Meaning and applicability of composition Scheme
Section 10 of the CGST Act, is an exception to the charging section i.e. section 9 of the CGST Act, 2017. Composition scheme in simple words can be explained as payment of tax at concessional rate on the basis of turnover. This scheme is designed to give benefit to the small taxpayers wherein they are given an option to pay tax at concessional rates subject to certain conditions. This scheme is optional and not compulsory.
As per sec 10(1) & (2) for supply of goods
As per sec 10 (2A) for supply of services
Composition scheme for supply of goods as per sec 10(1) & (2) read with Rule 7 of the CGST Act, 2017. [Primarily for Manufacturer]
A registered person whose aggregate turnover does not exceed 1.5 crores in the preceding financial year can opt for the composition scheme. This limit is Rs 75 lakhs for the special category states*.
The rate of tax for the supply of goods and specified services are as follows:
|Section under which scheme is opted||Category of registered person||Rate of Tax|
|Sec 10 (1) & (2)||Manufacturer of goods other than ice cream or other edible ice, Pan Masala, Tobacco, Aerated Waters||1% (½% CGST + ½% SGST/UTGST) of the turnover in the state or UT.|
|Sec 10 (1) & (2)||Supplier of restaurant services as specified in schedule II para 6(b)||5% (2½% CGST + 2½% SGST/UTGST) of the turnover in the state or UT.|
|Sec 10 (1) & (2)||Any other person eligible under sec 10(1) & (2) [For Eg: Trader]||1% (½% CGST + ½% SGST/UTGST) of the turnover of taxable supplies of goods & Services in the state or UT.|
*Special category states are Arunachal Pradesh, Uttarakhand, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim and Tripura.
Though this scheme is primarily for manufacturers of goods, if the manufacturer or trader of goods deals in services then also they will be eligible for this scheme provided the same is within the limits specified.
The limit specified for the maximum value of these services should be higher of the two i.e.
1. 10% of the turnover* in the state or union territory in the preceding financial year or,
2. 5 lakh rupees.
This *turnover does not include the value of exempt supplies provided by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount.
Composition scheme for supply of services as per sec 10(2A) read with Rule 7 of the CGST Act, 2017. (Alternate Composition scheme)
Initially, the composition scheme was designed for suppliers of goods and only for restaurant services. Subsequently, the benefits of this scheme were extended to small service providers also via insertion of clause (2A) in section 10 by the Finance Act 2019 w.e.f 01.01.2020. The turnover limit in the preceding FY to opt for this scheme is up to Rs 50 Lakhs. The benefit under sec 10 (2A) can only be availed if the registered person does not fall under sec 10(1) & (2).
The rate of tax for the supply of services are as follows:
|Section under which scheme is opted||Category of registered person||Rate of Tax|
|Sec 10 (2A)||Registered person not eligible under 10 (1) & 2 but eligible under (2A)||6% (3% CGST + 3% SGST/UTGST) of the turnover of supplies of goods & services in the state or UT.|
In this scheme, dealers can supply any amount of goods and services up to Rs. 50 Lakhs. This scheme gives a window to the service providers to supply goods along with services. Like services provided by boutiques, etc.
Conditions or Restrictions for composition Scheme section 10(2) read with Rule 5 of the CGST Act.
The following persons are allowed to apply for the composition scheme:
1. He is not engaged in the supply of services other than specified above i.e. specified in sec 10(1)
2. He is not engaged in making interstate outward supply of goods or services,
3. He is not engaged in making any supply of goods or services which are not leviable to tax under this act which are listed as follows:
4. He is not engaged in supplying goods or services under E-commerce who is required to collect TCS under sec 52,
5. He is not a manufacturer of ice cream and other edible ice, whether or not containing cocoa, Tobacco and manufactured tobacco substitutes, Pan Masala and Aerated water. (Notification No. 14/2019 CT dated 07.03.2019)
6. He is required to issue ‘bill of supply’ in place of ‘Invoice’
7. He is neither a Casual Taxable person nor a non-resident taxable person.
8. The word “Composition taxable person, not liable to collect tax on supplies” must be mentioned on top of the “Bill of supply” issued by him.
9. The word “Composition taxable person” must be mentioned on every notice or signboard displayed at a prominent place of business and at every additional place of business.
10. The goods held in stock on the appointed date must not be on account of interstate trade or commerce or import or must not be received from his branch or agent or principal outside the state where the option is exercised under rule 3 sub-rule 1
11. He is still liable to pay tax under 9(3)/9(4) (at rates normal rates applicable) on inward supplies of goods or services or both (RCM)
If the registered person does not satisfy the first condition stated above i.e. he is engaged in providing services and fulfils the rest of the 5 conditions then also the benefit of the composition scheme can be availed as per the insertion of clause (2A) w.e.f. 01.01.2020 as stated above.
If the registered person obtains more than one registration under the same PAN, then the benefit of the composition scheme under section 10 (1) and (2A) can opt only if the tax is paid under this scheme for all other branches. Also, Fresh intimation is not required to be filed every year by the person registered under this section.
Calculation of turnover under composition scheme inserted by the Finance Act, 2019 w.e.f. 01.01.2020
There is confusion as to what will be included in the turnover to calculate the eligibility of this scheme and whether the tax will also be paid on the same turnover or not?
Turnover for calculating the eligibility to fall under this scheme is:
|Turnover includes||Turnover excludes|
|Taxable supplies||Taxes (CGST/ SGST/UTGST/ Cess)|
|Exempt supplies||Value of inward supplies on which tax is payable on RCM|
|Exports*||Exempt supplies of services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount.|
This also includes the value of supplies made from 1st April of a FY till liable for registration
*Exports and interstate supply are only included for calculating the turnover of the preceding FY. These values are not used for calculating the turnover of the current year in which the composition scheme has been opted since interstate supplies and exports are not permitted under the composition levy.
Turnover for calculating the tax liability after becoming eligible for the composition scheme is:
|Turnover includes||Turnover excludes|
|All supplies made after obtaining the registration||supplies from 1st April of a FY till the time of registration|
|Exempt supplies||Exempt supplies of services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount.|
This means while calculating the turnover for payment of tax following things are required to be taken care of:
1. The supplies from 1st April of a FY till the time of registration will not be included in this calculation.
2. All exempt supplies will be included except the supplies by way of extending deposits loan and advances represented by way of interest or discount.
“Aggregate Turnover” on the Permanent Account Number of the Registered Person is to be checked for eligibility and Tax is to be paid on the “turnover in the State” or “Turnover in the Union Territory”.
The Registered person would have to check whether the annual aggregate turnover on his permanent account number in the entire country does not exceed the threshold limit even though he is opting for a composition scheme in a State. Further, if he has opted for a composition scheme in a State then he would have to opt for a composition scheme for the entire country. After opting for a composition scheme, the composition tax is to be paid on the turnover in a State or turnover in the Union Territory.
Disadvantages of composition scheme
1. The person opting for the composition scheme is not allowed to collect the tax from the recipient i.e. the concessional rate of tax will be borne by the registered person itself.
2. The person opting for the composition scheme is not allowed to avail the Input Tax Credit of the taxes already paid by him to purchase any goods or services for the purpose of business.
3. The benefit of the composition scheme will lapse from the day when the aggregate turnover during the financial year exceeds the threshold limit prescribed (1.5 crores/75 lakhs/50 lakhs) and such person is required to pay tax under the normal scheme and intimation for withdrawal of composition is required to be filed within 7 days.
4. If the proper officer believes that the person has paid tax under this scheme despite the fact that he was not eligible for this benefit, then the concessional rates will not apply he will have to pay the tax at normal rates prescribed. The provisions provided in sec 73, 74 of the CGST Act, 2017 will also apply to compute tax and penalty.
Intimation for composition levy (Rule 3 of the CGST Act)
Intimation by the person applying for registration (New Registration)
An intimation is required to be given in Form CMP-01 electronically duly signed and verified through electronic verification code within 30 days from the grant of provisional registration. If the same is not filed within 30 days or such extended dates as permitted by the commissioner then, the registered person cannot collect tax and accordingly must issue a bill of supply.
The person who is not registered and accordingly during the registration process if the option to pay tax under section 10 in part B of FORM GST REG-01 is opted then this will be considered as an intimation to the government to pay tax under the composition scheme. The option to pay tax under this scheme will be effective from the date of registration only.
Intimation by registered person:
An intimation is required to be given in Form CMP-02 electronically duly signed and verified through electronic verification code prior to commencement of the financial year in which tax is required to be paid under sec 10. Also, a statement in FORM GST ITC -03 is required to be furnished within 60 days from the commencement of the financial year.
The person who has been granted provisional registration or registration under the composition scheme may opt to pay tax under the composition scheme from the 1st day of the month immediately succeeding the month in which FORM GST CMP-02 intimation has been filed.
Also, the ITC 03 must be filed within 180 days from the date he commences to pay tax under this scheme w.e.f. 23.01.2018 vide NN 03/2018.
FORM GST CMP-03 must be filed within a period of 90 days or such extended period by the commissioner showing the details of the stock including inward supply of good received from an unregistered person on the day immediately preceding the date from which he opts to pay tax under sec 10.
An intimation filed for one place of business will be deemed to be an intimation for all the branches registered under the same PAN No. Thus there is no requirement for filing multiple intimations.
Deposit of Tax and submission of returns by Composition Dealer: Rule 62
Deposit of Tax: Composition dealer is required to furnish a statement every quarter containing the details of payment of self-assessed tax in FORM GST CMP-08 by 18th day of the month succeeding such quarter
Return: Composition dealer is required to file only one return annually in form GSTR-4 which will be submitted by 13th April of next financial year.
Some important issues related to composition scheme which are also published by ICAI in their handbook on composition scheme are produced below for better understanding:
Question: A person has two establishments i.e. in Uttarakhand and Rajasthan. The turnover in Rajasthan is Rs 60 Lakh and turnover in Uttarakhand is Rs 30 Lakh. He wants to opt for Composition Scheme in Rajasthan. Whether he can do so?
Answer: As per the provisions of Section 10 of CGST Act, 2017 if a person opts for composition scheme in one State, he has to opt for composition scheme on all the registrations he has obtained across all States on the same permanent account number. Therefore, as a corollary, if he is not able to opt for composition scheme in even one of the States, he would not be eligible to opt for composition scheme in any of the States. In the given example, the person is eligible to opt for composition scheme for Rajasthan on a stand-alone basis since his annual aggregate turnover of previous financial year is less than Rs 150 Lakh. However, he has an establishment in Uttarakhand as well wherein threshold limit of annual aggregate turnover of previous financial year for opting composition scheme is Rs 75 Lakh. Since his aggregate turnover for previous year on his permanent account number was more than 75 Lakh therefore, he cannot opt for composition scheme for the State of Uttarakhand. Since he would not be able to opt for composition scheme in Uttarakhand, therefore he would also not be able to opt for composition scheme in Rajasthan.
Aggregate Turnover in case of Multiple Entities in different States under same PAN: If an entity has its offices in multiple States; aggregate turnover of entities in all States would be taken for the purpose of checking the eligibility to opt for composition scheme. The turnover of entity in a State would be irrelevant and the aggregate turnover on the permanent account number would have to be considered.
Question: Whether the benefit of composition scheme will be available to the person who is setting up new business in the current financial year?
Answer: Supplies are made by a registered person whose aggregate turnover in the preceding financial year was INR 75 Lakh/150 lakhs or below the person might have started a new business in the current year and thus would not have any turnover in previous year. Such a person would be eligible to opt for the scheme as his turnover was less than 150 Lakhs in the previous year. The person could have been exclusively dealing in exempted goods or services in the previous year and thus was not required to be registered. Such a person would be eligible if his turnover of exempted goods or services or both was less than INR 150 Lakhs but if his turnover of exempted goods or services or both was more than INR 150 Lakhs (although not required to be registered under GST as dealing exclusively in exempted goods), then he would not be eligible to opt for the scheme.
Question: Can a composition dealer supply goods to any registered person who has also opted for composition Scheme?
Answer: There is no restriction in the law for supply of goods by one registered person under composition scheme to another registered person under composition scheme.
Question: Can a person opting for composition scheme purchase goods from outside the State?
Answer: Section 10 of CGST Act, 2017 places restriction on inter-State supply of goods by a person who has opted to pay under composition scheme. However, it has not placed a restriction on such a person to import goods from outside the State. Therefore, there is no restriction on goods being imported from outside the State by a person who has opted for payment under composition scheme.
Question: Can a person who is supplying goods permitted to make inter-State supply?
Answer: A person who has opted to pay tax under section 10 of CGST Act, 2017 cannot make an inter-State supply of goods. If he does so, he would not be eligible to remain under the composition scheme and would have to withdraw from the composition scheme.
Question: Can person opting under the composition scheme have multiple registrations in other States as well?
Answer: A person who has opted for composition scheme can have registration in multiple States. However, if he has opted for composition scheme for one registration, then he would have to opt for composition scheme for all other registrations. Further pursuant to opting for composition scheme, if he has to withdraw from composition scheme for some reason, he would have to withdraw from composition scheme from all the States.
Question: Can a person opt for composition scheme in one State and regular scheme in other States?
Answer: No, if a person has to opt for composition scheme under section 10, he will have to opt for composition for all the States. He cannot have the option to choose composition scheme in one registration and remain under normal scheme for other registrations.
Question: Can a person who is supplying alcoholic liquor for human consumption or petrol opts for composition scheme?
Answer: No, a person supplying alcoholic liquor for human consumption or petrol is not eligible to opt for Composition Scheme as provisions of Section 10 debar a person to opt for composition scheme if he is engaged in supplying goods which are not liable to tax. As per the provisions of Section 9 of CGST Act, 2017 both petrol and liquor for human consumption are supplies not liable to GST
Question: Can a composition dealer supply through e-commerce operator?
Answer: Yes, a person who has opted for composition scheme can supply through the ecommerce operator who is not liable to collect tax under section 52 of CGST Act, 2017. If a person who has opted to pay tax under composition scheme supplies through an ecommerce operator who is liable to collect tax under section 52, he would have to withdraw from the composition scheme. Therefore, if a kirana store dealer has opted for composition scheme under GST regime and he also supplies through ABC Limited and ABC Limited collects TCS on supplies made through him, then in such case the kirana dealer would have to withdraw from the Composition Scheme.