When Six Per Cent Composition Costs More Than It Saves

Composition Relief Extended to Small Service Providers

The original composition scheme under Section 10 of the CGST Act, 2017 was mainly intended for manufacturers, traders and specified restaurant suppliers. A business primarily supplying services was generally not eligible. From 01.02.2019, a composition taxpayer covered by Section 10(1) was permitted to supply a limited amount of services, not exceeding 10% of the turnover in the State or Union territory during the preceding financial year or Rs.5 lakh, whichever was higher. This relaxation assisted traders and manufacturers providing small incidental services, but did not help businesses whose principal activity was the supply of services.

Consequently, small consultants, repair establishments, coaching centres, beauty and fitness businesses, photographers and similar service providers remained outside the simplified composition framework. Mixed suppliers dealing substantially in both goods and services faced the same difficulty. To address this gap, a separate scheme was introduced from 01.04.2019 through Notification No. 02/2019-Central Tax (Rate), dated 07.03.2019. It applied to eligible service providers and mixed suppliers whose aggregate turnover in the preceding financial year did not exceed Rs.50 lakh. Tax was payable at the combined rate of 6%, comprising 3% CGST and 3% SGST or UTGST.

The scheme was subsequently given an express statutory foundation through Section 10(2A), inserted by Section 93 of the Finance (No. 2) Act, 2019 and brought into force from 01.01.2020. Rule 7 of the CGST Rules, 2017 prescribes the central tax component of 3%. Section 10(2A) now forms part of the statutory composition framework and is not merely a notification-based concession. It offers simpler compliance to eligible small businesses, but in return imposes important restrictions, including denial of ITC, prohibition on inter-State outward supplies and restrictions on supplying services through specified electronic commerce operators.

Section 10(2A) Applies Only When the Main Composition Scheme Is Unavailable

Section 10(2A) is not an alternative that every small taxpayer may choose instead of the conventional composition scheme. It applies only to a registered person who is not eligible under Section 10(1), read with the conditions prescribed in Section 10(2). Eligibility under the conventional scheme must therefore be examined first. Only when that scheme is unavailable can the taxpayer consider Section 10(2A), subject to its Rs.50 lakh turnover limit and other conditions.

This distinction is particularly important for a trader or manufacturer who also provides some services. Such a person may continue under Section 10(1) if the value of services, other than specified restaurant services, does not exceed 10% of the turnover in the State or Union territory during the preceding financial year or Rs.5 lakh, whichever is higher. For example, if a trader’s preceding-year turnover was Rs.40 lakh, incidental services up to Rs.5 lakh would be permitted because Rs.5 lakh is higher than 10% of Rs.40 lakh. The trader would remain within Section 10(1) and could not choose Section 10(2A) merely because its tax or compliance structure appeared more attractive. If the permitted service limit were exceeded, eligibility under Section 10(2A) could then be examined.

Eligible restaurant suppliers also remain within Section 10(1) and ordinarily pay composition tax at the combined rate of 5%. Section 10(2A) is mainly intended for pure service providers and mixed suppliers who cannot enter the conventional scheme. The taxpayer must therefore first identify the legally applicable composition category and only then compare its tax and compliance consequences. Personal preference or a lower perceived cost cannot determine the applicable sub-section.

The Rs 50 Lakh Limit Applies Across the PAN and Throughout the Year

Eligibility under Section 10(2A) depends upon the aggregate turnover of the preceding financial year not exceeding Rs.50 lakh. Under Section 2(6) of the CGST Act, 2017, aggregate turnover is calculated on an all-India basis by combining the turnover of every GST registration held under the same Permanent Account Number. It includes taxable and exempt supplies, exports and inter-State supplies, but excludes CGST, SGST, UTGST, IGST and compensation cess, as well as inward supplies on which tax is payable under reverse charge. Compensation cess was made Nil on most goods from 22.09.2025 and on the remaining specified pan masala and tobacco products from 01.02.2026. Nevertheless, cess charged during an earlier period continues to be excluded while computing aggregate turnover for that period.

The Rs.50 lakh limit cannot be applied separately to each GST registration. For example, suppose a firm has turnover of Rs.20 lakh in Delhi, Rs.18 lakh in Haryana and Rs.15 lakh in Uttar Pradesh under the same PAN. Its aggregate turnover is Rs.53 lakh. Although the turnover of each registration is individually below Rs.50 lakh, none of them can opt for Section 10(2A). Where the combined turnover is within the limit, all registrations under the same PAN must opt for the scheme together; one registration cannot remain under the regular scheme while another adopts Section 10(2A).

The turnover test operates at two stages. First, the preceding financial year’s aggregate turnover determines whether the taxpayer can enter the scheme. Second, aggregate turnover must be monitored continuously during the current financial year because Section 10(3) ends the option from the day the combined turnover exceeds Rs.50 lakh. Limited exclusions apply to interest or discount earned from deposits, loans or advances and, for calculating composition tax, to specified supplies made before the person became liable for registration. These exclusions do not change the basic condition that the threshold applies PAN-wise and must be observed throughout the year.

The Six Per Cent Rate Is Simple, but Its Economic Base Is Wide

Rule 7 of the CGST Rules, 2017 prescribes a central tax of 3% for a person opting under Section 10(2A). The corresponding State or Union territory levy ordinarily adds another 3%, bringing the combined burden to 6%. A corrigendum issued immediately after Notification No. 50/2020-Central Tax replaced the expression “ turnover of taxable” with “turnover of.” The current rule therefore refers to the turnover of supplies of goods and services in the State or Union territory.

This wording has an important consequence. The tax base is not necessarily confined to supplies that would independently attract GST under the regular scheme. Exempt supplies may enter the composition turnover base, subject to the statutory exclusions, including the exclusion relating to specified interest or discount income. A service provider with a substantial stream of exempt receipts must therefore calculate the effective burden carefully. The headline rate of 6% can become expensive when applied to receipts that would otherwise not attract output tax under the regular method.

The levy is calculated on turnover, not on profit or value addition. A business earning a narrow margin cannot reduce the composition liability by showing high operating expenditure. Similarly, a taxpayer receiving reimbursement or recovery of expenses must first determine whether those amounts form part of the value of supply and consequently the turnover base. The apparent simplicity of applying one percentage should not obscure the importance of valuation, classification of receipts and identification of exempt or excluded income.

Zero ITC and the Prohibition on Tax Collection Change the Commercial Equation

Section 10(4) prohibits a composition taxpayer from collecting tax separately from the recipient and from claiming input tax credit. The supplier must issue a bill of supply rather than a tax invoice and bear the composition levy on the agreed consideration. The bill of supply and prescribed business displays must include a mandatory declaration that the supplier is a composition taxable person and is not eligible to collect tax.

The denial of ITC affects both parties to the transaction. The Section 10(2A) taxpayer cannot claim credit for GST paid on rent, professional services, equipment, software, consumables, or other business inputs. That tax becomes part of the cost structure. At the same time, a registered customer purchasing services from the composition taxpayer receives no corresponding ITC. The scheme may therefore be commercially unattractive to customers who are primarily businesses and expect a tax invoice and credit flow.

A 6% composition rate should consequently not be compared directly with an 18% regular or standard GST rate. Under the regular scheme, tax is charged to the customer and credit is available for eligible inward supplies. Under Section 10(2A), the supplier ordinarily absorbs the 6% liability, and inward tax becomes a cost. The meaningful comparison is between the net cash and commercial consequences under both systems, after considering ITC, pricing power, customer profile and operating margin. A lower nominal rate does not invariably produce a lower effective burden.

Eligibility Can Be Lost Through Geography, Platforms or the Nature of Supplies

Section 10(2A) prohibits inter-State outward supplies of goods or services. Inward purchases from another State are not prohibited, but the supplier’s outward supplies must remain intra-State. For a service provider, this condition requires close attention to the IGST Act's place-of-supply provisions. A consultant may perform all work from one office, yet the service may become inter-State if the legally determined place of supply is in another State. Exports and supplies to Special Economic Zone units or developers also do not fit the composition framework.

The taxpayer must not supply goods or services that are not liable to GST. This expression should not be confused with an exempt supply. Supplies such as alcoholic liquor for human consumption or specified petroleum products outside the operational GST levy can render the taxpayer ineligible, whereas exempt supplies are treated differently. The taxpayer must also not be a casual taxable person or a non-resident taxable person, and must not manufacture notified goods or supply any category of service that may be notified for exclusion.

Online Sale of Goods Is Permitted, but Online Supply of Services Remains Restricted

Until 30.09.2023, a person paying tax under Section 10(2 A) could not make any supply of goods or services through an electronic commerce operator required to collect tax at source under Section 52. The restriction was relaxed from 01.10.2023 by omitting the words “goods or.” Consequently, an eligible person can now sell goods through an e-commerce platform while remaining under Section 10(2A). However, the relaxation applies only to goods. Supply of services through an electronic commerce operator required to collect tax at source under Section 52 still makes the supplier ineligible for the scheme.

The permission to sell goods online is subject to an important territorial restriction. Under Notification No. 36/2023- Central Tax, dated 04.08.2023, the electronic commerce operator must ensure that the composition taxpayer does not make any inter- State supply of goods through its platform. The operator must also collect tax at source under Section 52, deposit it with the Government, and report the transactions in Form GSTR-8. For example, a composition taxpayer registered in Delhi may sell handicrafts through an online marketplace to customers located within Delhi. The same taxpayer cannot use that platform to supply those goods to a customer in Haryana or Uttar Pradesh because that would amount to an inter- State outward supply.

The distinction between goods and services is crucial. Suppose a small trader covered under Section 10(2A) sells stationery through an online platform within the State. Such sales may continue under the scheme if all prescribed conditions are satisfied. However, if a consultant, designer, or repair professional supplies services through an e-commerce operator required to collect tax under Section 52, the benefit of Section 10(2 A) would not be available. A person supplying both goods and services must therefore examine each online transaction separately. The amendment opened the e- commerce market to small suppliers of goods; it did not grant a similar relaxation for services supplied through operators covered by Section 52.

Reverse Charge and PAN-Level Election Prevent Selective Use of the Scheme

Section 10(2A) operates subject to Sections 9(3) and 9(4). Composition tax replaces the normal forward-charge liability under Section 9(1); it does not replace tax payable under reverse charge. Where the taxpayer receives a service falling under reverse charge, the applicable GST must be paid at the regular rate prescribed for that supply. The 6% composition rate cannot be applied to reduce the reverse-charge liability.

The resulting tax is particularly significant because the composition taxpayer cannot claim ITC. Reverse-charge tax paid on legal services, specified transport services, security services, renting of motor vehicles, or other notified inward supplies may therefore become an absolute cost. A business with regular reverse-charge exposure must add that cost to the 6% composition liability before deciding whether the scheme is beneficial.

The PAN-level requirement also prevents selective placement of profitable or B2C activities under composition while retaining input-intensive or B2B activities under the regular scheme. Every registration under the same PAN must move together. Before exercising the option, the taxpayer must review each branch's business model, customer locations, inter-State supplies, electronic-commerce activity, and reverse-charge exposure. A decision suitable for one registration may be commercially harmful or legally unavailable for another.

Simplified Returns Do Not Eliminate Compliance Discipline

An existing registered person ordinarily exercises the composition option through Form GST CMP-02 before the commencement of the financial year. A new applicant may indicate the composition option in Form GST REG-01. A person transitioning from the regular scheme must reverse the relevant ITC on inputs, stock and capital goods in accordance with Section 18(4), Rule 44 and Form GST ITC-03. Circular No. 97/16/2019-GST clarified the procedural application of the composition rules to service providers under the original notification-based scheme, including the PAN-level operation of the option.

Tax is reported and paid quarterly through Form GST CMP-08, ordinarily by the 18th day of the month following the quarter. An annual return is furnished in Form GSTR-4. For financial year 2024-25 onwards, the GST Council extended the due date for annual GSTR-4 from 30 April to 30 June after the end of the financial year.

The taxpayer must also monitor continuing eligibility. If turnover crosses Rs.50 lakh or any other condition is breached, the option lapses from the date of the disqualifying event. Form GST CMP-04 must ordinarily be filed within seven days. Regular tax invoices must be issued for subsequent taxable supplies, and eligible credit on stock may be claimed through Form GST ITC-01, subject to the statutory conditions. If an ineligible person wrongly continues under Section 10(2A), differential tax and penalty may be determined under Section 10(5), read with Sections 73, 74 or 74A, as applicable to the relevant tax period.

A Six Per Cent Rate Does Not Always Mean a Lower Tax Cost

Section 10(2A) may suit a small, locally operating service provider whose customers do not require ITC, whose purchases carry little GST and whose turnover is unlikely to approach Rs.50 lakh. A neighbourhood repair establishment, coaching centre, beauty salon or similar B2C business may find the scheme convenient because tax is paid at a fixed rate and compliance is comparatively simple.

The 6% rate should not, however, be examined in isolation. Composition tax is payable on turnover, not profit; ITC is unavailable; and the tax cannot be separately collected from customers. For example, a service provider with few taxable expenses may lose very little ITC and may benefit from the scheme. A works contractor or another business purchasing substantial materials and subcontracting services may lose significant ITC, making the regular scheme commercially preferable despite its additional compliance.

The scheme may also be unsuitable where the business serves corporate customers requiring ITC, makes inter-State outward supplies, supplies services through an electronic commerce operator covered by Section 52, or expects rapid growth. The decision should therefore compare the 6% composition liability with regular GST after available ITC and should also consider reverse-charge payments, customer expectations and future turnover. Section 10(2A) offers simpler compliance, but only in exchange for restricted business operations and loss of ITC.