The composition levy is an alternative method of levy of tax designed for small taxpayers whose turnover is up to prescribed limit.
Small taxpayers with an aggregate turnover in a preceding financial year up to Rs. 1.5 crore shall be eligible for composition levy. However, Threshold limit is Rs. 75 lakh in respect of 8 of the Special Category States namely:
- Nagaland
- Uttarakhand
- Sikkim
- Tripura
- Arunachal Pradesh
- Mizoram
- Manipur
- Meghalaya
The objective of the composition scheme is to bring simplicity and to reduce the compliance cost for the small taxpayers. The composition scheme is available to the suppliers of goods and restaurant service.
However, as per the second proviso to section 10(1), composition suppliers are permitted to supply other services upto:
- 10% of turnover in the state or union territory in the preceding financial year or
- Rs.5,00,000
whichever is higher.
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 a quarter, he would pay the tax, without availing the benefit of input tax credit. Return is to be filed annually by a composition supplier.
While computing the threshold limit of Rs. 1.5 crore, some inclusions and some exclusions are followed:
Inclusions
- Taxable supplies
- Exempt supplies
- Exports
- Inter-State supplies of persons having the same PAN be computed on an all-India basis
Exclusions
- Value of inward supplies on which tax is payable under reverse charge
- Taxes Under GST
(i.e.CGST/SGST/UTGST/IGST/Compensation Cess)
Conditions for opting to pay tax under composition scheme
(i) Restricted from making a supply of goods which are not liable to GST
Certain goods are not liable to GST, e.g. petroleum, alcohol for human consumption, etc. - a person opting for a composition scheme shall not be entitled to make any supply of non-GST goods.
(ii) Restricted from effecting inter-State outward supplies
The taxable person should not affect any inter-State outward supplies. This means that even stock transfers to branches outside the State would not be permitted. However, in so far as it relates to inter-State inward procurements/receipts, there is no restriction.
(iii) Restricted from making supplies through an e-commerce operator
A person opting for a composition scheme is not allowed to affect any supply of goods through an e-commerce portal, unless such portal is owned by the same person.
(iv) Restriction on the manufacture of notified goods
The person opting for the scheme should not be a manufacturer of certain goods as are notified in this regard. However, there is no restriction in case the person is engaged in trading of such goods.
Notified Goods
(i) Ice cream and other edible ice, whether or not containing cocoa
(ii) Pan masala
(iii) Tobacco and manufactured tobacco substitutes
(iv) Manufacture of Aerated Water
(v) Would be applicable for all transactions under the same PAN: Composition scheme would become applicable for all the business verticals having separate registrations within the State and all other registrations outside the State which are held by the person with same PAN.
(vi) Shall not collect tax: Taxable person opting to pay tax under the composition scheme is prohibited from collecting tax on the outward supplies.
(vii) Not entitled to input tax credit: Taxable persons opting to pay tax under the composition scheme will not be eligible to claim any input tax credits.
(viii) Such supplier shall mention the words "composition taxable person not eligible to collect tax on supplies" at the top of the bill of supply. (not allowed to issue tax invoice)
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