Small dealers and Composition Scheme : Right from the pages of GST Law

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“Composition means componere, meaning “put together”. One of the  feature of Indirect Tax laws is that in order to provide a comfort to assessee from complying with the requirement of paying tax on value addition by maintaining detail of ‘inputs’ and ‘outputs’, an option is provided to go for a put together scheme.

The option of availing the benefit of Composition Levy is only available to small businesses. The objective of composition scheme is to bring simplicity and to reduce the compliance cost for the small taxpayers. The GST Composition scheme, is optional and the eligible person opting to pay tax under this scheme can pay tax at a prescribed percentage of his turnover every quarter, instead of paying tax at normal rate.

Threshold limit for Composition scheme:

The provision related to composition levy is governed by  CGST Act, 2017 (“Act”). The Act here empowers an option to the ‘Registered person’ whose ‘aggregate turnover’ during preceding FY does not exceed 1.5 Crore to, discharge its GST liability on a composite or nominal rate.

The Government, under the Act has the power to increase the said limit of fifty lakh rupees to one crore rupees, by way of a notification, on recommendation of GST Council. In exercise of the power conferred under the Act, Central Government by way of Notification No- 8/2017-CT dated 27th June-2017 prescribed the limit of Rs. Seventy-five lakh rupees which was subsequently increased to Rs. One and a half a crore.

For special category states as specified in sub-clause (g)of clause (4) of article 279A of the Constitution, except Uttrakhand and Jammu and Kashmir aggregate turnover limit was originally specified as fifty lakh rupees by Notification No- 8/2017-CT dated 27th June-2017 which was subsequently increased to Rs. One Crore.

The person registered under composition scheme is neither permitted to collect any tax from the recipient of supplies made by him nor can he avail any credit of input tax paid.

The ‘aggregate turnover’ as defined in GST law is the aggregate value of all:

  • taxable supplies (excluding the value of inward supplies on which tax is payable on reverse charge basis),
  • exempt supplies,
  • exports of goods or services or both and
  • inter-State supplies
  • Taxpayers having the same Permanent Account Number to be computed on all India basis but excluding central tax, State tax, Union territory tax, integrated tax and cess.

Note : The aggregate turnover is different from turnover in a State. The former is used for determining the threshold limit for registration as well as eligibility for Composition Scheme. But always, the composition levy would be calculated on the basis of turnover in the State.

Composition Rate:

Manufacturer: One per cent (both CGST and SGST) of the turnover in State or turnover in Union territory.

Restaurants not serving alcohol: Service provided by Restaurants as specified under Schedule II as 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 of any drink (other than alcoholic liquor for human consumption) are leviable at the rate of five percent (two and half of CGST and two and half for SGST)under composition scheme.

Other suppliers: One per cent of the turnover taxable supplies of goods in State or turnover in Union territory. An important thing to be noted here is that in this case aggregate turnover shall not be leviable to composition rate and only turnover of taxable supplies shall be leviable to composition levy.

The registered person opting for composition levy shall pay tax on inward supply of goods or services or both.

Who are all Eligible for Composition Scheme :  The Composition scheme can be availed by the following categories of registered persons:

  • He is not engaged in the supply of service other than supplies referred to in Schedule II (Restaurant Service).
  • Such person is not engaged in making any supply of goods which are not leviable to tax under GST Laws.
  • Such person is not engaged in making any inter-state outward supplies of goods.
  • Such registered person should not be engaged in making any supply of goods through an electronic commerce operator. This limitation constrains numerous small suppliers/vendors from availing benefit of composition scheme. Although there is a valid reason behind the imposition of this restriction – the supply from an e-commerce operator may result in inter-state outward supplies in many cases.
  • The taxable person should not be a manufacturer of such goods as may be notified by the Government on the recommendations of the Council. Central Government by way of Notification No. 8/2017-CT has specified goods manufacturers of which shall not be eligible for this scheme.
Classifications Description
2105 00 00 Ice cream and other edible ice products, whether or not containing cocoa
2106 90 20 Pan Masala
             24 Tobacco and manufactured tobacco substitutes

                                    

The conditions and restrictions for composition levy is laid in Central Goods and Service Tax Rules, 2017 (“Rules”) which are as follows

  • The person should neither be a casual taxable person nor a non-resident taxable person.
  • The goods held in stock on the appointed day had not been purchased in the course of inter-State trade or commerce or imported from a place outside India or received from branch situated outside the State or from his agent or principal outside the State,
  • The goods held in stock by him have not been purchased from an unregistered person and where purchased, he pays the tax under reverse charge basis on such supplies.

The schemes benefit will be available only when all the registered entities under a single Permanent Account Number opts for such scheme.

How to Opt Composition Scheme?

This option can be exercised in three possible scenarios:

S. No. Various Scenario of Opting the Scheme How to Opt Effective date for Composition
1. The taxable person migrating to GST from previous regime Can opt by filing FORM GST

CMP-01 not later than 30 days or such further period as may be extended, from the appointed date.

Effective from appointed date.
2. Person taking new registration

under GST

Can opt at the time of obtaining registration in Part B of FORM GST REG-01 Effective from the date of registration.
3. A registered person under GST opting for composition scheme May opt by filing FORM GST

CMP-02 prior to commencement of FY for which option is exercised.

Effective from the

beginning of the financial year.

4. The taxable person migrating to GST from previous regime and Person taking new registration under GST (one time) but opting for

Composition Scheme after the

appointed date or his date of

registration

 

By filing intimation in FORM

GST CMP-02

Effective from the

first day of the month,

succeeding the month in which he files an intimation.

 

Any registered person who has availed of input tax credit and also opts to pay tax under Composition Scheme, then, such person shall be required to 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 as may be prescribed, on the day immediately preceding the date of exercising of such option. Any balance after such payment of input tax credit lying in his electronic credit ledger, shall lapse. Statement of such input tax shall be filed in Form GST ITC-03.

What are the returns that a composition dealer is supposed to file : The persons paying tax under composition scheme are required to pay tax on quarterly basis and also required to file a quarterly return in FORM GSTR-4 by the 18th of the month following the end of the quarter instead of any statement of outward or inward supplies. The proper officer may cancel the registration where the said person has not furnished returns for three consecutive tax periods. Registered person opting for composition levy have to file Annual Return in FORM GSTR-9A.

Invoice :A registered person opting for composition scheme shall not issue a tax invoice and shall issue a BILL OF SUPPLY containing various details as given below: –

  • Name, address and GSTIN of the supplier
  • a consecutive serial number not exceeding sixteen characters, in one or multiple series, containing alphabets or numerals or special characters -hyphen or dash and slash symbolised as “-” and “/” respectively, and any combination thereof, unique for a financial year
  • date of its issue
  • name, address and Goods and Services Tax Identification Number or Unique Identity Number, if registered, of the recipient
  • Harmonised System of Nomenclature Code for goods or services
  • description of goods or services or both
  • taxable value of supply of goods or services or both taking into account discount or abatement, if any; and
  • signature or digital signature of the supplier or his authorised representative

Such taxable registered person may not issue a bill of supply if the value of the goods or services or both supplied is less than two hundred rupees. The person shall mention the words “composition taxable person, not eligible to collect tax on supplies” at the top of the bill of supply issued by him. And 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.

The schemes Validity and Withdrawal conditions :

The person opting to pay tax under composition scheme shall remain valid so long as he satisfies all the conditions. He may not file a fresh intimation every year and he may continue to pay tax under the said section subject to the provisions of the Act and these rules. The option to pay tax under composition scheme lapses from the day on which his aggregate turnover during the financial year exceeds the specified limit (Rs. 1. 5 Cr/Rs.1 C) or he ceases to satisfy any of the conditions of this Scheme. Such person is also required to file an intimation for withdrawal from the scheme in FORM GST CMP-04 within seven days from the day on which the threshold limit has been crossed. A registered person paying tax under this scheme may also voluntarily opt out by filing FORM GST CMP-04. 

The Composition scheme provides a short window for those who fulfill the criterion to organize themselves as the limit of Rs. 1. 5 crore / 1 crore is meagre. The possibility of many of the uneducated/ unorganized traders and manufacturers (job workers) not understanding GST and its implications is very high. Only those who are selling to consumers in the last mile of the supply chain would find Composition worthwhile. The trade associations catering to the smaller businesses wish to have the restriction on interstate sale be removed and tax the same at full rate with credit.

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and loves to help people with their Tax Queries.