1) Introduction :

In view of the spread of pandemic COVID-19 across many countries of the world including India, The GOI has increased the due date for filling intimation to opt for payment of tax under composition scheme for FY:2020-21 to 30.06.2020 vide Notification No. 35/2020 – Central Tax dated 03.04.2020. So before advising client with respect to whether to opt in or out for composition scheme let’s run through over the entire concept of composition scheme.

2) Eligibility to pay tax under composition scheme :

a) A registered person, whose aggregate turnover in the preceding financial year did not exceed  one crore and fifty lakh rupees may opt to pay tax under composition scheme  at a fixed rate, regardless of the actual rate of tax applicable on the said outward supply :

Sr. No

Category Rate

Note

i) Manufacturers 1% (0.5% CGST+ 0.5% SGST) of the turnover in the State/UT The rate applicable has been reduced from 2% to 1% vide Notification No. 1/2018-Central Tax dated 23.01.2018 effective 01.01.2018.
ii) Other suppliers like trades 1% (0.5% CGST+ 0.5% SGST) of the turnover of taxable supplies in the State/UT The word turnover of taxable supplies in the State/UT inserted instead of turnover in the State/UT vide Notification No. 1/2018-Central Tax dated 23.01.2018 effective 01.01.2018.
iii) Food/restaurant services 5% (2.5% CGST+ 2.5% SGST) of the turnover in the State/UT i.e., in case of composite supply of service specified in Entry 6(b) of Schedule II.

A person who opts to pay tax under clause (i) or clause (ii) or clause (iii) may supply services (other than those referred to in clause (b) of paragraph 6 of Schedule II), of value not exceeding ten percent of turnover in a State or Union territory in the preceding financial year or five lakh rupees, whichever is higher. (Note: Amendments made in CGST Act which has been notified on 30.08.2018 effective 01.02.2019).

b) A registered person, who is not eligible to opt for scheme under clause (a) above whose aggregate turnover in the preceding financial year did not exceed fifty lakh rupees may opt to pay tax under composition scheme  at a fixed rate , regardless of the actual rate of tax applicable on the said outward supply at the rate not exceeding 6% (3% CGST+ 3% SGST) on first supplies of goods or services or both up to an aggregate turnover of fifty lakh rupees made on or after the 1st day of April in any financial year. For Ex: Architecture, Professionals (Note: Vide Notification No. 2/2019-Central Tax (Rate) dated 07.03. 2019 effective 01.04.2019).

The option to pay tax under clause (a) and (b) above is mutually exclusive. Thus, persons who are eligible for composition under clause (a) (even if not opted) will not be allowed to pay tax under clause (b).

Note: 1) For the purposes of computing aggregate turnover:

Include: The value of supplies made by such person from the 1st day of April of a financial year up to the date when he becomes liable for registration i.e. Threshold limit for registration under section 22.

Exclude: 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.

2) For the purposes of computing turnover in the State/UT:

Exclude: i) The value of supplies made by such person from the 1st day of April of a financial year up to the date when he becomes liable for registration i.e. Threshold limit for registration under section 22 only if registration taken during the year.

ii) 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.

 3) The option to avail composition scheme is PAN-based and hence, a person has to opt for composition scheme for all the business verticals across India. He cannot opt for the scheme only in a particular business vertical.

3) Conditions and restrictions :

a) The registered person shall be eligible to opt if he is:

i) Not engaged in supply of service other than services specified in Entry 6(b) to Schedule II unless such supply is a composite or mixed supply of goods as discussed above below table. One of the difficulties which was initially faced by such persons was is that if person earns any interest income then whether that would have been deemed to be a supply against service under GST and thus such registered person shall be ineligible for opting composition scheme. For the removal of difficulty Order No. 01/2017-Central Tax dated 13.10.2017 issued to clarify that if person engaged in outward supply of services for which the consideration is in the form of interest, shall not be ineligible for the composition scheme.

ii) Not engaged in making any supply of non-taxable goods i.e. alcoholic liquor for human consumption, petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel.

iii) Not engaged in making any inter-State outward supplies of goods including supplies to SEZ unit / developer. It is also important to note that the condition is not limited to taxable supplies alone, and extends to exempt supplies as well. There is no restriction on making any inter-State inward supplies. Sending goods for job work outside the State does not violate, the conditions imposed (i.e., making inter-State outward supplies).

iv) Not engaged in making any supply of goods through an electronic commerce operator who is required to collect TDS under section 52.

v) Neither a casual taxable person nor a non-resident taxable person.

b) The goods held in stock by him on 01.07.2017 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 (Not so relevant now).

c) He shall pay tax under sub-section (3) or sub-section (4) of section 9 on inward supply of goods or services or both. Note: Composition suppliers being recipients of supplies on which tax is payable on RCM, will have to remit tax at the applicable rates and not at the concessional composition tax rates.

d) He is not a manufacturer of such goods as may be notified by the Government on the recommendations of the Council namely;

Note: There is no restriction in trading of such goods.

e) 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.

f) 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.

g) The composition taxpayer is prohibited from collecting any GST / Cess applicable on the outward supplies effected by him. Care must be taken when composition taxable persons are involved in supply of MRP based goods. MRP includes output tax and selling at MRP violates this condition. The impact is far more severe as the composition facility gets rejected and full output tax is liable to be paid but input tax credit (otherwise available) would not have been availed within the relevant time permitted as well as penalty under section 122 can be imposed. It appears that they need sell ‘below MRP’ excluding output tax but after including input credit lost.

h) The composition taxpayer is not entitled to claim credit in respect of taxes paid by him on any of the inward supplies effected by him, including inward supplies on which he pays tax under RCM.

4) Validity of composition levy:

a) The option availed of by a registered person shall lapse with effect from the day on which his aggregate turnover during a financial year exceeds the limit specified.

b) The option exercised shall remain valid so long as he satisfies all the conditions mentioned. If he ceases to satisfy any of the conditions mentioned he:

    • Shall be liable to pay tax under sub-section (1) of section 9 from the day he ceases.
    • Shall issue tax invoice for every taxable supply made.
    • Shall also file an intimation for withdrawal from the scheme in FORM GST CMP-04 within seven days of the occurrence of such event.

c) Where the proper officer has reasons to believe that the registered person was not eligible to pay tax under composition scheme – he may issue a notice to such person in FORM GST CMP 05 to show cause within fifteen days of the receipt.

d) Upon receipt of the reply to the show cause notice issued under clause (c) above from the registered person in FORM GST CMP-06, the proper officer shall issue an order in FORM GST CMP-07 within a period of thirty days of the receipt of such reply, either accepting the reply, or denying the option to pay tax under scheme from the date of contravention and demand the following:

    • Differential tax and interest
    • Penalty determined based on the demand provisions under Section 73 or 74.

5) Other Related Provisions of the Statute:

a) Where any registered person ceases to pay tax under composition scheme, he shall be entitled to take credit of input tax in respect of inputs held in stock/semi-finished/finished goods and on capital goods on the day immediately preceding the date from which he becomes liable to pay tax under regular scheme.

Manner of claiming credit in Form GST ITC- 01 with respect to:

Capital Goods: After reducing the tax paid on such capital goods by five percentage points per quarter of a year or part thereof from the date of the invoice or such other documents on which the capital goods were received by the taxable person.

b) Where any registered person who has availed of input tax credit opts to pay tax under composition scheme, he shall pay an amount, by way of debit in the electronic credit/cash ledger, equivalent to the credit of input tax in respect of inputs held in stock/semi-finished/finished goods and on capital goods on the day immediately preceding the date of exercising such option. Provided that after payment of such amount, the balance if any lying in his electronic credit ledger shall lapse.

Manner of reversal in Form GST ITC-03 with respect to:

Input: Calculated proportionately on the basis of the corresponding invoices on which credit had been availed. Where the tax invoices related to the inputs held in stock are not available, the registered person shall estimate the amount based on the prevailing market price of the goods on the effective date.

Capital Goods: The ITC involved in the remaining useful life in months shall be computed on pro-rata basis, taking the useful life as five years.

c) The amount specified under a & b shall be computed separately for CGST/SGST/IGST.

d) The proper officer may cancel the registration if a person paying tax under Composition Scheme has not furnished returns for three consecutive tax periods.

e) The facility of generating EWB will be barred if person payable tax under composition scheme fails to furnish the statement in FORM GST CMP-08 for two consecutive quarters.

f) The Cess would not be leviable on supplies made by a person who has opted for composition levy.

g) Person registered under composition scheme shall furnish:

Form

Due Date

Statement for payment of self-assessed tax – Form CMP 08 by 18th of the month succeeding the quarter
Return in Form GSTR 4 Annually by 30th April following the end of a financial year
Return in Form GSTR 9A 31st December of the next Financial Year

6) Conclusion:

After reading only eligibility criteria it’s very difficult to conclude whether its composition scheme or confusing scheme for taxpayer. All the rules and regulation required to read simultaneously and not in isolation.

!!!Stay Home, Stay Safe!!!

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Disclaimer: The views expressed are personal and contents of this document are solely for informational purpose. The information in article has been drawn primarily from the www.cbec.gov.in and other sources. While every effort has been made to keep the information stated in this article error free.

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Qualification: Student - CA/CS/CMA
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Location: Aurangabad, Maharashtra, IN
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