returns of aggregate turnover in the state or U.T., Inward supplies of goods or services or both, tax payable & tax paid within 18 days after end of such quarter.
• Annual return: every composition dealer shall furnish an annual return for every financial year on or before 31^st December following the end of such financial year.

Reasons why to opt for composition Scheme:

• Lesser compliance w.r.t. furnishing of returns, maintenance of books and records, issuance of invoices more focus on business
• Limited tax liability in comparison with regular taxpayers
• Low working capital requirement for business operations

Demerits to opt composition Scheme:

• Person registered under composition scheme can’t make inter-state outward supplies and cannot affect import-export of goods and/or services.
• Under the scheme, ITC is not allowed and registered person has to pay tax on outward supply from his own pocket, leading to higher cost of sale and loss of business.
• Strict penal provision if registered person is found to be not eligible to the composition scheme
• Registered person is not allowed to make supplies through e-commerce.

Composition Scheme under GST: Key Features, Eligibility & Benefits