Introduction: Context and Need for a Simplified Regime
The introduction of the Goods and Services Tax (GST) in India marked a paradigm shift in the indirect taxation system of the country. GST aimed at subsuming a plethora of indirect taxes levied by the Centre and States and bringing about a unified tax regime. However, one of the key concerns post-implementation was the compliance burden on small taxpayers, particularly small traders, shopkeepers, and service providers with limited resources to deal with the complexities of filing monthly returns and managing input tax credit mechanisms.
To mitigate this, the Composition Levy Scheme was introduced under Section 10 of the Central Goods and Services Tax Act, 2017, echoing a similar approach adopted in the erstwhile VAT regime. The core idea was to reduce the tax compliance burden for small businesses by allowing them to pay tax at a fixed percentage of their turnover, without the need to claim input tax credit (ITC) or maintain elaborate records.
Sub-section (1): The Basic Composition Scheme
Section 10(1) allows a registered person, whose aggregate turnover in the preceding financial year does not exceed ₹50 lakh, to opt for the composition scheme. However, the government, on the recommendation of the GST Council, has enhanced this monetary limit to ₹1.5 crore (₹75 lakh for certain specified special category states) through various notifications. The scheme is optional and can be availed only upon filing an intimation in Form GST CMP-02 prior to the beginning of the financial year.
Under this provision, a registered person is allowed to pay tax at a prescribed rate, which shall not exceed:
- 1% of turnover for manufacturers (0.5% CGST + 0.5% SGST);
- 5% of turnover for restaurant services (2.5% CGST + 2.5% SGST);
- 1% of turnover for traders (0.5% CGST + 0.5% SGST).
The rate of tax is levied on the turnover in the State or Union Territory, and the taxpayer is barred from collecting tax from customers. This results in a tax-inclusive pricing model, which is attractive for B2C businesses where passing on tax credit is not a major concern.
Proviso to Sub-section (1): Limited Inclusion of Service Income
Recognizing the need to extend relief to businesses that have incidental service income, the proviso to Section 10(1) allows such taxpayers to supply services (other than restaurant services) to the extent of 10% of their turnover in the preceding financial year or ₹5 lakhs, whichever is higher. This amendment brought about flexibility and broadened the scope of the scheme, especially for small businesses that often engage in composite supply involving both goods and services.
For example, a trader who also installs the goods (incidental service) or a manufacturer who provides a warranty (a service element) may still remain eligible under the composition scheme if their service revenue does not breach the prescribed threshold.
Explanation 1 to Section 10: Exclusion of Interest Income
The first explanation clarifies that interest or discount received on deposits, loans, or advances, being exempt supply under Schedule III, shall not be included while calculating aggregate turnover. This clarification was vital since many small businesses maintain fixed deposits or grant unsecured loans, and the inclusion of such interest income could have unintentionally disqualified them from the scheme.
Sub-section (2): Conditions for Eligibility
To prevent misuse and ensure that the scheme serves its intended purpose, Section 10(2) lays down a set of mandatory conditions, without which a person is not eligible to opt for the scheme. These conditions include:
1.The person shall not be engaged in the supply of services, other than those allowed under the proviso to Section 10(1).
2. The person shall not engage in the supply of goods or services not leviable to GST (such as alcohol for human consumption).
3. The person shall not engage in inter-State outward supplies of goods or services.
4. The person shall not make any supply through an e-commerce operator who is liable to collect tax at source under Section 52 (e.g., Amazon, Flipkart).
5. The person shall not be a manufacturer of notified goods, such as ice cream, pan masala, or tobacco products, as notified under Notification No. 14/2019 – Central Tax dated 07.03.2019.
6. The person shall not be a casual taxable person or a non-resident taxable person.
7. Additionally, if a person has multiple registrations under the same Permanent Account Number (PAN), all such registered units must collectively opt for the composition scheme. If any one unit is ineligible or opts out, the benefit is denied across all registrations under the same PAN.
Sub-section (2A): A Separate Composition Scheme for Service Providers
The government further acknowledged the plight of small service providers, who were completely excluded from the benefits of composition initially. Accordingly, via the CGST (Amendment) Act, 2018, a new sub-section (2A) was inserted, which came into effect from 1st April 2019.
This provision allows registered persons not eligible under sub-section (1), and engaged in the supply of services or mixed supplies, to pay tax at a rate not exceeding 6% (3% CGST + 3% SGST) of their turnover in the State/UT. The threshold for eligibility remains ₹50 lakhs in the preceding financial year. The person must fulfill similar exclusionary conditions as provided under sub-section (2), such as no inter-State supply, no e-commerce sales, and no notified goods/services.
This scheme was especially beneficial for freelancers, consultants, beauty parlors, repair shops, and other such small service businesses that previously had to comply with the normal GST regime, regardless of turnover.
Sub-section (3): Compulsory Withdrawal on Exceeding Limits
Section 10(3) mandates that the option availed under the composition scheme shall lapse from the day the turnover of the person exceeds the prescribed threshold during the financial year. The taxpayer is required to intimate the change in status and switch to the regular scheme, and thereafter must comply with all provisions relating to normal taxpayers, including the requirement to issue tax invoices, collect GST, and file monthly returns.
Failure to make such a transition in time may result in penalties and recovery of tax, along with interest.
Sub-section (4): Restrictions on Tax Collection and ITC
A key feature of the composition scheme is the simplified compliance model. The composition taxpayer is:
- Not allowed to collect tax from customers;
- Not entitled to claim input tax credit;
- Required to issue a ‘Bill of Supply’ instead of a tax invoice;
- Required to file CMP-08 (quarterly payment) and GSTR-4 (annual return).
These provisions are aimed at reducing compliance load. However, the downside is that the recipient of supply from a composition dealer cannot avail ITC, which may make purchases from such dealers less attractive for business customers.
Sub-section (5): Penalty for Wrong Availment
Section 10(5) provides that if the proper officer finds that the taxpayer has wrongfully availed the benefit of the composition scheme, either by misdeclaring turnover or by engaging in prohibited supplies (e.g., inter-State), then such taxpayer shall be liable to pay tax under the regular provisions along with penalty. The proceedings for recovery are initiated under Section 73 or 74 of the Act, depending on whether the error was deliberate or otherwise.
This is intended to curb abuse of the scheme and ensure that only genuinely eligible taxpayers avail of its benefits.
Conclusion: A Balancing Mechanism of Relief and Responsibility
The Composition Scheme under Section 10 of the CGST Act, 2017, is a legislative innovation rooted in the principle of proportional compliance. It acknowledges that one size does not fit all, especially in a diverse economy like India. By offering a low-tax, low-compliance route to small businesses, the government sought to bring them under the GST net without overwhelming them with procedural intricacies.
However, with this relief comes responsibility. The scheme requires taxpayers to carefully monitor turnover, refrain from ineligible activities, and maintain transparency in operations. Any deviation may lead to forfeiture of benefits and additional liabilities. Thus, while Section 10 serves as a stepping stone for small businesses, it also demands legal awareness and diligent compliance.
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Disclaimer: This Article is intended solely for informational and educational purposes and does not constitute legal, tax, or professional advice. The content is based on provisions of the Central Goods and Services Tax Act, 2017 and relevant notifications, circulars, and judicial interpretations as available at the time of writing. While every effort has been made to ensure the accuracy and reliability of the information provided, the author and publisher accept no responsibility for any errors or omissions or for any consequences arising from the use of this information. Readers are advised to consult a qualified tax professional or legal advisor for advice specific to their situation or for any updates or amendments to applicable laws. The use of this material is at the reader’s own discretion and risk.
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