Introduction

GST being an indirect tax is applicable on all types of goods or services, unless it is specifically exempted or non-GST supply. The tax is applicable for small shops to big MNCs. However, one cannot expect the small taxpayers to comply the provisions relating to filings, payments, accounting and documentation. Hence, normally the tax laws provide for simplified systems like presumptive method or composition scheme for small taxpayers.

GST law also provides for composition scheme, the relevant provisions are contained in section 10 of CGST Act, 2017 and chapter II of CGST Rules, 2017. The purpose of scheme is proper collection of tax from small taxpayers with minimum compliance requirements while adhering to the basic principle of consumption-based destination tax.

However, the law relating to composition scheme under GST has undergone number of changes after its introduction in July 2017, which made even professionals in difficulty. In this article I made an attempt to consolidate all the provisions applicable to the scheme as on 3rd April 2020.

A) Basic Conditions for GST GST Composition Scheme

Broadly the scheme under GST is classified as applicable on (i) ‘supply of goods’ (though restaurant service is included in this) and (ii) ‘supply of services’. The applicability and other conditions are presented in a tabular format for comparison and ease of understanding of the provisions.

Particulars Supply of goods [Section 10(1)] Supply of services [Section 10(2A)]
Applicability
  • A registered person whose aggregate turnover did not exceed Rs. 1.5 Crores (Rs. 75 Lakhs for special category states) in the preceding financial year may opt for composition.
  • The value of services (other than restaurant services) should not exceed 10% of turnover in the state or UT in the preceding FY or Rs. 5 Lakhs, whichever is higher.
  • Registered persons who are not eligible as mentioned in left column.
  • Whose aggregate turnover in the preceding FY did not exceed Rs. 50 Lakhs.
Rate of levy
  • Persons engaged in making supplies referred to in clause (b) of paragraph 6 of Schedule II (restaurant services) – 5% of turnover in state or UT.
  • Manufacturers – 1% of turnover in state or UT.
  • Other suppliers – 1% of turnover of taxable supplies in state or UT.
6% of turnover in the State or UT.
Reverse charge Reverse charge as mentioned in sub-sections (3) and (4) of section 9 is applicable to composition person. Reverse charge as mentioned in sub-sections (3) and (4) of section 9 is applicable to composition person.
Conditions
  • Should not be engaged in supply of services (see exception above).
  • Not engaged in supply of goods which are not leviable to tax
  • Not engaged in making any inter-state outward supply of goods
  • Not engaged in making any supply of goods through e-com operator who is required to collect tax at source.
  • Not a manufacturer of goods as may be notified by the Govt.
  • He is neither a casual taxable person nor a non-resident taxable person.
  • Not applicable
  • Not engaged in supply of goods or services which are not leviable to tax under this Act.
  • Not engaged in making any inter-state supply
  • Not engaged in making any supply through e-com operator who is required to collect tax at source
  • Not a manufacturer of goods as may be notified by the Govt.
  • Neither a casual taxable person not a non-resident taxable person

Aggregate Turnover for determining eligibility:

For determining the eligibility to pay tax under the scheme, aggregate turnover shall include value of supplies made by such person from the 1st day of April of a FY upto the date when he becomes liable for registration under the Act, but shall not include value of exempt supply of services provided by way of extending deposits, loans or advances in so far as consideration is represented by way of interest or discount.

Turnover in State or UT for payment of tax:

Turnover in State or UT shall not include Supplies from the first day of April of a FY upto the date when such person becomes liable for registration under this Act, but shall not include value of exempt supply of services provided by way of extending deposits, loans or advances in so far as consideration is represented by way of interest or discount.

Other points:

1. If a person (with same PAN) has more than one registration, the registered person shall not be eligible to opt for the scheme unless all registered persons opt to pay tax under the scheme.

2. Value of turnover in state or UTshall not include interest or discount received on services provided by way of extending deposits, loans or advances.

3. The compounded person shall not collect any tax from the recipient on supplies made by hm.

4. The compounded person shall not be entitled to credit of input tax on supplies received by him.

5. He shall not issue ‘Tax Invoice’, instead he shall issue “Bill of Supply”.

6. He shall mention the words “composition taxable person, not eligible to collect tax on supplies” on top of the bill of supply issued by him.

7. 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.

8. A registered person who receives any inward supply from a composition taxpayer, he is not eligible for input tax credit of tax paid on such supply.

Manufacture of following notified goods are not eligible for composition scheme

S No. Tariff Item, sub-heading, heading or Chapter Description
1 2105 00 00 Ice cream and other edible ice, whether or not containing cocoa
2 2106 90 20 Pan masala
2A 2202 10 10 Aerated Water
3 24 All goods, i.e., Tobacco and manufactured tobacco substitutes

B) Validity of GST composition scheme:

1. The option availed by a registered person to pay tax under section 10 shall remain valid as long as he satisfies all the conditions mentioned in that section and the rules. The scheme shall lapse with effect from the day on which his aggregate turnover during a FY exceeds the limit specified above. A person shall be liable to pay normal tax u/s 9(1) from the day he ceases to satisfy any of the conditions mentioned in sec 10 or the relevant rules. He shall issue tax invoice for every taxable supply made thereafter. He shall file an intimation for withdrawal from the scheme in GST CMP-04 within 7 days of the occurrence of such event.

2. A registered person intends to withdraw from the scheme shall, before the date of such withdrawal, file an application in GST CMP-04.

3. Every person who has intimated or filed application as stated above may furnish a statement in GST ITC-01 containing details of the stock of inputs and inputs contained in semi-finished or finished goods held in stock by him on the date on which the option is withdrawn, within a period of 30 days from the date from which the option is withdrawn.

4. Any intimation or application for withdrawal of the option to pay tax u/s 10 in respect of any place of business in any State or UT, shall be deemed to be an intimation in respect of all other places of business registered on the same PAN.

C) Intimation for GST composition levy:

1. Any person who applies for fresh GST registration may opt composition levy in Part B of GST REG-01, which shall be considered as an intimation to pay tax u/s 10.

2. Any existing registered persons who opts to pay tax u/s 10 shall file an intimation in GST CMP-02, prior to commencement of the financial year. He shall also furnish a statement in GST ITC-03 u/s 44(4) within 60 days from the commencement of the relevant FY. However, for FY 2020-21 the due date for filing of GST CMP-02 is extended to 30th June 2020 and to furnish ITC-03 is 31st day of July 2020 (NN 30/2020-CT dated 03/04/2020).

3. An intimation in respect of place of business in any State or UT shall be deemed to be an intimation in respect of other place of businesses registered on the same PAN.

D) Effective date for GST composition levy:

1. For existing registered persons – from the beginning of the FY.

2. For new registrations intimated along with GST REG-01 – same as effective date for registration.

E) GST Returns:

1. Every registered person who has opted for the scheme shall furnish a statement for every quarter or part thereof, details of payment of self-assessed tax in GST CMP-08. Due date is 18th of the month succeeding such quarter. However, for quarter ending March 2020, the due date has been extended to 7th day of July, 2020 (NN 34/2020-CT dated 03/04/2020).

2. And he shall furnish a return for every financial year or part thereof in GSTR-4, till the 30thday of April following the end of such FY. Again, the due date for financial year ending 31st March, 2020 extended to 15th day of July, 2020 (NN 34/2020-CT dated 03/04/2020).

3. Where a regular person opted for composition scheme from the beginning of the financial year, where required he shall furnish all the details under rule 59, 60 and 61 (i.e., outward supplies, inward supplies and monthly return) till the due date of filing the return for the month of September or actual date of filing of annual return, whichever is earlier. Further, the person shall not be eligible to avail ITC on receipt of invoices or debit notes from the supplier for the period prior to opting for the composition scheme.

4. Where a registered person withdraws from the scheme on his own motion or at the instance of the proper officer, he shall furnish GST CMP-08 by 18thof the month succeeding the quarter in which he withdraws and furnish GSTR-4 by 30th April following the end of the financial year in which he withdrawn from the scheme.

5. Restriction on EWB: The registered person opted for composition scheme shall not be allowed to generate e-way bill (GST EWB-01) where he has not furnished statement in GST CMP-08 for two consecutive quarters.

6. Where a person paying tax under section 10 has not furnished returns for three consecutive tax periods, the proper officer may cancel the GST registration.

7. A person opted for composition scheme shall furnish annual return in Form GSTR-9A. Due date for filing annual return is 31st December after the end of the financial year. Due date for filing annual return for FY 2018-19 is 30th June 2020 (NN 15/2020-CT dated 23/03/2020). However, vide NN 47/2019-CT dated 9th October 2019 the annual returns for FY 2017-18 and FY 2018-19 has been made optional for the taxpayers.

F) Accounts & Records:

1. Registered persons opted for composition scheme are not required to maintain accounts of stock in respect of goods received and supplied by hm.

2. He is also not required to keep and maintain account containing details of tax payable, tax collected, ITC, etc.

3. All other provisions relating to accounts and records are applicable to persons opted for composition scheme.

4. In order to file GSTR-4, the registered person should keep and maintain tax rate wise details of outward supplies and inward supplies attracting reverse charge. He should also maintain details of inward supplies invoice wise and supplier wise.

G) Input Tax Credit – Transition period:

From compounded to normal provisions:

1. If the compounded person exit the scheme or ceases to be u/s 10, he shall be entitled to take credit of input tax in respect of (i) inputs held in stock, (ii) inputs contained in semi-finished or finished goods held in stock and (iii) on capital goods, on the day immediately preceding the date from which he becomes liable to pay tax u/s 9 (i.e., normal provisions).

2. However, credit on capital goods shall be claimed after reducing the tax paid on such capital goods by 5% per quarter of a year or part thereof from the date of invoice or such documents on which the capital goods were received by the taxable person. (R 40)

3. The above registered person shall not be entitled to take ITC in respect any supply of goods or services or both after the expiry of one year from the date of issue of tax invoice relating to such supply.

From normal taxpayer to compound scheme:

1. Where a registered person who has availed ITC opts to pay tax under composition scheme, he shall pay an amount equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods, reduced by such percentage points, on the day immediately preceding the date of exercising such option.

2. The amount may be paid by way of debit to electronic credit ledger or electronic cash ledger. The balance in electronic credit ledger after such payment shall be lapsed.

3. For capital goods held in stock, the ITC involved in the remaining useful life in months shall be computed on pro-rata basis, taking the useful life as 5 years. (R 44)

H) Levy on exempt supply:

It may be noted that in the case of manufacturers, restaurant service providers and other suppliers as mentioned in section 10(2A), the levy is at specified rate on the turnover in State or turnover in UT. As per section 2(112), “turnover in State or turnover in UT” includes value of exempt supply. Therefore, a registered person opted for composition scheme, must pay tax at specified rate on exempted supply also.

However, in case of suppliers other than above, i.e., traders, levy is on turnover of taxable supplies in State or UT. Hence, in this case exempted or nil rated supplies are not liable for levy.

I) Conclusion

Though certain relaxations are available with respect to compliances, record keeping and payment of tax for persons opted for composition, a registered person should take utmost care and analyse properly before going for the scheme. Restrictions on input tax credit, inter-state supply, etc may have a direct impact on his business model and profitability. He should also consider other factors like the nature of his customers – whether B2B or retail, nature of goods, ratio of taxable and exempt supply before finalising his decision.

CA Jamsheed Adam, FCA – Partner: Aakk & Associates

Author Bio

Qualification: CA in Practice
Company: AAKK & Associates
Location: Kozhikode, Kerala, IN
Member Since: 05 Apr 2020 | Total Posts: 1
A Chartered Accountant in practice, qualified in 2009. Presently partner of a Kerala based firm 'Aakk & Associates", located at Kozhikode. Have wide range of experience in indirect taxes, internal audit, financial management and MIS of manufacturing concerns, educational institutions, jewellery View Full Profile

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