Concept of Composition levy is prevailing under the current Central Excise as well as under the State VAT Laws. The same has been continued under the new GST regime but with various changes which are discussed in this article.
Section 10 of the GST Act deals with the Scheme of Composition Levy. Section 10(1) of the Act provides that a registered person whose aggregate turnover in preceding financial year does not exceed Fifty Lakh Rupees can opt for composition levy and pay the amount calculated at the following rates:
(a) 2% of turnover in State or UT in case of manufacture.
(b) 5% of turnover in State or UT in case of person supplying referred in clause (b) of para 6 of Schedule II i.e. Restaurant Service.
(c) 1% of turnover in State or UT in case of other supplies.
Two terms ‘Aggregate Turnover’ & ‘Turnover in State’ used in this section are of prime importance to arrive at the eligibility and taxability in case of composition levy.
Both these terms are defined under Section 2(6) & 2(112) of the GST Act.
Aggregate turnover means the aggregate value of all taxable supplies (excluding RCM supplies), exempt supplies, exports, interstate supplies of person having same PAN computed on all India basis.
Turnover in State or UT means the aggregate value of all taxable supplies (excluding RCM supplies), exempt supplies, exports, interstate supplies made from state or UT.
So now to calculate the limit of Fifty Lakh even the exempt supplies which are not liable to tax under the Act are to be taken into account. So a person cannot opt for composite levy if his taxable and exempt supplies exceed fifty lakh though in normal course the exempt supplies are not liable to tax.
Another condition which will force a person to think twice before opting composition levy is that Tax under Composition levy is to be calculated on the turnover in State or UT which also includes the exempt supplies. So if you opt for composition levy you will have to pay tax on your exempt supplies as well which otherwise are not liable to tax.
So a person who is selling milk, cream, ghee or butter if opt for composition scheme will have to pay tax on milk and cream as well which are otherwise exempt from tax.
Section 10(2) also lays down following conditions which are to be complied by a person opting for composition levy:
(a) He is not engaged in the supply of services other than supplies referred to in clause (b) of para 6 of Schedule II.
(b) He is not engaged in making supply of goods which are not leviable to tax under the Act.
(c) He is not engaged in making any inter-state outward supplies of goods.
(d) He is not engaged in making supplies through E-commerce operator who is required to collect tax under Section 52.
(e) He is not manufacturing such goods as may be notified by government.
Clause (b) of para 6 of Schedule II is reproduced below:
“supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drinks (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.”
By virtue of sub clause (b) of Section 10(2) Services except Restaurant Service are out of Composition Levy. So the composition levy is only available on the supply of goods and not on the supply of services except the one referred above.
Even where a Restaurant owner who is supplying some service other than restaurant service will be out of composition levy.
Rule 3 of the composition rules provides that a person registered under the existing law if want to opt for Composition Levy under the GST should not possess any stock with him on the appointed day which was purchased in the course of inter-state trade or commerce or import from outside India or received from his branch situated outside state.
So an existing dealer who wants to opt for composition scheme has to dispose all his stock which is purchase from outside state before the appointed day.
Another condition making it more difficult for a person to opt for composition is that he has to comply with the provisions of Section 9(3) & 9(4) of the GST Act even though he has opted for composition levy.
It means if a composition dealer purchases any goods which are taxable under Reverse Charge Mechanism or purchases any goods from an unregistered dealer he will have to pay the tax on the same under Reverse Charge and all the provisions of the Act will apply to him as he is the person making supply of such goods.
Now at what rate these goods will be taxed are still unclear. Another setback for dealers opting composition levy is that whether ITC on purchases made under the Section 9(3) & (4) of the Act will be available or not as Section 10(4) bars a person opting for composition levy not to claim any credit of input tax. Interestingly Section 17(5) (e) only bars credit on inputs on which tax has been paid under Section 10. So to my understanding credit of tax paid under Section 9(3) & (4) should be available to the dealer. Comments of the readers are welcomed on this issue.
So a dealer opting for a composition levy has to plan his business model accordingly that he does not end up paying higher tax than what he was supposed to pay as a normal dealer.
Author Bio
Is composition scheme available to used car dealers . If yes then whether ultimate selling price or profit margin will formed part of turnover in order to calculate limits of 75 Lacs .
For example :
A dealer sells a used car for Rs 5 lacs which he has bought at 4 lacs . Thus making a profit of Rs 1 Lac. As per valuation rules if he is not under composition scheme he has to tax on margin of Rs 1 Lac * rate of car under gst . So whether 5 lacs or 1 lac will be considered for determining the limits of turnover under GST
Dear Sir,
whether the taxes are 1% , 2.5% and 0.5% or 2%,5% and 1%. Because, if you see, Rule 5 of composition Rules, it gives an understanding that total GST to be paid by a person under composition scheme itself is 1%, 2.5% and 0.5%. If that is the case 0.5%, 1.25% and 0.25% CGST and SGST/UTGST. Pl clarify
Abhishekji, a person supplying milk, cream, ghee and butter cannot opt for composition scheme in first place in view the bar precribed under Section10(2)(b). However, one would get a feel that exempted supplies attract tax under composition scheme as rightly opined by the author in view of definition of turnover in States which is defined in the Act interalia to include non-taxable and inter-state supplies. In view of the specific bar prescribed under Section 10(2)(b) and Section 10(2)(c) in respect of non-taxable supplies and inter-state supplies, no tax need be paid on milk, ghee, butter etc in my personal view. It seems an anamoly in this regard can be rectified by the government by taking recourse to Section 172 of CGST Act,2017.
Here it says – “So a person who is selling milk, cream, ghee or butter if opt for composition scheme will have to pay tax on milk and cream as well which are otherwise exempt from tax.”
However Section 10(2)(b) says one of the condition for composition scheme is “He is not engaged in making supply of goods which are not leviable to tax under the Act.”
Can you please explain
Sir keep the good work going on !
It was very useful for me. Keep sharing such ideas in the future as well. This was actually what I was looking for, and I am glad to came here! Thanks for sharing the such information with us.
A dealer opting for composition scheme is allowed to make Interstate Purchases and not interstate supply then what is the relevance of this line “So an existing dealer who wants to opt for composition scheme has to dispose all his stock which is purchase from outside state before the appointed day.”
Author deserves appreciation for writing a nice article on composition scheme lucidly with details of taxes to be paid, the conditions to be fulfilled to opt for the scheme under Section 10 of CGST Act,2017. However, I differ with his view that input tax credit is available on the taxes paid on reverse charge basis in view of unambiguous bar prescribed under Section 10(4) of CGST Act,2017 which is extracted below for reference:
“Section 10 (4) A taxable person to whom the provisions of sub-section (1) apply shall not collect any tax from the recipient on supplies made by him nor shall he be entitled to any credit of input tax.”