Composition Scheme Under GST

Under GST law there is a Scheme available for small taxpayers based upon the turnover. This scheme is called composition scheme. This is an optional scheme. The Composition Levy is an alternative method of levy of tax designed for small taxpayers whose turnover is up to the prescribed limit. The objective of the Composition scheme is to bring simplicity, ease the compliance burden for the small taxpayers. In this article we will discuss the composition scheme, persons eligible for Composition Scheme. The invoicing requirements & ITC eligibility under this scheme and many other points in relation to composition scheme.

Turnover Criteria & other restrictions For Composition Scheme:

A registered person (being a supplier of goods) whose aggregate turnover in the preceding financial year does not exceed Rs 1.5 crore can opt for Composition Scheme. In case of some specified states (Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Uttarakhand) the limit is Rs 75 lakh.

The sub section 2 of section 10 of CGST Act 2017 imposes some restrictions for composition taxpayers. The said sub section 2 of section 10 of CGST Act 2017states that;

"(2) The registered person shall be eligible to opt under sub-section (1), if-
(a) save as provided in sub-section (1), he is not engaged in the supply of services
(b) he is not engaged in making any supply of goods or services which are not leviable to tax under this Act;
(c) he is not engaged in making any inter-state outward supplies of goods or services
(d) he is not engaged in making any supply of services through an electronic commerce operator who is required to collect tax at source under section 52;
(e) he is not a manufacturer of such goods as may be notified by the Government on the recommendations of the Council; and
(f) he is neither a casual taxable person nor a non-resident taxable person"

Composition Scheme for supplier of services:

Vide sub section 2A of section 10 of CGST Act 2017, the Composition scheme has also been made available for suppliers of services (to those who are otherwise not eligible under Section 10(1) of the CGST Act) with a tax rate of 6% (3% CGST + 3% SGST) having an aggregate Annual Turnover in the preceding FY up to R 50 Lakh.

Intimation for the scheme:

• Any registered person who wants to opt for Composition Levy has to file an electronic intimation in the FORM GST CMP-02 prior to the commencement of financial year for which the option to pay tax under Composition Levy is exercised.

• Such person also has to furnish a statement in FORM GST ITC-03 in accordance with the Rule 44(4) of CGST Rules, 2017, within 60 days from the commencement of the relevant F.Y.

• There is no need to file intimation in FORM GST CMP-02 every year.

• The intimation once filed would remain valid, as long as the taxpayer is eligible for the Composition scheme under GST.

• It is important to note that any intimation filed in respect of any place of business in any State shall be deemed to be an intimation in respect of all other places of business registered on the same Permanent Account Number.

Rate of Tax under the scheme:

Rule 7 of CGST Rules 2017 prescribes the rates of tax applicable for composition suppliers. There are different rates prescribed for three different categories of suppliers.

• An eligible manufacturer has to pay 1% (0.5% CGST + 0.5% SGST/ UTGST) of turnover in a state or Union Territory, as the case may be.

• All eligible service providers (or goods and service suppliers) have to pay 6% (3% CGST + 3% SGST / UTGST) of turnover in a State or Union Territory, as the case may be.

• An eligible person engaged in making supplies mentioned in clause (b) of para 6 of Schedule II of the CGST Act (provider of restaurant Service) has to pay 5% (2.5% CGST + 2.5% SGST/UTGST) of turnover in a state or Union Territory, as the case may be.

• All other eligible suppliers (i.e. traders) have to pay 1% (0.5% CGST + 0.5% SGST/UTGST) of the taxable turnover in a State or Union Territory, as the case may be.

Requirement to Issue Bill of Supply:

As per section 31(3)(c) of CGST Act 2017 the registered paying tax under the provisions of section 10 (Composition Scheme) shall instead of issuing a tax invoice, has to issue a bill of supply. Further, as per Rule 5(1) of CGST Rules 2017 he 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 he shall also 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.

GST Returns for Composition Taxpayers:

• Every Composition taxpayer has to furnish a quarterly statement containing the details of payment of self-assessed tax in FORM GST CMP-08, till the 18th day of the month succeeding such quarter.

• The taxpayer needs to furnish a yearly return in FORM GSTR-4, till the 30th day of April following the end of such F.Y.

• However, from F.Y 2024-25 onwards the return in FORM GSTR-4 shall be required to be furnished by the registered person till the thirtieth day of June following the end of such F.Y.

Withdrawal from the Composition Levy scheme and procedure thereafter:

• A registered person who intends to withdraw from the scheme has to file an intimation for withdrawal in the FORM GST CMP-04.

• A registered person who ceases to satisfy any provision of the scheme has to file an intimation for withdrawal from the scheme in the FORM GST CMP-04, within 7 days of occurrence of such event.

• After opting out of the scheme, he has to pay tax as a normal taxpayer and issue tax invoice for every taxable supply made thereafter.

• Subsequently he has to forward a statement in FORM GST ITC-01 containing details of the stock of the inputs and inputs contained in semi-finished or finished goods held in stock by him on the date on which the option is withdrawn. The said statement has to be submitted on the common portal within 30 days from the date of withdrawal.

• He shall be 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 as normal taxpayer under Section 9 of the CGST Act, 2017.

Main Drawbacks of Composition Scheme:

There are some limitations under the GST Composition Levy scheme, which a taxpayer must be aware of before opting for the scheme. These are:

• No credit of Input Tax: The taxpayer registered under Composition Levy scheme will not be eligible to take Credit of Input Tax paid on purchases.

• No Inter-State business: The major drawback of the scheme is that the taxpayer cannot deal in inter-state supplies or affect exports of goods and services.

• Pay tax form own pocket: Since the taxpayer is not allowed to charge tax from his buyer, he has to pay tax out of his own pocket, despite the rate being low. He is not even allowed to issue a tax invoice, resulting in the burden on the taxpayer to pay tax.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.