What is composition scheme under GST?

The composition scheme is an alternative method of levy of tax designed for small tax payers whose turnover is up to prescribed limit.

Small taxpayers with an aggregate turnover of Rs 1.5 Cr shall be eligible for composition levy.

Advantages of Composition Scheme

The biggest advantage of composition levy is suppliers need not worry about the classification of their goods or services or both, the rate of GST applicable on their goods or services or both. They are not required to raise any tax invoice, but simply need to issue bill of supply wherein to tax shall be charged from the recipient.

An eligible person opting to pay tax under the composition scheme shall instead of paying tax on every invoice at the specified rate, pay tax at a prescribed percentage of his turnover every quarter. At the end of the quarter , he would pay tax without availing the benefit of Input Tax Credit. Return is to be filled Annually by the composition tax payer .

Non-eligibility of Composition Levy

1. Person making inter state supply of goods
2. Persons making supplies of goods through e commerce operators who are required to collect tax at source shall not be eligible for composition scheme.
3. Supplier of services.
4. Manufacturer of ice cream , panmasala and tobacco.

Turnover Limit for composition Limit

Section 10 of CGST act provides the turnover limit of Rs 50 Lakh for becoming eligible for composition levy. However section 10(1) empowers the government to increase the said limit of Rs 50 Lakh upto Rs 1.5 Cr , on the recommendation of the council. As per notification number 14/2019 the turnover limit for composition levy has been increased from Rs 50 Lakhs to Rs 1.5 Cr.

However, the said notification further stipulates that the turnover limit for composition levy shall be Rs 75 Lakhs in respect of 8 Special Category states which are :

1. Arunachal Pradesh
2. Uttarakhand
3. Manipur
4. Meghalaya
5. Mizoram
6. Nagaland
7. Sikkim
8. Tripura

While computing the threshold limit of Rs 1.5 Cr, inclusions and exclusions from the 'aggregate turnover are as follows:

Inclusions:

Value of all outward supplies: Taxable supplies, Exempt supplies, Exports, Inter-state supplies of persons having the same PAN be computed on all India basis.

Exclusions :

CGST, SGST,UTGST, IGST,CESS, Value of inward supplies on which tax is payable under reverse charge.

Rates of Tax for Composition Scheme

1. Manufacturers other than manufacturers of such goods as may be notified by the government, i.e., ice cream, pan masala and tobacco

   = 0.5% of the turnover in the state/union territory.

2. Suppliers making supplies of restaurant services

   = 2.5% of the turnover in the state/union territory.

3. Any other supplier eligible for composition levy under section 10

   = 0.5% of the turnover of the taxable supplies of goods and services in the state/union territory.

Intimation of opting for Composition Levy ( Rule 3 & 4 )

(i) Intimation by person applying for registration :

Any person who is not registered and applies for registration may be given an option to pay tax under composition scheme in part B of the Registration Form GST REG 01 . It would be considered as an intimation to pay tax under composition scheme. Such intimation shall be considered only after the grant of registration to the applicant and his option to pay tax under composition levy shall be effective from the date from which registration is effective.

(ii) Intimation by a Registered Person :

A registered person who opts to pay tax under composition levy scheme shall electronically file an intimation in prescribed form on the GST common portal, prior to the commencement of the FY for which said option is exercised.

He shall also furnish the prescribed form in accordance with the provisions of rule 44(4) of CGST Rules, 2017 within 60 days from the commencement of the relevant FY.

Any intimation in respect of any place of business in a State/UT shall be deemed to be an intimation in respect of all other places of business registered on the same PAN.

The option to pay tax under Composition Scheme shall be effective from the beginning of the FY.

A person engaged in marginal supply of services other than restaurant service along with the supply of goods or restaurant services {Second proviso to section 10(1) read with section 10(2)2}.

Fundamentally, the composition scheme can be availed in respect of good and only one service that is restaurant service. However there are cases where a manufacturer/trader is also engaged in supply of services other than restaurant service though the percentage of such supply of services is very small as compared to supply of goods. There may also be cases where a restaurant service provider may also be engaged in supplying a small percentage of other services.

With a view to enable such taxpayers to avail the benefit of composition scheme, second proviso to section 10(1) permits marginal supply of services (other than restaurant services) for a specified value along with the supply of goods and/or restaurant service, as the case may be. The specified value is value not exceeding :

(1) 10% of the Turnover in a State/Union territory in the preceding Financial Year. OR>
(2) Rs 5 Lakhs

WHICHEVER IS HIGHER

Thus, it can be inferred that where the turnover of a registered person opting for composition scheme is up to Rs 50 Lakhs in the preceding Financial Year, he can supply services (other than restaurant services) up to a maximum value of Rs 5 Lakhs in the current Financial Year. Further where the turnover of a registered person opting for composition scheme is more than Rs 50 Lakhs and up to Rs 1.5 Cr in the preceding Financial Year, he can supply services (other than restaurant services) in the current financial year upto a maximum value of 10% of the turnover in a state/union territory in the preceding financial year.