Composition Scheme under GST for Goods and Services | Several FAQs | Procedure

INTRODUCTION

Composition in dictionary meaning: the nature of something’s ingredients or constituents; the way in which a whole or mixture is made up.

The word “composition” comes from the Latin, meaning “put together”. It is a feature of Indirect Tax laws that in order to provide comfort to an assessee from completing with the requirement of paying tax.

The composition scheme introduces by CBIC to bring simplicity and to reduce the compliance cost of assessee and mainly for the small taxpayer. Small taxpayer with an aggregate turnover of preceding financial year up to 1.5 Cr. shall be eligible for apply composition levy. Supplier opting for composition levy need not worry about classification of their goods or services or both, the rate of GST applicable on the same and also not required to raise any tax invoice but simply issue a bill of supply. At the end of the quarter the composition supplier would pay a certain specified percentage of his/her turnovers of the quarter as tax; without availing the benefit of input tax credit.

DEFINITION UNDER GST

As per section 2 sub-section (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, export 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.

ELIGIBILITY CRITERIA FOR COMPOSITION LEVY

As per section 10 and sub-section (1) of the CGST Act, Notwithstanding anything to the contrary contained in this Act but subject to the provision of sub-sections (3) and (4) of section 9, a registered person, whose aggregate turnover in the preceding financial year did not exceed 1.5 Cr. (75 lacs for special category state except for the state of Assam, Himachal Pradesh and Jammu and Kashmir), may opt to pay, in lieu of the tax payable by him u/s 9(1), an amount calculated at such rate as may be prescribed, but not exceeding,-

(a) half percent of the turnover in state or turnover in union territory in case of manufacturer,

(b) two and a half percent of the turnover in state or turnover in union territory in case of person engaged in making supplies referred to in clause (b) of paragraph 6 of schedule II, and

(c) half percent of the turnover of taxable supply of goods (an services as per rule7 below) in state or turnover in union territory in case of other supplier.

Provided that the government may, by notification, increase the said limit of fifty lakh rupees to such higher amount, not exceeding one crore and fifty lakh rupees, as may be recommended by the council.

Provided further that a person who opts to pay tax under clause (a) or clause (b) or clause (c) may supply of services (other than those referred to in clause (b) of paragraph 6 of  schedule II), of value not exceeding 10% of turnover in a state or union territory in the preceding financial year or 5 lakh rupees, whichever is higher.

AMENDMENT OF SECTION 10

As per section 119 of the Finance Act, 2020; in section 10 of the Central Goods and services Act, in sub-section (2) in clause (b), (c) and (d), after the words “of goods”, the words “or services” shall be inserted.

[Actual rate of tax under composition scheme which was provided above notified in rule 7 of the CGST Rules, 2017 and which was amended further in notification 1 and notification 3 of the central tax on dated 1^st January 2018 and 23^rd January 2018 respectively.]

CONDITIONS FOR COMPOSITION SCHEME

As per section 10 and sub-section (2) of the CGST Act, 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 goods or 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 recommendation of the council; and

(f) he is neither a casual taxable person nor a non-resident taxable person.

Provided that where more than one registered persons are having the same Permanent Account Number (PAN) (issued under the Income Tax Act, 1961)(43 of 1961), the registered person shall not be eligible to opt for the scheme under the sub-section (1) unless all such registered persons opt to pay tax under that sub-section.

As per section 10 and sub-section (3) of the CGST Act, the option availed of a registered person under sub-section (1) shall lapse with effect from the day on which his aggregate turnover during the financial year exceed the threshold limit which was specified under sub-section (1).

CONDITIONS AND RESTRICTIONS FOR COMPOSITION LEVY

As per rule 5 of the CGST Rule, 2017; the person exercising the option to pay tax under section 10 shall comply with the following conditions, namely:-

(a) he is neither casual taxable person nor a non-resident taxable person.

(b) 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 the outside the state or from his agent or principal outside the state, where the option is exercised under sub-rule (1) of rule 3;

(c) 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.

(d) he shall pay tax under sub-section (3) or sub-section (4) of section 9 on inward supply of goods or services or both;

(e) he was not engaged in the manufacturer of goods as notified under clause (e) of sub-section (2) of section 10 during the preceding financial year;

(f) he shall mentioned the words “ composition taxable person, not eligible to collect tax on supplies” at the top of the bill of supply issued by him; and

(g) he shall mentioned the words “composition taxable person” on every notice or sign board displayed at a prominent place at his principal place of business and at every additional place or places of business.

INTIMATION AND EFFECTIVE DATE OF OPTING FOR COMPOSITION LEVY

As per Rule 3 and sub-rule (1) of the CGST Rule, 2017; 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.

As per sub-rule (2) of the CGST rule, 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.

As per sub-rule (3) of the CGST rule 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.

As per Notification No. 30/2020- Central tax on dated 3^rd April, 2020; the following proviso shall be inserted, namely-

“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 up to the 31st day of July, 2020”.

He shall also furnish the statement FORM GST ITC-03 for details of ITC relating to inputs lying in stock, inputs contained in semi-finished or finished goods within one hundred and eighty days (before it was 90 days) of  commencement of the relevant financial year in accordance with the provisions of sub-rule (4) of rule 44 of the CGST Rules, 2017.

Provided that the said persons shall not be allowed to furnish the declaration in FORM GST TRAN-1 after the statement in FORM GST ITC-03 has been furnished.

Any intimation in respect of any place of business in a state/union territory shall be deemed to be an intimation in respect of all other place of business registered in the same PAN.

COMPOSITION SCHEME FOR SERVICES

EFFECTIVE FROM 1^ST APRIL 2019 (NOTIFICATION NO.-2/2019-CT(R) ON DATED 7^TH MARCH 2019)

Eligibility Criteria:-

1. Supplies are made by the registered person whose aggregate turnover in preceding financial year was Fifty Lakh or below.
2. Supply is not eligible to pay tax u/s 10(1) of the CGST Act.

Composition tax rate and levy in the current year:-

GST Rate 6% (i.e. CGST 3% & SGST 3%) on the first supply of goods or services or both up to an aggregate turnover of 50 lakh made on or after the first day of April in any financial year, by the registered person.

Explanation- “first supplies of goods or services or both” shall include the supplies from the first day of April of a financial year to the date from which he becomes liable for registration under the said Act but for the purpose of determination of tax payable under this notification shall not include the supplies from the first day of April of a financial year to the date from which he becomes liable for registration under the Act.

IMPORTANT NOTE: – The first supply of goods and services include: – Taxable supply of Goods and Services, Exempt Supply of Goods and Services and NIL Rate Supply of Goods and Services.

OTHER CONDITION FOR AVILING COMPOSITION SCHEME (FOR SERVICES):-

(a) The supplier should not be engaged in the business of making any supplies on which GST is not leviable under this Act (i.e., petro products or alcoholic liquor).

(b) The supplier should not be making any interstate supplies.

(c) The supplier should not be a casual taxable person, non-resident taxable person and

(d) The supplier should not make any supply through an e-commerce operator (ECO) on which TCS applies.

(e) Shall not collect any tax from the recipient on supplies made by him nor shall he be entitled to any credit of input tax.

(f) Shall be liable to pay central tax on inward supplies on which he is liable to pay tax under Section 9(3) or 9(4) of CGST Act at the applicable rates.

(g) Shall issue, instead of tax invoice, a bill of supply as referred to in section 31(3)(c) of the CGST Act with particulars as prescribed in rule 49 of CGST Rules. The registered person shall mention the following words at the top of the bill of supply, 6/7 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’.

(h) The supplier should not be engaged in the business of ice cream, Pan Masala, Aerated Water, Tobacco and tobacco substitutes.

FREQUENTLY ASKED QUESTIONS ON MSME:

Q: Is there any scheme for payment of taxes under GST for small traders and manufacturers?

A: Yes Composition levy is an alternative method of levy of tax designed for small taxpayers whose turnover is up to ₹ 150 Lakh (₹ 75 Lakh for special category States, excluding J&K and Uttarakhand) for supply of goods. It is a kind of turnover tax. The objective of the scheme is to provide a simplified tax payment regime for the small tax payers. The scheme is optional and is mainly for small traders, manufacturers and restaurants. Composition scheme has also been made available for suppliers of services (to those who are not eligible for the presently available Composition Scheme) with a tax rate of 6% (3% CGST +3% SGST) having an annual turnover in the preceding FY up to ₹ 50 Lakh. They would be liable to file one Annual Return with quarterly payment of taxes. This has been made effective from 01.04.2019.

Q: What are the eligibility criteria for opting for composition levy? Which are the Special Category States in which the turnover limit for Composition Levy for CGST and SGST purpose shall be ₹ 50 Lakh?

A: Composition scheme is a scheme for payment of GST available to small taxpayers, dealing in supply of goods, whose aggregate turnover in the preceding financial year did not cross ₹ 150 Lakh. In the case of certain States, the limit of turnover is ₹ 75 Lakh in the preceding financial year, namely – Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand.

Q: What is the form in which an intimation to pay tax under the composition scheme needs to be made by the taxable person?

A: Composition scheme is optional and intimation that option has been availed should be made electronically in Form GST REG-01 by a new taxpayer. A person who has already obtained registration and opts for payment under composition levy subsequently needs to give intimation electronically in Form GST CMP-02.

Q: What is the rate of tax under Composition levy for a manufacturer?

A: Composition rate for manufacturers is 1% (0.50% CGST and 0.50% SGST) of turnover in the State or Union Territory.

Q: Are all manufacturers eligible for composition scheme?

A: A manufacturer is eligible to avail composition scheme except manufacturers – a) whose aggregate turnover in the preceding financial year crossed ₹ 150 Lakh; b) who make any inter-State outward supplies of goods or services; c) who make supply of goods through an electronic commerce operator; d) who manufacture the following goods: Sl. no Tariff Head Description 1 2105 00 00 Ice cream and other edible ice, whether or not containing cocoa 2 2106 90 20 Pan masala 3 24 Tobacco and manufactured tobacco substitutes

Q: When will a registered person have to pay tax?

A: A registered person will have to pay GST on monthly basis on or before 20th of the succeeding month and if he has opted for composition levy he will have to pay GST on a quarterly basis on or before the 18th day of the month after the end of the quarter.

Q: A person availing composition scheme during a financial year crosses the turnover of ₹ 150 Lakh / ₹ 75 Lakh during the course of the year i.e. say, he crosses the turnover of ₹ 150 Lakh/ ₹ 75 Lakh in December? Will he be allowed to pay tax under composition scheme for the remainder of the year i.e. till 31st March?

 A: No. The option to pay tax under composition scheme shall lapse from the day on which his aggregate turnover during the financial year exceeds ₹ 150 Lakh/ 75 Lakh. Once he crosses the threshold, he shall file an intimation for withdrawal from the scheme in FORM GST CMP-04 within seven days of the occurrence of such event. He shall also furnish a statement in FORM GST ITC-01 containing details of the stock of inputs and capital goods as per the rules in this regard. This would containing details of the stock of inputs and capital goods as per the rules in this regard. This would help him join the input tax credit chain and avail credit of tax that he has paid on his inputs/goods lying in stock on the day he crosses over.

Q: For the purpose of availing composition how will aggregate turnover be computed for the purpose of composition?

A: Aggregate turnover shall be computed on the basis of turnover on all India basis. It includes 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 but excludes GST and cess.

Q: Can a person who has opted to pay tax under the composition scheme avail Input Tax Credit on his inward supplies?

A: No, a taxable person opting to pay tax under the composition scheme is out of the credit chain. He cannot take input tax credit on the supplies received.

Q: How is a manufacturer under the composition scheme required to bill his supply? Can a registered person, who purchases goods from a composition manufacturer, take input tax credit?

A: A manufacturer opting to pay tax under the composition scheme cannot issue a tax invoice to his buyer but would issue a Bill of Supply. He cannot collect any tax on supplies made by him on his Bill of Supply and is required to show only the price charged for the supply. Consequently, the registered person buying goods from a composition manufacturer cannot take input tax credit.

Q: In case a person has registration in multiple States, can he opt for payment of tax under composition levy only in one State and not in other States?

A: No. An intimation that composition scheme has been availed in one State shall be deemed to be an intimation in respect of all other places of business registered on the same Permanent Account Number in other States.

Q: What is the validity of composition levy?

A: The option exercised by a registered person to pay tax under the composition scheme shall remain valid so long as he satisfies all the conditions specified in the law. The option is not required to be renewed.

Q: Can a person paying tax under composition levy, withdraw voluntarily from the scheme?

A: Yes, the registered person who intends to withdraw from the composition scheme can file a duly signed or verified application in FORM GST CMP-04. In case he wants to claim input tax credit on the stock of inputs and inputs contained in semi-finished or finished goods held in stock by him on the date of withdrawal, he is required to furnish a statement in FORM GST ITC-01 containing the details of such stock within a period of thirty days of withdrawal.

Q: Will withdrawal intimation in any one place be applicable to all places of business?

A: Yes. Any intimation or application for withdrawal in respect of any place of business in any State or Union territory, shall be deemed to be an intimation for withdrawal in respect of all other places of business registered on the same Permanent Account Number.

Q: Can a person paying tax under composition scheme make exports or supply goods to SEZ?

A: No, because exports and supplies to SEZ from Domestic Tariff Area are treated as inter-State supply. A person paying tax under composition scheme cannot make inter-State outward supply of goods.

Q: How can tax payments be made by a registered person under the composition scheme?

A: A registered person under composition scheme would not have input tax credit and he would make all his tax payments by debit in the cash ledger maintained at the common portal. The taxpayer can deposit cash anytime in the electronic cash ledger at his convenience.

Q: Does a registered person under the composition scheme pay his taxes every month?

A: No, registered person under the composition scheme will not pay taxes every month. Taxpayers under Composition scheme have been allowed to pay ‘self-assessed tax’ on a quarterly basis till 18th of the month succeeding such quarter and furnish a return till 30th April for the previous financial year.

Q: What are the accounts a manufacturer under the composition scheme needs to maintain?

A: Rules on Accounts and Records provide details of the accounts to be maintained. They are maintained under normal course of business by any small manufacturer. The details to be maintained in accounts, inter-alia, consists of goods supplied, inward supplies attracting reverse charge, invoices, bills of supply, delivery challans, credit notes, debit notes, receipt vouchers, payment vouchers, refund vouchers, etc.

Q: Does a manufacturer under the composition scheme need to maintain details of accounts of every supply received and made?

A: No, the requirement to maintain detailed accounts of stocks in respect of goods received and supplied, work in progress, lost; destroyed etc. does not apply to a manufacturer under the composition scheme. Such a person shall maintain a true and correct account of production or manufacture of goods, inward and outward supply of goods, stock of goods, tax payable and paid.

Q: Does a manufacturer under the composition scheme needs to maintain account of inputs tax credit?

A: A manufacturer under the composition scheme need not maintain account of input tax, input tax credit claimed etc. as he is neither allowed to avail of input tax credit nor can he issue an invoice showing tax which buyer can avail input tax credit.

Q: Can a manufacturer under the composition scheme maintain his accounts manually? And can he issue his bill of supply manually?

A: Yes, a manufacturer under the composition scheme can maintain his accounts in registers serially numbered and also issue bill of supply manually following the conditions specified in rules in this regard.

Q: Whether a registered person under the composition scheme needs to learn HSN code of any input purchases and output supplies?

A: No, a registered person under the composition scheme would not need to specify HSN code of their products in bill of supply or return.

Q: What details are required to be furnished in the return to be filed by the registered person under the composition scheme?

A: GSTR-4 may be referred to details required to be filled in the return. It is a very simple return containing consolidated details of outward supplies, details of import of services or other supplies attracting reverse charge and inward supplies.

Q: Can a manufacturer / trader of goods opt for composition scheme if his service component is very small?

A: A person who opts to pay tax under composition scheme may supply services (other than those referred to in clause (b) of paragraph 6 of Schedule II), of value not exceeding 10% of turnover in a State or Union territory in the preceding financial year or ₹ 5 Lakh, whichever is higher.

Q: Can a service provider opt for composition scheme?

A: Yes. With effect from 01.04.2019, suppliers of service only or suppliers of service and goods together can opt for composition scheme for first clearances up to ₹ 50 Lakh. The rate of composition tax in such cases is fixed at 6%.

Disclaimer: “This article is for the purpose of information and shall not be treated as a solicitation in any manner and for any other purpose whatsoever. It shall not be used as a legal opinion and not be used for rendering any professional advice. This article is written on the basis of the author’s personal experience and provision applicable as on the date of written of this article. Adequate attention has been given to avoid any clerical/arithmetical error, however, if it still persists kindly intimate me to avoid such error for the benefit of other readers”.