04. Composition Levy
This article is part of the book named " Comprehensive Guide to GST" authored by CA. Brijesh Thakar. You can access the full book on following link.
Relevant Definitions
Aggregate turnover: Section 2 (6) of CGST Act
“aggregate turnover” 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), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis but excludes central tax, State tax, Union territory tax, integrated tax and cess;
Taxable supplies: Section 2 (108) of CGST Act
“Taxable supply” means a supply of goods or services or both which is leviable to tax under this Act;
Inward Supplies : Section 2 (67) of the CGST Act
“Inward supply” in relation to a person, shall mean receipt of goods or services or both whether by purchase, acquisition or any other means with or without consideration;
Outward Supplies: Section 2 (83) of the CGST Act
“outward supply” in relation to a taxable person, means supply of goods or services or both, whether by sale, transfer, barter, exchange, licence, rental, lease or disposal or any other mode, made or agreed to be made by such person in the course or furtherance of business;
Manufacture: Section 2 (72) of the CGST Act
“manufacture” means processing of raw material or inputs in any manner that results in emergence of a new product having a distinct name, character and use and the term “manufacturer” shall be construed accordingly.
Turnover in a state or in union territory: Section 2 (112) of the CGST Act
“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.
Electronic commerce : As per section 2 (44) of the CGST Act
“electronic commerce” means the supply of goods or services or both, including digital products over digital or electronic network;
Electronic commerce operator: As per section 2 (45) of the CGST Act
“electronic commerce operator” means any person who owns, operates or manages digital or electronic facility or platform for electronic commerce;
Capital Goods: As per section 2 (19) of the CGST Act
“capital goods” means goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business;
Place of Business: As per section 2 (85) of the CGST Act
“place of business” includes––
(a) a place from where the business is ordinarily carried on, and includes a warehouse, a godown or any other place where a taxable person stores his goods, supplies or receives goods or services or both; or
(b) a place where a taxable person maintains his books of account; or
(c) a place where a taxable person is engaged in business through an agent, by whatever name called;
Taxable person: As per section 2 (107)
“taxable person” means a person who is registered or liable to be registered under section 22 or section 24
Casual taxable person: As per section 2(20) of the CGST Act
“casual taxable person” means a person who occasionally undertakes transactions involving supply of goods or services or both in the course or furtherance of business, whether as principal, agent or in any other capacity, in a State or a Union territory where he has no fixed place of business.
Non-resident taxable person: As per section 2(77) of the CGST Act
“non-resident taxable person” means any person who occasionally undertakes transactions involving supply of goods or services or both, whether as principal or agent or in any other capacity, but who has no fixed place of business or residence in India;
Principal place of business: As per section 2 (89) of the CGST Act
“principal place of business” means the place of business specified as the principal place of business in the certificate of registration
Commentary on Basic provisions
GST provisions have been considered very complicated by small taxpayers from the beginning. To make compliance with GST easy for small taxpayers, composition scheme is implemented. It is a simplified scheme for small taxpayers giving lower rate of tax and reducing other complications to a large extent. Further this scheme has been amended from time to time to make it more tax payer friendly and to cover more and more tax payer under this scheme. A Scheme similar to composition scheme has also been implemented for certain categories of service providers (though not under section 10). Let us understand first the provisions of section 10 of the CGST Act and rules made there under for composition levy.
Section 10 of the CGST Act provides for composition levy. Section 10 starts with a non obstante clause which overrides all the sections of the Act except section 9 (3) and Section 9 (4).(i.e. provisions for reverse charge mechanism). Hence, a person who opts for composition scheme is not required to pay GST as per normal provisions of the Act, however, he will not be relieved from a tax liability arising from Reverse charge.
As per section 10 (1) of CGST Act, notwithstanding anything to the contrary contained in this Act but subject to the provisions of sub-sections (3) and (4) of section 9, a registered person, whose aggregate turnover in the preceding financial year did not exceed following limits, may opt for composition scheme.
For specified categories of states
( see note-1 below)
Rs. 75 lakhs
( Rs 50 lakhs up to 13th October, 2017)
or Other states
Rs. 1.50 crores
(Applicable from 1st April, 2019. It was 75 lakhs up to 13th October, 2017 then after increased to 1 crores up to 31st march 2019)
NOTES:
Following states are considered as specific category of states for composition scheme
Arunachal Pradesh, (ii) Manipur, (iii) Meghalaya, (iv) Mizoram, (v) Nagaland,(vi) Sikkim, (vii) Tripura, (viii) Himachal Pradesh
Aggregate turnover has been defined u/s 2(6) as under:
“aggregate turnover” 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), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis but excludes central tax, State tax, Union territory tax, integrated tax and cess.
Let us understand the definition of aggregate turnover. This definition has an important role at many other places in GST Act. As per the definition, aggregate turnover is the aggregate of all taxable supplies, exempt supplies, export of goods/services. Hence, it does not only covers supplies which are taxable but also supplies which are exempt from GST. Further, export supplies are also required to be added. This addition needs to be made for all the persons having single PAN. Interstate supplies shall also be added for computing aggregate turnover. As per section 22 of the CGST Act, a person need to take registration in each state from which he make taxable supplies of goods or services or both. Further he can take separate registration in one state also for different places of business. As per section 25 (4). When a person obtains multiple registration under a single PAN, all such registrations shall be considered as distinct persons. Hence, it is important to understand that though in case of multiple registration under a single PAN, all registrations are considered as distinct, for the purpose of making computation of aggregate turnover, turnover of all these persons shall be aggregated.
It has also been mentioned in the definition that aggregate turnover shall exclude the value of inward supplies on which tax is payable by a person on a reverse charge basis. Does this mean that the inward supplies on which tax is not paid by the person on reverse charge shall be included in his aggregate turnover? The answer is an obvious NO. Turnover cannot include inward supplies, whether covered under RCM or not. The sentence of exclusion of the inward supplies in computing aggregate turnover is in the nature of clarification. As the person pays tax on outward supplies and inward supplies covered under RCM, there may arise a query as to whether to include this inward supply on which tax is payable by a person under RCM in aggregate turnover or not. To avoid such confusion, it is mentioned in the definition that the inward supplies on which tax is payable under RCM shall be excluded from computation of aggregate turnover. Hence we can say that we need to make sum total of all outward supplies (whether taxable or exempt or export) under one PAN for computing aggregate turnover.
Rate of GST under composition scheme under section 10
This sketch cannot currently be displayed in exports
NOTES:
The term manufacture has been defined under section 2(72) as under
“Manufacture” means processing of raw material or inputs in any manner that results in emergence of a new product having a distinct name, character and use and the term “manufacturer” shall be construed accordingly.
By notification 01/2018-CT, dated 1st January, 2018, composition rate of GST for manufacturer has been reduced from 2 percent to 1 percent. Hence we can say that except for restaurant services for all other supplies composition GST rate is now 1 %.
Supplies referred to in clause (b) of paragraph 6 of schedule II covers, 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 or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.
Hence it is not only restaurant services but also outdoor caterers’ services which will be eligible for composition levy. However vide notification 46/2017-Central Tax, dated 14/11/2017 restaurant services will attract only 5 % GST rate instead of 18 %. Hence it may not be beneficial for restaurants to go for composition scheme. However for outdoor caterers composition scheme may be still beneficial because for supply of outdoor catering services normal GST rate is 18%.
Percentages mentioned in above table are required to be applied on turnover of taxable supplies vide notification 01/2018- CT. Earlier the percentages were required to be applied on turnover in a state . As per section 2 (112) of CGST Act,
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 section 2 (108) of CGST Act,
“taxable supply” means a supply of goods or services or both which is leviable to tax under this Act
It is important to note that supplies exempt under section 11 of CGST Act, remains taxable as the levy under section 9 already exist. However certain products like petroleum, alcoholic liquor etc. are non-taxable because they are outside the scope of charging section 9. Hence if a person opts for composition levy, he is required to pay tax on exempt supplies also. For example if Mr. X is a trader and he opts for composition levy. He has made taxable supplies of Rs. 30,00,000/- and exempt supplies (under section 11 ) of Rs. 20,00,000/- then he is required to pay 1 percent GST on Total 50,00,000/-.
By notification 05/2019-CT dated 29-01-2019, it has been provided that the percentage of composition levy is to be applied on turnover within the state and not on taxable turnover.
Persons not eligible for opting for composition scheme under section 10 (2)
As per section 10 (2), following persons shall not be eligible to opt for composition scheme
(a) he is engaged in the supply of services other than supplies referred to in clause (b) of paragraph 6 of Schedule II;
Provided a person who opts for a composition scheme can provide services up to higher of the following
10 % of turnover in a state or union territory in the preceding financial year or
Five lakh rupees.
(b) he is engaged in making any supply of goods which are not leviable to tax under this Act;
(c) he is engaged in making any inter-State outward supplies of goods;
(d) he is engaged in making any supply of goods through an electronic commerce operator who is required to collect tax at source under section 52; and
(e) he is a manufacturer of such goods as may be notified by the Government on the commendations of the Council:
Provided that where more than one registered persons are having the same Permanent Account Number (issued under the Income-tax Act, 1961), the registered person shall not be eligible to opt for the scheme under sub-section (1) unless all such registered persons opt to pay tax under that sub-section.
commentary on section 10-2
Let us understand each of these restrictions one by one
A. Restriction on provision of services
As mentioned earlier, only food supply services given under clause (b) of paragraph 6 of Schedule II is covered under composition scheme under section 10 ( there is a separate scheme for service providers to pay GST at 6 % which is discussed later in this chapter). There is a long history of this restriction and its gradual reduction.
By exercising the powers conferred in Section 172 of the CGST Act, 2017 the Central Government has notified that if a person supplies goods and/or services referred to in clause (b) of paragraph 6 of Schedule II of the said Act and also supplies any exempt services including services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount, the said person shall not be ineligible for the composition scheme under section 10 subject to the fulfillment of all other conditions specified therein by passing an order through Order No.01/2017known as THE CENTRAL GOODS AND SERVICES TAX (REMOVAL OF DIFFICULTIES) ORDER, 2017 in the Official Gazette of India on 13th October, 2017.
Example:
Mr.A has lent his residential property and is getting rental income on this residential property, then he is said to be providing service. However, still he can opt for composition scheme because renting of residential property is exempt. However, if he has lent commercial property then he cannot opt for composition scheme because renting of commercial property is not an exempt service.
However this removal of difficulties order which addressed issues of only exempt services being provided was not sufficient to attract persons to composition scheme. Hence By GST Amendment Act, 2018 following proviso has been inserted,
“A person who opts for Composition Scheme can provide services up to higher of following:
10% of turnover in a State or Union Territory in the preceding F.Y. or
Five Lakhs rupees.
Mr. X has total turnover of Rs. 1.30 crores in F.Y. 2018-19. He can opt for composition scheme even if he provides services upto Rs. 13 lakhs (10% of 1.30 crores or Rs. 5 lakhs whichever is higher) in the F.Y. 2019-20.
It is important to note that above proviso applies to all services- exempt as well as taxable. Hence the order of removal of difficulties applicable only to exempt supplies is of no relevance now.
B. Restriction on making any supply of goods which are not leviable to tax under this Act
Readers’ attention is required to the words “supplies not leviable to tax”. These words “supplies not leviable to tax “ does not cover exempt supplies. Exempt supplies are still supplies leviable to tax. This restriction is applicable only to goods not leviable to tax and not to exempt goods. For Example: At present petroleum products are kept outside GST. Hence they are goods not leviable to tax. Whereas goods like vegetables, fruits, milk are considered as exempt goods.
C. Restriction on making any inter-State outward supplies of goods;
A person engaged in making any outward inter state supplies of goods is not allowed to opt for composition scheme. This restriction is applicable only to outward supplies and not to inward supplies. Hence a person who has opted for composition scheme can purchase goods from outside state.
D. he is not engaged in making any supply of goods through an electronic commerce operator who is required to collect tax at source under section 52
An electronic commerce operator who collects consideration for the supplies made through him is required to deduct 1 % TCS as per section 52 of the CGST Act. This section is implemented for matching supplies shown by supplier with statement submitted by the electronic commerce operator (It is discussed in other chapter in detail). To properly implement this provision, a restriction has been imposed that a person who supplies goods through electronic commerce operator cannot opt for composition scheme.
Restriction on manufacturing of such goods as may be notified by the Government on the recommendations of the Council. Council has recommended manufacturers of following goods ineligible for composition scheme vide notification 8/2017-CT dated 27/06/2017.
1
2105 00 00
Ice cream and other edible ice, whether or not containing cocoa
2
2106 90 20
Pan masala
2A
2202 10 10
Aerated Water
(Added by Noti. No. 18/2019 - CTR
Dated 30-09-2019)
3
24
All goods, i.e. Tobacco and manufactured tobacco substitutes
There is also a proviso to section 10 (2) which provides that where more than one registered persons are having the same Permanent Account Number (issued under the Income-tax Act, 1961), the registered person shall not be eligible to opt for the scheme under sub-section (1) unless all such registered persons opt to pay tax under that sub-section.
Hence if A ltd has 25 GST registrations under one PAN then all such registrations must opt for composition. It is not allowed that the entity registered in one state opts for composition and entity registered in another state (or other place of business in same state under section 25-3) registered under the same PAN pays tax as per normal provisions.
Other provisions of composition scheme under section 10 (3), 10 (4) and 10 (5)
As per section 10 (3), if aggregate turnover of a person exceeds the limit prescribed under section 10 (1) (I.e. 1.50 crores at present), he cannot continue paying tax under composition scheme. The day on which aggregate turnover crosses the prescribed limit, the option to pay tax under composition scheme shall lapse.
As per section 10 (4), a person who is paying tax under composition scheme under section 10 cannot collect tax from the recipient. He can also not take any input tax credit.
As per section 10 (5), If the proper officer has reasons to believe that a taxable person has paid tax under sub-section (1) despite not being eligible, such person shall, in addition to any tax that may be payable by him under any other provisions of this Act, be liable to a penalty and the provisions of section 73 or section 74 shall, mutatis mutandis, apply for determination of tax and penalty
Applicable Rules for Composition Levy with commentary
Rule 3 Intimation for composition levy.-
Rule 3 (1) Any person who has been granted registration on a provisional basis under clause (b) of sub-rule (1) of rule 24 and who opts to pay tax under section 10, shall electronically file an intimation in FORM GST CMP-01, duly signed or verified through electronic verification code, on the common portal, either directly or through a Facilitation Centre notified by the Commissioner, prior to the appointed day, but not later than thirty days after the said day, or such further period as may be extended by the Commissioner in this behalf:
Provided that where the intimation in FORM GST CMP-01 is filed after the appointed day, the registered person shall not collect any tax from the appointed day but shall issue bill of supply for supplies made after the said day.
Commentary
Rule 3(1) is not of much significance today because it talks about the migration of erstwhile tax payers registered under service tax, VAT, excise to GST. Those taxpayers who were registered under erstwhile tax laws and migrated to GST by issuance of provisional registration may wish to opt for composition scheme under GST under section 10. It is quite possible that a taxpayer who was paying tax at normal rate in erstwhile tax law finds section 10 of the GST Act more attractive and wish to opt for composition scheme. Here, such person needs to file an intimation in FORM GST CMP-01 electronically. As has been discussed earlier, as per section 10 (4), a person who opts for composition scheme cannot collect tax from the recipient. He is also not allowed to take any input tax credit.
As per section 31 (3) –c, a person who supplies exempt goods or services or who has opted for composition scheme under section 10 cannot issue tax invoice. Instead he is required to issue Bill of Supply. (Content of Bill of Entry has been discussed later in relevant chapter).
Rule 3(2) Any person who applies for registration under sub-rule (1) of rule 8 may give an option to pay tax under section 10 in Part B of FORM GST REG-01, which shall be considered as an intimation to pay tax under the said section.
Commentary
Sub Rule 1 was for migrated taxpayers. Sub rule 2 is for those tax payers who are taking fresh registration under GST. They can opt for composition scheme in the registration form itself. When they file FORM REG-01 ( GST registration form), in part B they need to mention that they are opting for composition scheme.
Rule 3(3) Any registered person who opts to pay tax under section 10 shall electronically file an intimation in FORM GST CMP-02, duly signed or verified through electronic verification code, on the common portal, either directly or through a Facilitation Centre notified by the Commissioner, prior to the commencement of the financial year for which the option to pay tax under the aforesaid section is exercised and shall furnish the statement in FORM GST ITC-03 in accordance with the provisions of sub-rule (4) of rule 44 within a period of sixty days from the commencement of the relevant financial year.
[Provided that any registered person who opts to pay tax under section 10 for the financial year 2020-21 shall electronically file an intimation in FORM GST CMP-02, duly signed or verified through electronic verification code, on the common portal, either directly or through a Facilitation Centre notified by the Commissioner, on or before 30th day of June, 2020 and shall furnish the statement in FORM GST ITC-03 in accordance with the provisions of sub-rule (4) of rule 44 upto the 31st day of July, 2020.]
Commentary
It is also possible that a person who is paying tax as per normal provisions wishes to switch over to composition scheme. Here as per Rule 3 (3), a person cannot opt for composition scheme from normal scheme in between the financial year. He must opt for composition scheme before commencement of financial year. He needs to file FORM CMP-02 before commencement of the financial year.
Readers are aware that a person opting for composition cannot take input tax credit as per section 10 (4). When a person paying tax under normal provisions of GST opts for composition he needs to reverse the ITC available on the date of exercising the option. It is also possible that he has some inventory lying on the date of opting for composition and on that stock he has availed ITC. This much ITC also he is required to pay.
This provision has been given under section 18(4) of the CGST Act. As per this section, Where any registered person who has availed of input tax credit opts to pay tax under section 10, he shall 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 per Rule 44 ( five percentage points for a quarter or part thereof), on the day immediately preceding the date of exercising of such option. After payment of such amount if any ITC is left in electronic credit ledger then it shall be lapsed. This will be done by filing form GST ITC-03.
As per Rule 44, the input tax credit shall be computed for inputs proportionately on the basis of the corresponding invoices on which ITC has been availed. In case of capital goods held in stock the input tax credit shall be computed in the remaining useful life in months on pro rata basis taking useful life as five year. For example, let us assume that capital goods are in use for four years, six months and fifteen days. The useful life remaining in months shall be five months ignoring part of the month. ITC required to reversed = ITC taken on such capital goods *5 /60.
Rule (3A)Notwithstanding anything contained in sub-rules (1), (2) and (3), a person who has been granted registration on a provisional basis under rule 24 or who has been granted certificate of registration under sub-rule (1) of rule 10 may opt to pay tax under section 10 with effect from the first day of the month immediately succeeding the month in which he files an intimation in FORM GST CMP-02, on the common portal either directly or through a Facilitation Centre notified by the Commissioner, on or before the31st day of March, 2018, and shall furnish the statement in FORM GST ITC-03 in accordance with the provisions of sub-rule (4) of rule 44 within a period of [one hundred and eighty days]3from the day on which such person commences to pay tax under section 10:
Provided that the said persons shall not be allowed to furnish the declaration inFORM GST TRAN-1 after the statement in FORM GST ITC-03 has been furnished.]
Commentary
This rule provides only for extension in furnishing GST CMP-02 and ITC-03 for specific year.
Rule 3(4) Any person who files an intimation under sub-rule (1) to pay tax under section 10 shall furnish the details of stock, including the inward supply of goods received from unregistered persons, held by him on the day preceding the date from which he opts to pay tax under the said section, electronically, in FORM GST CMP-03, on the common portal, either directly or through a Facilitation Centre notified by the Commissioner, within a period of [ninety]5 days from the date on which the option for composition levy is exercised or within such further period as may be extended by the Commissioner in this behalf.
Commentary
For migrated tax payers a form CMP-03 was required to be filed if he opts to pay tax under composition scheme. This form contains details of stock including the inward supply of goods received from unregistered person.
Rule 3(5) Any intimation under sub-rule (1) or sub-rule (3) [or sub-rule (3A)]6in respect of any place of business in any State or Union territory shall be deemed to be an intimation in respect of all other places of business registered on the same Permanent Account Number.
Commentary
As we have already discussed earlier that as per proviso to section 10 (2), if multiple registrations are taken under single PAN then all such persons need to be under composition if any one of them wishes to opt for composition scheme. Hence this rule provides that when an intimation for composition is filed by any one person, all other persons registered under same PAN shall be deemed to have opted for composition scheme.
Special provisions for the financial year 2017-18:
As per Notification 45/2017-CT dated 13/10/2017 notwithstanding anything contained in above table a person who has been granted provisional registration or a registered person may opt for composition scheme by filing Form GST ICMP-02 on or before 31st March, 2018 and Form GST ITC-s 03 within a period of 90 days from the day on which he commences to pay tax u/s 10.
In the above situation composition scheme will be effective from the first day of the month succeeding month in which GST CMP-02 is filed.
For Example: Mr. A is registered under GST. He wants to switch over to composition scheme in the year 2017-18. He files intimation under GST CMP-02 on 20th November, 2017. Then composition will be applicable to him from 1st December, 2017. He is required to file GST ITC-03 within 90 days from 1st December 2017.
Rule 4 Effective Date of Composition levy
(1) The option to pay tax under section 10 shall be effective from the beginning of the financial year, where the intimation is filed under sub-rule (3) of rule 3 and the appointed day where the intimation is filed under sub-rule (1) of the said rule.
(2) The intimation under sub-rule (2) of rule 3, shall be considered only after the grant of registration to the applicant and his option to pay tax under section 10 shall be effective from the date fixed under sub-rule (2) or (3) of rule 10.
Commentary
We have verified in the analysis of rule 3 that a person who is paying tax under normal scheme can opt for composition scheme. However, this intimation is required to be filed before commencement of the financial year. When such intimation of conversion to composition levy is filed, the composition scheme shall be effective from the first day of the financial year. This makes it clear that the composition scheme cannot be opted in between the financial year by a person paying tax as per normal scheme.
For a person who is applying for fresh registration can fill in part B of the registration form declaring that he is opting for composition scheme. In this case date of granting of registration shall be the effective date of composition scheme.
Rule 5 Conditions and restrictions for composition levy.-
We have verified section 10 (2) which prescribes list of persons who cannot opt for composition scheme. Rule 5 gives further restrictions on exercise of option to pay tax under composition scheme. As per this rule
The person exercising the option to pay tax under section 10 shall comply with the following conditions, namely:-
He is neither a casual taxable person nor a non-resident taxable person;
Commentary
A person who is casual taxable person or a non-resident taxable person cannot opt for composition scheme. (See definition portion for definition of casual taxable person and non-resident taxable person). There are special provisions for registration and tax payments in case of casual taxable person and non-resident person.
The goods held in stock by him on the appointed day have not been purchased in the course of inter-State trade or commerce or imported from a place outside India or received from his branch situated outside the State or from his agent or principal outside the State, where the option is exercised under sub-rule (1) of rule 3;
Commentary
As we have discussed earlier, under section 10 (2), A person engaged in making any outward inter state supplies of goods is not allowed to opt for composition scheme. This restriction is applicable only to outward supplies and not to inward supplies. Hence a person who has opted for composition scheme can purchase goods from outside state. Rule 5 (b) as mentioned above restricts goods being purchased from outside the state. Readers need to note that the restriction given under rule 5 (b) regarding stock not having any goods purchased from outside the state is applicable only for migration from old law to GST on appointed day ( i.e. on 1st July, 2017). Subsequent purchase of goods from outside state is not restricted.
The goods held in stock by him have not been purchased from an unregistered supplier and where purchased, he pays the tax under sub-section (4) of section 9;
Commentary
This sub rule has become redundant now as section 9 (4) itself has lost its applicability except for few persons (Already discussed in the chapter of reverse charge mechanism). As per section 9 (4) for specific persons like promoter of real estate scheme, if goods are purchased from unregistered person then the recipient needs to pay GST under RCM.
He shall pay tax under sub-section (3) or sub-section (4) of section 9 on inward supply of goods or services or both;
Commentary
As we have discussed at the beginning of the chapter, section 10 has overriding effect over all sections of GST Act except sections of reverse charge mechanism under section 9 (3) and 9 (4). Hence even if a person has opted for composition scheme he is required to pay GST under RCM. Further, he is not eligible for taking input tax credit of the tax paid by him under RCM.
He was not engaged in the manufacture of goods as notified under clause (e) of sub-section (2) of section 10, during the preceding financial year;
Commentary
List of goods mentioned under section 10 (2) (e) has already been discussed in this chapter. Hence this sub rule in only repetition of the restriction given under section 10 (2) (e).
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;
Commentary
As per section 31 (3) –c, a person who supplies exempt goods or services or who has opted for composition scheme under section 10 cannot issue tax invoice. Instead he is required to issue Bill of Supply. (Content of Bill of Entry has been discussed later in relevant chapter).
As per section 10 (3), a person who has opted for composition scheme can neither take ITC of any input or input services nor can he collect GST from the recipient. This means the GST payable by the composition tax payer must be paid from his own pocket. This sub rule says that the bill of supply issued by the person paying tax under composition scheme needs to write on the bill of supply “composition taxable person, not eligible to collect tax”
He 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.
Commentary
This sub rule provides for another procedural requirement of writing “Composition Taxable Person” on every notice or signboard displayed at a prominent place at his places of business.
It is important to note that the person opting for composition scheme needs to be careful about following small procedural requirements like writing “composition taxable person- not eligible to collect tax” on Bill of supply and “composition taxable person” on signboards because non-compliance of such procedure may attract penalty up to Rs. 50,000 (25000 CGST and 25000 SGST) under section 125.
As per Rule 5 (2) registered person paying tax under composition is not required to file fresh intimation every year.
Rule 6 Validity of composition levy.-
(1)The option exercised by a registered person to pay tax under section 10 shall remain valid so long as he satisfies all the conditions mentioned in the said section and under these rules.
(2) The person referred to in sub-rule (1) shall be liable to pay tax under sub-section (1) of section 9 from the day he ceases to satisfy any of the conditions mentioned in section 10 or the provisions of this Chapter and shall issue tax invoice for every taxable supply made thereafter and he shall also file an intimation for withdrawal from the scheme in FORM GST CMP-04 within seven days of the occurrence of such event.
(3) The registered person who intends to withdraw from the composition scheme shall, before the date of such withdrawal, file an application in FORM GST CMP-04, duly signed or verified through electronic verification code, electronically on the common portal.
(4) Where the proper officer has reasons to believe that the registered person was not eligible to pay tax under section 10 or has contravened the provisions of the Act or provisions of this Chapter, he may issue a notice to such person in FORM GST CMP-05 to show cause within fifteen days of the receipt of such notice as to why the option to pay tax under section 10 shall not be denied.
(5) Upon receipt of the reply to the show cause notice issued under sub-rule (4) from the registered person in FORM GST CMP-06, the proper officer shall issue an order in FORM GST CMP-07within a period of thirty days of the receipt of such reply, either accepting the reply, or denying the option to pay tax under section 10 from the date of the option or from the date of the event concerning such contravention, as the case may be.
(6) Every person who has furnished an intimation under sub-rule (2) or filed an application for withdrawal under sub-rule (3) or a person in respect of whom an order of withdrawal of option has been passed in FORM GST CMP-07 under sub-rule (5), may electronically furnish at the common portal, either directly or through a Facilitation Centre notified by the Commissioner, a statement in FORM GST ITC-01 containing details of the stock of inputs and inputs contained in semi-finished or finished goods held in stock by him on the date on which the option is withdrawn or denied, within a period of thirty days from the date from which the option is withdrawn or from the date of the order passed in FORM GST CMP-07, as the case may be.
(7) Any intimation or application for withdrawal under sub-rule (2) or (3) or denial of the option to pay tax under section 10 in accordance with sub-rule (5) in respect of any place of business in any State or Union territory, shall be deemed to be an intimation in respect of all other places of business registered on the same Permanent Account Number.
Commentary
As per rule 5 (2), a person who has opted for composition scheme is not required to file fresh intimation every year. The option once exercised shall remain valid till occurrence of any of the following three events.
Taxable person cease to fulfil conditions prescribed under section 10 (for example aggregate turnover exceeds Rs. 1.50 crores) and he files intimation of withdrawal from the composition scheme. He needs to file this intimation within seven days from the date of becoming ineligible to continue in composition scheme. After that he shall issue tax invoice instead of bill of supply and shall collect GST from recipient of supply.
Taxable person remains eligible for composition scheme but voluntarily wishes to switch over to normal scheme. It is important to observe that for a taxable person there is no way to switch to composition scheme from normal scheme in between the year, it has to be done from the beginning of next financial year. However, there is no such restriction for switching over voluntarily from composition scheme to normal scheme. For withdrawal of composition scheme, he only needs to file an intimation.
When taxable person paying tax under composition scheme violates any of the conditions of section 10 or other rules made thereunder, GST officer can issue him a show cause notice asking him to show cause as to why he should not be denied composition scheme. The tax payer needs to reply to the SCN within 15 days from the date of receipt of the notice. Within 30 days from the date of receipt of the reply from the taxable person, GST officer shall pass an order either accepting the reply or rejecting and consequently cancelling the benefit of composition scheme for the tax payer. The effective date of the order shall be the date on which the contravention occurred or the date of granting the option of composition scheme. When such order is passed, the tax payer needs to pay differential tax with interest and penalty.
There also arises a question whether the taxable person shall be eligible to take ITC for making the payment of the differential amount? For example, on 31/1/2021, GST officer cancels the benefit of composition scheme with effect from 1/4/2020. Here, taxable person has paid tax at composition rate from 1/4/2020 to 31/1/2021. He shall pay the differential tax for a period between 1/4/2020 to 31/1/2021. If he has purchased some goods or acquired some services on which he has paid GST, he has not taken the ITC as he was making payment under composition scheme. Now as he is paying differential tax under normal scheme from retrospective effect from 1/4/2020, he shall also be eligible to take ITC for inward supplies between 1/4/2020 and 31/1/2021 provided other conditions of section 16 and 17 are fulfilled ( these conditions are discussed in the chapter of Input tax credit ).
Taking of ITC on inventory lying on the date of withdrawal of composition
A taxable person whose option to pay GST under composition scheme ceases due to any of the reason mentioned in a to c above is eligible to take ITC on the inputs lying in the inventory on the date of withdrawal of the option. Earlier we have verified that a person who is switching over to composition scheme from normal scheme needs to pay GST on the inventory lying in stock by reversal of ITC. In the same way, this shall be a reverse case where a person under composition scheme is switching over to normal scheme ( either voluntarily or compulsorily ), hence he shall be allowed ITC on the stock lying in his inventory.
Readers’ attention is invited to provisions of section 18 (1) –C ( read with rule 40 )which addresses this situation. As per this section, Where any registered person ceases to pay tax under section 10, 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 under section 9. Credit of capital goods shall be reduced by five percentage points per quarter or part thereof from the date of invoice or such other documents on which the capital goods are received by the taxable person.
Example: Mr. A, a registered taxable person, was paying tax at composition rate up to 30th July. However, w.e.f. 31st July, Mr. B becomes liable to pay tax under regular scheme. Mr. B will be eligible for ITC on inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods as on 30th July. ITC on capital goods will be reduced by 5% per quarter from the date of the invoice.
This Input tax credit shall be taken by filing FORM GST ITC-01 containing details of the stock of inputs and inputs contained in semi-finished or finished goods held in stock by him on the date on which the option is withdrawn or denied, within a period of thirty days from the date from which the option is withdrawn or from the date of the order passed in FORM GST CMP-07.
Once composition option is withdrawn by one person or it is denied to him, all other persons registered under same PAN shall cease to get benefit of composition scheme and they shall fall under normal scheme.
Return filing and payment of tax by composition tax payers
A person who has opted for composition scheme is required to make quarterly payment of tax and his return shall also be filed quarterly.
Composition Scheme for Service Providers
A notification No.2/2019-CTR dated 07/03/2019 has been issued which provides for reduced rate of tax for certain Categories of Suppliers. Following provisions are relevant.
The notification is not issued under Section 10 but it is issued under section 9 and section 11.
Reduced rate of 6% (3% CGST & 3% SGST) shall be applicable to first supplies of goods or services or both up to an aggregate turnover of 50 lakhs made on or after 1st april in any financial year by a registered person subject to conditions mention
in point no. 3 to 9.
Supplies are made by a registered person, -
whose aggregate turnover in the preceding financial year was fifty lakh rupees or below;
who is not eligible to pay tax under sub-section (1) of section 10 of the said Act;
who is not engaged in making any supply which is not leviable to tax under the said Act;
who is not engaged in making any inter-State outward supply;
who is neither a casual taxable person nor a non-resident taxable person;
who is not engaged in making any supply through an electronic commerce operator who is required to collect tax at source under section 52; and
vii. who is not engaged in making supplies of the goods, the description of which is specified in column (3) of the Annexure below and falling under the tariff item, sub-heading, heading or Chapter, as the case may be, as specified in the corresponding entry in column (2) of the said annexure.
Where more than one registered persons are having the same Permanent Account Number, issued under the Income Tax Act, 1961(43 of 1961), central tax on supplies by all such registered persons is paid at the rate specified in column (2) under this notification.
The registered person shall not collect any tax from the recipient on supplies made by him nor shall he be entitled to any credit of input tax.
The registered person shall issue, instead of tax invoice, a bill of supply as referred to in clause (c) of sub-section (3) of section 31 of the said Act with particulars as prescribed in rule 49 of Central Goods and Services Tax Rules.
The registered person shall mention the following words at the top of the bill of supply, namely: - ‘taxable person paying tax in terms of notification No. 2/ 2019-Central Tax (Rate) dated 07.03.2019, not eligible to collect tax on supplies’.
The registered person opting to pay central tax at the rate of three percent under this notification shall be liable to pay central tax at the rate of three percent on all outward supplies specified in column (1) notwithstanding any other notification issued under sub-section (1) of section 9 or under section 11 of said Act.
The registered person opting to pay central tax at the rate of three percent under this notification shall be liable to pay central tax on inward supplies on which he is liable to pay tax under sub-section (3) or, as the case may be, under subsection (4) of section 9 of said Act at the applicable rates.
Government has issued notification no. 09/2019-CTR dated 29/03/2019 where by it has been provided that when a person opts to pay tax at 6% as per notification no. 2/ 2019-CT , he is required to pay an amount by debiting electronic credit ledger or electronic cash ledger equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished goods held in stock on capital goods as if the supply made under this notification attracts the provisions of section 18 (4) and balance if any lying in his electronic credit ledger shall lapse.
The notification further states that GST Rules 2017 as applicable to a person paying tax under section 10 shall, mutatis mutandis apply to a person paying tax under notification 02/2019-CTR.
As per notification no. 21/2019-CT dated 23/04/2019, a person paying tax at 6% under notification 02/2019-CTR shall furnish a statement , every quarter containing details of payment of self-assessed tax in form GST CMP-08 till 18th day of the month succeeding such quarter.
Further the said person shall furnish a return for every financial year in form GSTR -4 on or before 30th April. Following the end of such financial year.
Hence readers can deduce from above discussion that all the procedural provisions of composition scheme for service providers shall be same as for composition scheme under section 10 of the CGST Act.
Important issues and author’s answer
I am selling both- taxable as well as exempt goods and my aggregate turnover is below 1.5 crores. Do I need to pay GST under composition scheme on my entire turnover (i.e. including exempt sales) or I need to pay composition GST tax only on taxable portion?
Author’s opinion
By notification 05/2019-CT dated 29-01-2019, it has been provided that the percentage of composition levy is to be applied on turnover within the state and not on taxable turnover. Turnover within the state is defined under Section 2 (112) of the CGST Act as under-
“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.
From the definition it is clear that composition GST is required to be paid on taxable as well as exempt supplies.
I wish to opt for composition scheme. However, I have purchases made from other states. Am I eligible for composition scheme?
Author’s opinion
Restriction under section 10 (2) for interstate supplies apply only to outward supplies and not to inward supplies. When you are under composition scheme you can make inward interstate supply but cannot make outward interstate supply. Rule 5 which provides for restriction about inventory not having goods purchased from outside the state is applicable only for appointed date ( i.e. 1st July, 2017) for migrating tax payers.
I wish to opt for composition scheme. However I have balance of ITC lying in my electronic credit ledger. Do I need to reverse full ITC before opting for composition scheme?
Author’s opinion
Yes. The ITC needs to be reversed by filing form ITC -03. This provision has been given under section 18(4) of the CGST Act. As per this section, Where any registered person who has availed of input tax credit opts to pay tax under section 10, he shall 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 per Rule 44 ( five percentage points for a quarter or part thereof), on the day immediately preceding the date of exercising of such option. After payment of such amount if any ITC is left in electronic credit ledger then it shall be lapsed. This will be done by filing form GST ITC-03.
As per Rule 44, the input tax credit shall be computed for inputs proportionately on the basis of the corresponding invoices on which ITC has been availed. In case of capital goods held in stock the input tax credit shall be computed in the remaining useful life in months on pro rata basis taking useful life as five year. For example, let us assume that capital goods are in use for four years, six months and fifteen days. The useful life remaining in months shall be five months ignoring part of the month. ITC required to reversed = ITC taken on such capital goods *5 /60.
It is also possible that the computation made under rule 44 is higher than the ITC shown under electronic credit ledger. In this situation the balancing amount is required to be paid through electronic cash ledger.
I am paying tax as per normal scheme. I wish to switchover to composition scheme from 1st October of the year.
Author’s opinion
Normal tax payer can switch over to composition scheme only from the beginning of next financial year. Switching over to composition from a normal scheme after commencement of a financial year is not allowed. Person wishing to switch over to composition needs to file form CMP -02 before commencement of the financial year. Effective date of the composition scheme shall be 1st day of the financial year.
I am paying tax under composition scheme. I wish to switchover to normal scheme from 1st October. Is this allowed? Will I get ITC on the stock lying in inventory on the date of conversion.
Author’s opinion
Answer to both these questions is a YES. There is no restriction of opting out of composition scheme in between the year. You will also get ITC of the stock lying in inventory.
Earlier we have verified that a person who is switching over to composition scheme from normal scheme needs to pay GST on the inventory lying in stock by reversal of ITC. In the same way, this shall be a reverse case where a person under composition scheme is switching over to normal scheme ( either voluntarily or compulsorily ), hence he shall be allowed ITC on the stock lying in his inventory.
Section 18 (1) –C ( read with rule 40 )which addresses this situation. As per this section, Where any registered person ceases to pay tax under section 10, 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 under section 9. Credit of capital goods shall be reduced by five percentage points per quarter or part thereof from the date of invoice or such other documents on which the capital goods are received by the taxable person.
For example, Mr. A, a registered taxable person, was paying tax at composition rate up to 30th July. However, w.e.f. 31st July, Mr. B becomes liable to pay tax under regular scheme. Mr. B will be eligible for ITC on inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods as on 30th July. ITC on capital goods will be reduced by 5% per quarter from the date of the invoice.
This Input tax credit shall be taken by filing FORM GST ITC-01 containing details of the stock of inputs and inputs contained in semi-finished or finished goods held in stock by him on the date on which the option is withdrawn or denied, within a period of thirty days from the date from which the option is withdrawn.
If a person covered under composition scheme collects tax from recipient is it violation of any provision of composition scheme? What else precaution composition tax payer need to take?
Author’s opinion
A person opting for composition scheme can neither take ITC of inward supplies nor can he collect tax from the recipient. He cannot issue tax invoice but he needs to issue Bill of Supply. Bill of supply should contain the words – “Composition tax payer – Not eligible for collecting tax”. Further, he also need to write composition tax payer on sign board at a place of business.
I have filed an intimation for opting for composition scheme before commencement of FY 2020-21. Do I need to file intimation for FY 2021-22 also?
Author’s opinion
Intimation for opting for composition scheme filed once shall be valid till it is withdrawn. Taxable person does not require to file fresh intimation every year.
I have opted for composition scheme. My aggregate turnover exceeded Rs. 1.50 crores on 31st October, 2021. However, I continued to pay GST under composition scheme till 31st march, 2022. GST officer issued me a SCN and passed order for denial of composition levy effective from 31st October, 2021. He demanded differential GST of Rs. 680,000 along with interest and penalty. I have purchased goods between 31st October, 2021 and 31st March, 2022 on which I have paid GST and supplier has issued me tax invoice. This ITC amounts to Rs. 60000/-. However, I have not taken this ITC as I was paying tax under composition. GST officer denies to allow me taking this credit. Am I eligible to take this ITC?
Author’s opinion
As per my opinion this credit can be taken provided other conditions of section 16 and section 17 are satisfied.
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