1. A simplified composition scheme has been provided; vide section 10 of CGST Act for small taxable persons who do not have sufficient knowledge and expertise to comply with the GST requirements relating to records and accounts.

2. The scheme is available to those whose aggregate turnover in the previous financial year did not exceed Rs. 150 lakhs. For special category states (Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura,)  the limit is Rs 75 Lakh only. (Notification No. 14/2019-CT dated 7-3-2019).

Goods and Services Tax GST  sign on the page.

2.1 The term Aggregate turnover is the most crucial aspect for ascertaining eligibility and for payment of tax as well . Aggregate Turnover for  DETERMINING ELIGIBILITY  to opt for Composition Scheme under Sec 10 will be computed as follows:-

Supplies  to be considered (Added ) for Aggregate Turnover under SEC 10
Sl Description Remarks / Reference
(a) Aggregate value of all taxable supplies
(b) Exempt Supplies (i) Includes supplies attracts NIL rate of tax

(ii) Wholly exempted supplies under sec 11

(c ) Non taxable supplies (such as petroleum products etc) Means supply which is not leviable to tax under CGST Act or IGST Act – section 2(78) of CGST Act.
(d) Export of goods and/or services Zero rated supplies (including supplies to SEZ)
(e) Inter-state supplies between distinct persons having same PAN would be added to ‘aggregate turnover
Aggregate  turnover is to be calculated by taking together the value in respect of the activities carried out on all-India basis.
Supplies  NOT to be considered (Not to be Added ) for Aggregate Turnover under SEC 10
(a) value of inward supplies on which tax is payable on reverse charge basis
(b) Taxes  under GST Act CGST, SGST, UTGST and IGST
(c ) Activities or transactions specified in Schedule III of CGST Act These are neither good nor  services
(d) Interest  received on deposits, loans or advances etc explanation 1 to section 10 of CGST Act, inserted vide Finance (No. 2) Act, 2019

Supply of Services under Composition Scheme : The Composition scheme was not available to supplier of services, except supply of food for human consumption (restaurant services  till 01.02.2019 .

3.1 Second proviso to section 10(1) of CGST Act has been inserted vide CGST (Amendment) Act, 2018 w.e.f. 1-2-2019.:-

Statutory Provision :-

Provided further that a person who opts to pay tax under clause (a) or clause (b) or clause (c) may supply services (other than those referred to in clause (b) of paragraph 6 of Schedule II), of value not exceeding ten per cent. of turnover in a State or Union territory in the preceding financial year or five lakh rupees, whichever is higher.

3.2 Accordingly , a person who opts for Composition Scheme may supply services of value not exceeding ten per cent, of turnover in a State in the preceding financial year or five lakh rupees, whichever is higher .

For Example : Mr. X  is a registered  Composition dealer  in Maharashtra  and his turnover in a State in 2019-20 was Rs 35 Lakhs . He can supply services up to Rs 5 lakhs ( 10% of turnover in previous financial year or Rs 5 lakhs , whichever is higher)  in 2020-21.

3.3 Interest or discounts received on deposits, loans etc. will not be considered for 10% limit of providing services by traders .

Statutory Provision :- Explanation for the purposes of second proviso :-

The value of 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 shall not be taken into account for determining the value of turnover in a State or Union territory

In the example above ,suppose in addition to turnover of Rs 35 lakhs ,income  from interest on loan was Rs 20 Lakhs in 2019-20,  he is still eligible for providing services up to Rs 5 lakhs as interest on discount on loans, deposits etc. will not be considered for determining the eligibility for providing services up to 10% of turnover.

Eligibility for Composition Scheme : As per section 10(2) of CGST Act, following taxable persons will NOT  be eligible for composition scheme under section 10 :-

Sl Description Explanation / References
(a) Engaged in supply of Services (other than restaurant  services ) However, SUPPLIER OF GOODS can supply services up to 10% of turnover of previous financial year or Rs five lakhs whichever is higher w.e.f. 01.02.2019 .( inserted vide CGST Amendment Act 2018 )
(b) Engaged in supply of goods & services which are not leviable to tax under this Act This cover petroleum products and alcoholic liquor If in addition to these products, he is engaged in another supply and wish to opt for composition scheme , it is not available  .
(c ) Engaged in making any inter-State outward supplies of goods & services * He can make inter-state purchases from registered persons but not inter-state supplies
(d) Casual taxable person or a non-resident taxable person inserted vide Finance (No. 2) Act, 2019
(e) Manufacturer of such goods & services as may be notified on the recommendation of the Council The Government vide Notification No. 8/2017-CT dated 27-6-2017 excluded  following goods from composition eligibility :-

(i)   Ice cream and other edible ice, whether or not containing cocoa.

(ii)  Tobacco and manufactured tobacco substitutes

(iii)  Pan masala

Also confirm vide FAQ on GST Chapter 2 Q No. 20 issued by CBI&C on 15-12-2018 .

(f) Engaged in making any supply of goods through an electronic commerce operator who is required to collect tax at source under section 52 of CGST Act
Where more than one registered persons are having the same Permanent Account Number , the registered person shall not be eligible to opt for the scheme under sub-section (1) unless all such registered persons opt to pay tax under that sub-section.

* Note : A provision has been inserted vide Finance Act 2020 – In section 10 of the Central Goods and Services Tax Act, in sub-section (2), in clauses (b), (c) and (d), after the words “of goods”, the words “or services” shall be inserted.

GST Rates under Composition Scheme As per section 10(1) of CGST Act and rule 7 of CGST Rules, 2017 , The  rates of composition scheme are as follows :-

Sl Tax payable Rate of Tax Explanation
(a) Tax payable by manufacturer 1% ( 0.5%+0.5%) of turnover in State ‘turnover in a State means all taxable supply + EXEMPT supplies within State ……….

Thus tax at fixed rate is payable on ‘exempt supplies also’

(b) Tax on restaurant  services 5%( 2.5% +2.5% )  of turnover in State
(c ) Tax payable by traders 1% ( 0.5% +0.5%) of turnover of taxable supplies of goods and services in State In case of traders, tax @ 1% is payable on ‘turnover of taxable supplies

(Amended  w.e.f. 1-1-2018)

 Meaning of turnover in State:

Tax at fixed rate is payable under section 10(1) or 10(2A) of CGST Act (composition scheme) on ‘turnover in a State or turnover Union Territory’.

‘Turnover in State’ means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis) and exempt supplies made within a State  by a taxable person, exports of goods and / or services  and inter-State supplies of goods or/ and  services made from the State by the said taxable person but excludes Central tax, State tax, Union territory tax, integrated tax and cess – section 2(112) of CGST Act.

6.1. As per explanation 2 to section 10 of CGST Act, inserted vide Finance (No. 2) Act, 2019 ,turnover in State or Union Territory will not include following :-

(a) Supplies from the first day of April of a financial year up to the date when such person becomes liable for registration under this Act (till taxable person crosses exemption limit of Rs. 10/20/40 lakhs

(b) Interest on loans/deposits.

Meaning of Manufacturer : Manufacture” means processing of raw material or inputs in any manner that results in emergence of a new product having a distinct name, character and use – section 2(72) of CGST Act.

Composition Scheme for Small Service providers :A simplified scheme was introduced w.e.f. 1-4-2019 for small service providers (and those who are supplier of goods as well as services exceeding 10% of turnover within State/UT) whose aggregate turnover during previous financial year did not exceed Rs. 50 lakhs. The scheme was introduced vide Notification No. 2/2019-CT(Rate) dated 7-3-2019.

Initially , the scheme was introduced under section 9(1) of CGST Act, which empowers Government to determine GST Rates and it was not composition scheme as per sections 10(1) and 10(2) of CGST Act .Now, regular composition scheme is introduced for service providers also, vide section 10(2A) of CGST Act, introduced vide Finance (No. 2) Act, 2019 .

9Salient features of Composition Scheme for Small Service Providers under Section 10(2A)

(a) Eligibility (i) Aggregate turnover during previous financial year did not exceed Rs. 50 lakhs.

(ii) The person who is eligible for existing composition scheme under Sec 10 is not eligible for  this scheme

Further, the following person are NOT  eligible for his scheme :-

(iii) Engaged in INTERSTATE  outwards supplies of goods or services

(iv) Engaged in supply of goods which are not leviable to tax under this Act

(v) Engaged in making any supply of goods through an electronic commerce operator   who is  required to collect tax at source under section 52 of CGST Act.

(vi) Manufacturer of such goods as may be notified on the recommendation of the Council

(vi) Casual taxable person  or a non-resident taxable person

(b) Rate of Tax As may be prescribed but not exceeding 6% ( 3% + 3% )  of the Turnover in STATE

Conditions and restrictions for Composition levy : The person exercising the option to pay tax under section 10 shall comply with the following conditions [rule 5(1) of CGST Rules, 2017].

(a) 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

(b) Mention the words “composition taxable person, not eligible to collect tax on supplies” at   the top of the bill of supply issued by him.

(c) Not entitled to any Input Tax Credit.(ITC)

(d) Not allowed to charge GST in their invoice.

(e) Cannot show GST in their invoice

Reverse Charge Liablity A Composition Dealer has to pay tax under Reverse Charge Mechanism wherever applicable.

The rate applicable to the supplies is the rate at which GST has to be paid. This means that rate under composition scheme should not be used for reverse charge purposes. Also, no ITC is available for tax paid under reverse charge for a composition dealer

12 Procedure for exercising option to avail Composition Scheme

Sl Activity Procedure
(a) Fresh Registration Indicate the option in the application for registration in Part B of GST REG 1

No further intimation will not be required – rule 3(2) of CGST Rules, 2017.

(b) Switch from Normal to  Composition Scheme

 

The taxpayer shall electronically file an intimation in form GST CMP-02, duly signed or verified, on the Common Portal, prior to the commencement of the financial year for which the option to pay tax under composition scheme is exercised

This can be done only at the time of commencement of financial year

In view of Covid-19 outbreak , the time limit to opt into the composition scheme for the FY 2020-21 in form CMP-02 has been extended up to 30th June 2020.

A statement in form GST ITC-3 need to be submitted within sixty days from the commencement of the relevant financial year – rule 3(3) of CGST Rules, 2017

The statement under GST ITC-3 is required as the registered person will have to reverse the input tax credit of stock with him as on 31st March.

The time limit to file form ITC 03  for FY 2020-21 has  been extended till 31st July 2020.

Any intimation under rule 3(1) or rule 3(3) or rule 3(3A) in respect of any place of business in any State or Union territory shall be deemed to be an intimation in respect of all other places of business registered on the same PAN – rule 3(5) of CGST Rules, 2017.

The option to pay tax under section 10 shall be effective from the beginning of the financial year,

(c ) Validity of Composition Scheme It remain valid so long as the person  satisfies all the conditions mentioned in the section and the Rules – Rule 6(1) of CGST Rules, 2017
(d) Withdrawal from Composition Scheme An application in form GST CMP-04, duly signed or verified, need to file electronically on the Common Portal (Rule 6(3) of CGST Rules, 2017).

In case , a person  ceases to satisfy any of the conditions mentioned in section 10 or these rules , GST CMP 04  need to file within seven days  of occurrence of such event (  rule 6(2) of CGST Rules, 2017.

(e) Cancellation of Option by Proper Officer If the proper officer has reasons to believe that (a) the registered person was not eligible to pay tax under section 10 or (b) has contravened the provisions of the Act or these rules, he may issue a notice to such person in form GST CMP-05 within fifteen days of the receipt of such notice as to why option to pay tax under section 10 should not be denied – rule 6(4) of CGST Rules, 2017.

The registered person shall reply within prescribed period in form GST CMP-06. Upon receipt of reply to the show cause notice, the proper officer shall issue an order in form GST CMP-07 within thirty days of receipt of such reply.

He may either accept the reply or deny the option to pay tax under section 10 [composition scheme]. Such denial can be from the date of option or from the date of the event concerning such contravention, as applicable – rule 6(5) of CGST Rules, 2017.

Such withdrawal can be retrospective but shall not be prior to date of contravention of CGST Act. In such cases, proceedings for recovery of tax, interest and penalty shall be initiated under sections 73 and 74 of CGST Act – CBI&C circular No. 77/51/2018-GST dated 31-12-2018.

(f) Switching from composition scheme to normal scheme A person  is entitled to take credit of input tax in respect of inputs held in stock, inputs contained in semi-finished or finished goods held in stock and on capital goods on the day immediately preceding the date from which he becomes liable to pay tax under section 9 of CGST Act.

Following persons will shift from composition scheme to normal scheme –

(a) ceases to satisfy any of the conditions mentioned in section 10 and  furnished an intimation under rule 6(2)

(b) filed an application for withdrawal under rule 6(3)

(c) a person in respect of whom an order of withdrawal of option has been passed in form GST CMP-07 under rule 6(5) rule of CGST Rules, 2017.

The applicant should indicate the date from which he intends to withdraw from the scheme – CBI&C circular No. 77/51/2018-GST dated 31-12-2018.

A person switching to normal scheme will have to file a statement in form 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 or denied. The statement should be filed within 30 days from the date from which the option is withdrawn or from the date of order passed in form GST CMP-07, as applicable – rule 6(6) of CGST Rules, 2017.

He is required to file statement in form GST CMP-08 for the period for which he has paid tax under composition scheme or paid tax on services (@ 6%) under Notification No. 2/2019-CT (R) dated 7-3-2019, by 18th of month succeeding the quarter in which date of cessation takes place.

He will also furnish return in form GSTR-4 for the said period by 30th April following end of financial year during which cessation occurs – Rule 62(5) of CGST and SGST Rules, 2017 amended on 7-3-2019

Withdrawal means withdrawal from all places of business of the registered person  – Withdrawal under any of aforesaid provisions in respect of any place of business in any State or Union territory, shall be deemed to be withdrawal in respect of all other places of business registered on the same PAN – rule 6(7) of CGST Rules, 2017.

(g) Switch over from normal scheme to composition scheme Section 18(4) of CGST Act states that if any registered person who has availed of input tax credit opts to pay tax under section 10 of CGST Act (normal 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, on the day immediately preceding the date of exercising of such option, He shall also pay amount on capital goods, reduced by prescribed percentage points. He should pay the amount, by way of debit in the electronic credit ledger or electronic cash ledger.

If the taxable person switches from normal scheme to composition scheme at the beginning of financial year and if he was paying tax under normal scheme upto 31st March, he will have to file details of outward and inward supplies upto return of following September or furnishing of Annual return, whichever is earlier – Rule 62(4) of CGST and SGST Rules, 2017.

However, he will not be eligible to take Input Tax Credit of invoices or debit notes from supplier prior to his opting for composition scheme or opting to pay tax on services under Notification No. 2/2019-CT (Rate) dated 7-3-2019explanation to Rule 62(4) of CGST and SGST Rules, 2017 amended on 7-3-2019.

Statement & Returns

Sl Returns Periodicity
 Quarterly statement of payment of tax and interest in form GST CMP-08 w.e.f. April 2019

Annual Return – GSTR 4

 

 

 

A self-assessed tax return in one-page statement – Form GST CMP 08 . This quarterly return has to be filed after every quarter by the 18th day of the month.

In view of the  Covid-19 outbreak , date of  submitting CMP 08 for Jan-Mar 2020 quarter is extended by 7th July 2020.

The GSTR 4 of the Central Goods and Services Tax Rules, 2017 has been revamped by the Central Board of Indirect Taxes and Customs (CBIC) and now the (Composition dealers) GSTR 4 will be required to file it by 30th April for every financial year

In view of Covid-19 outbreak , the time limit to file GSTR 4 for the Financial Year 2019-20 has been extended till 15th July 2020

Other relevant points related to Composition Scheme

(a) A dealer registered under composition scheme is not required to maintain detailed records as required by a normal taxpayer.

(b) A Composition dealer can opt to switch between the Composition Scheme and the normal scheme in different years based on turnover. The declaration of change can be submitted on the GST Portal.

(c) Composition dealers cannot charge GST on their sales. So the end consumer pays less money than usual.

(d)  if a registered composition dealer fails to file return for a particular quarter, he cannot file the return for the succeeding quarter as well.

Disclaimer : Every effort has been made to keep the information cited in this article error free. Suggestions and feedback to improve the task are welcome.

Part 6 of the series will cover the topic “ Exemptions from GST by issue of Notification” under section 11 of the CGST Act 2017

The author can be approached at caanitabhadra@gmail.com

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