Chargeability of GST on the Exempted Supplies Done by the Person Opting for Composition Scheme

As we know that under GST law, there is an optional scheme called composition scheme for the small taxpayers based on the threshold limit of turnover and subject to certain conditions & restrictions. In this article we are about to discuss can a composition taxpayer supply exempted goods or services and if a composition taxpayer supply exempted goods or services, whether he has to pay GST on exempted supply also? Let’s discuss these issues one by one.

The provisions relating to the composition levy are contained in section 10 of CGST Act 2017 and sub section 2 of section 10 contains the list of the supply of goods or services which are restricted for the person who has opted to pay tax under composition scheme. In other words, the person should not be engaged in making those supplies otherwise he will not be eligible for composition scheme. The said sub section 2 of section 10 of CGST Act 2017 is reproduced as below; 

"(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"

From the above provisions, it is clear that sub section 2 of section 10 of CGST Act 2017 imposes some restrictions on the person registered as composition supplier and as per clause (b) of section 10(2), a registered person shall not be eligible to opt for composition scheme, if is engaged in making any supply of goods or services on which GST is not leviable i.e., Non GST Supply like Petrol, Diesel, Alcoholic Liquor etc. Hence the person who has opted to pay tax under composition scheme should not be engaged in making any supplies on which GST is not leviable. Here the important thing that has to be noted that restriction is provided for making Non GST supplies and one should not mixup the non GST supplies and exempted supplies as both supplies are totally different. Non GST supplies are those supplies on which GST is not leviable and Exempted supplies are those on which GST is leviable but for the time being an exemption has been granted by the government by way of issuance of notification in this regard. Hence it clear that a composition supplier can also supply the exempted goods provided that such supply of exempted goods should be within state i.e., intra state supply.  Moreover, while filing the statement for payment of self-assessed tax in Form GST CMP-08 by a composite supplier, the details of exempt supplies are also to be included in Outward Supplies in column 3(1) of CMP-08. The same is also an indication that there is no restriction on composite suppliers for providing exempt supply.

Once it is clear that there is no such kind of restriction on composition supplier for making an exempt supply, now the next question that arises here is whether composition supplier is also required to pay the tax on exempt supplies also. For getting the clarification in this regard, it is necessary to know the applicable GST rates for composition suppliers. Rule 7 of CGST Rules 2017 prescribes the rates of tax applicable for composition suppliers as follows;

Hence as per Rule 7 of CGST Rules 2017, if a composition supplier is a manufacturer (other than the manufacturer of notified goods) then he shall be required to pay tax @ 0.5% of the turnover in the state or union territory and if composition supplier is engaged in making supplies referred to in clause (b) of paragraph 6 of Schedule II (restaurant services), then he shall be required to pay tax @ 2.5% of the turnover in the state or union territory and if a composition supplier is a trader, then he shall be required to pay tax @ 0.5% of the turnover in the State or Union territory. The meaning of turnover in the State or Union territory is given under the sub section 112 of section 2 of CGST Act 2017 is as follows;

"(112) turnover in State or turnover in Union territory 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 or Union territory by a taxable person, exports of goods or services or both and inter-state supplies of goods or services or both made from the State or Union territory by the said taxable person but excludes central tax, state tax, union territory tax, integrated tax and cess"

As per the above definition the exempt supplies should be included while calculating the turnover in State or turnover in Union territory. Accordingly, if the person is a manufacturer, then he has to pay tax @ 1% (0.5% CGST & 0.5% SGST) of turnover in the state or union territory and as per the definition of  turnover in the state or union territory, the exempt supply should be counted. Hence the manufacturer has to pay tax @ 1% of both taxable & exempt supply. In other words tax has to be paid on exempt supplies also. But if the person is not a manufacturer (trader), then he has to pay tax @1% of the taxable supplies only.

From the above detailed discussions it can be concluded that there is no restriction under section 10(2) of CGST Act for the person who is under Composition Scheme to make an Exempt Supply. However, if a person is a manufacturer, then he has to pay tax @ 1% on both taxable & exempt supplies in other words tax has to be paid on exempt supplies also. But if the person is a trader then he has to pay tax @1% of taxable supplies only. 
 

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.