The word ‘composition’ comes from the Latin componere, meaning "put together". It is a feature of Indirect Tax laws that in order to provide a comfort to assessee from complying with the requirement of paying tax on value addition by maintaining detail of ‘inputs’ and ‘outputs’, a option is provided to go for a put together scheme. As per the scheme the assessee is made free from maintaining complete details of its inputs and outputs and by merely making payment of single put-together amount better known as ‘composition fees’ the assessee is allowed to carry on its business.
In terms of Section 10(1) of Central Goods and Service Tax Act, 2017 a registered person whose aggregate turnover in the preceding financial year did not exceed Rs.50 lakhs, may opt to pay an amount in lieu of tax payable in normal levy but not exceeding following % of turnover in State or in Union Territory:
(i) 1% of turnover, in case of a manufacturer
(ii) 2.5% of the turnover in case of restaurant services (excluding alcohol)
(iii) 0.5% in case of other suppliers
Point to remember is that the above rates are provided in CGST Act, therefore the actual pay out of composition rate will be double of the above rates i.e. either 2%, 5% and 1% respectively bifurcated into CGST and SGST/UTGST.
The above-mentioned composition levy shall not be granted to a taxable person-
- who is engaged in the supply of services other than resultant services; or
- who makes any supply of goods which are not leviable to tax under the CGST Act; or
- who makes any inter-state outward supplies of goods; or
- who makes any supply of goods through an Electronic Commerce Operator who is required to collect tax at source; or
- who a manufacturer of such goods is as may be notified on the recommendation of the Council.
- Who is a casual taxable person and a non resident person.
The benefit of composition scheme will be available only when all the registered entities under a single Permanent Account Number opts for such scheme. Resultantly, registered taxable person, having the same PAN has obtained more than one Registration, whether in the same State or in two different States as Head Office and Branch, then the Head Office and Branch cannot opt for Composition Levy Scheme in isolation. Both will have to opt for Composition Levy.
In terms of Section 10(3), the permission granted for Composition Levy Scheme shall stand withdrawn from the day when the aggregate turnover of the registered taxable person during a financial year exceeds Rs. 50,00,000/- or specified limit.
In terms of Section 10(4) a taxable person who pays tax under composition levy shall not collect any tax from the recipient on supplies made by him nor shall he be entitled to any credit of input tax.
It is also worth noting here that in terms of Section 10(5) if the proper officer has reasons to believe that a taxable person was not eligible to pay tax under Composition Levy Scheme, the concerned taxable person shall be liable to pay the following
(a) Any tax which may be payable by him under other provisions of the Act; and
(b) Penalty; provision of section 73 and 74 for shall apply for determination of tax and penalty
Some Important Points to be Noted
- The scheme is optional and there is no compulsion on eligible suppliers to opt for such scheme.
- Though the eligibility is for a financial year but the eligibility under the scheme comes to an end even during the financial year when the aggregate turnover exceeds INR 50 Lakhs.
- It is also to be noted that since Composition Levy Scheme cannot be availed by a taxable person who is engaged in the supply of services, works contractors providing Works Contract Services shall not be eligible for Composition Levy Scheme. Consequently, aforesaid Works Contractors would be forced to maintain proper Books of Accounts and Records.
- While a large part may not go for composition as their B2B customers will lose set off otherwise and also due to the restrictive coverage of assesses in composition scheme. Hence Traders doing B2B activity may not find the composition levy economically viable.
- The composition suppliers will not be entitled to input tax credit and would not be eligible to collect tax on supplies made by him.
- The composition u/s 10 of CGST Act/ SGST Act is subject to provisions of Section (3) and (4) of Section 9. It means that composition persons will pay tax at full rate on reverse charge basis, if they get supplies from notified suppliers of goods / services and from unregistered persons.
- There is no restriction on taxable persons under composition levy in respect of import of goods.
Conditions and Restrictions for Composition Levy
- The person opting for the scheme must neither be a casual taxable person nor a non-resident taxable person.
- The goods held by him in stock on the appointed date must not be purchased from a place outside his state. The goods should therefore not be classified as:
- Inter- state purchase
- Imported Goods
- Branch situated outside the State
- Agents or Principal situated outside the State
- Where the taxpayer’s deals with unregistered person, tax must be paid or no stock must be held. For inward supply of goods or services tax shall be paid by him.
- Mandatory display on invoices of the words ” composition taxable person, not eligible to collect tax on supplies”
- Mandatory display of the words “Composition Taxable Person” on every notice and signboard displayed at a prominent place.
The Composition scheme provides a short window for those who fulfill the criterion to organize themselves as the limit of Rs. 50 lakhs is meagre. The possibility of many of the uneducated/ unorganized traders and manufacturers (job workers) not understanding GST and its implications is very high.
Restaurant Service providers have to buy the goods and services from the unregistered persons in the course of nature of services provided by them. This will result in unnecessary burden on restaurant service providers on unregistered inward supplies. This will make the provisions contain in Section 10 of GST laws impractical and redundant while the intention of the Council is to give the relief to small restaurants and dhabhas who cannot keep the complicated accounts and documentation and to reduce the burden of taxation on restaurant service supplies.
Only those who are selling to consumers in the last mile of the supply chain would find Composition worthwhile.