Composition Scheme under GST 1


Concept of Composition Scheme is commonly known to every person because it was also available in Central Excise Duty laws and in State VAT law too.

Composition scheme is an opportunity provided to small traders, manufacturers and restaurant service providers to comply GST provisions with ease and in cost-effective manner. Under Composition Scheme, a person has to file quarterly returns instead of monthly return and to pay taxes quarterly instead of monthly.

In this article, we will go through the provisions of Composition Levy Scheme in detail.

Who can opt for Composition Scheme?

Following persons are allowed to opt for Composition Scheme:-

  • A manufacturer
  • A Trader
  • A Restaurant service provider (other than those serving Alcoholic Liquor for human consumption)

Following persons are not allowed to opt for Composition Scheme:

    • Service providers (other than restaurant service provider)

    • Any manufacturer/trader/restaurant service provider, if along with their respective business, also engaged in provision of services other than restaurant service.

What are the eligibility conditions to opt Composition Scheme under GST?

Condition 1 : Turnover Limits for Composition Scheme:

  • Composition Scheme can be availed by person having turnover upto Rs 100 lakh (or say Rupees 1 Crore) in preceding Financial Year.  However, W.e.f. 01.04.2019, the limit has been enhanced to Rs 150 Lakh (or say Rupees 1.5 Crore). 
    • {From 01.07.2017 to 12.10.2017- turnover limit was Rs 75 lakh} . (Refer NN CGST-46/2017 dated 13.10.2017 read with NN CGST-8-2017 dtd 27.06.2017).

  • In Case, person registered under GST belongs to following areas, turnover limit is Rs 75 lakh instead of Rs 100/150 lakh:
    1. Arunachal Pradesh
    2. Assam {Limit for Assam enhanced to 1.5 crore w.e.f. 01.04.2019}
    3. Manipur
    4. Meghalaya
    5. Mizoram
    6. Nagaland
    7. Sikkim
    8. Tripura
    9. Himachal Pradesh {Limit for Assam enhanced to 1.5 crore w.e.f. 01.04.2019}
    10. Uttarakhand {Limit for Uttarakhand decreased from 1 crore to 75 lakh w.e.f. 01.04.2019}

{From 01.07.2017 to 12.10.2017- turnover limit for these areas was Rs 50 lakh, except in case of Uttarakhand, where it was Rs 75 Lakh in that period} 


Condition 2 : He should not be engaged in provisioning of any service (except of Restaurant services).

However, w.e.f. 01.02.2019, the rule has been amended as follows:-

He should not be engaged in provisioning of any service (except of Restaurant services) more than the 10% of turnover in the State/UT in the preceding financial year or Rs 5 lakh, whichever is higher.

However, he may engaged in supply of exempt services including services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount. {Refer :- Order CGST-01/2017 dated 13.10.2017}.


Condition 3: He is not engaged in making any supply of goods which are not leviable to tax under this Act. (For example: If a restaurant serves liquor also, that restaurant can’t opt for composition scheme)


Condition 4 : He is not engaged in making any inter-State outward supplies of goods. Inter-state sale not allowed in composition scheme.


Condition 5 : He is not engaged in making any supply of goods through an electronic commerce operator who is required to collect tax at source under section 52. However, he can supply goods through such e-commerce operator who is not required to collect tax under section 52.


Condition 6 : He is not a manufacturer of such goods as may be notified by Central Government.

On 27 June 2017, government has provided following list of goods whose manufacturers can’t opt for composition scheme (NN CGST-8-2017 dtd 27.06.2017):

S. No.

Tariff item, sub-heading, heading or Chapter

Description

(1)

(2)

(3)

1.

2105 00 00 Ice cream and other edible ice, whether or not containing cocoa.

2.

2106 90 20

Pan masala

3. 24

All goods, i.e. Tobacco and manufactured tobacco substitutes


Condition 7 : All persons having same PAN in India should opt for Composition scheme unanimously.


Condition 8: He is neither a casual taxable person nor a non-resident taxable person.


What are the other conditions for applicants migrating from earlier laws to Composition Scheme under GST?

1) 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 outside the State or
  • from his agent or principal outside the State

If there is any of goods mentioned above are available in stock, it’s better to first clear this stock and then apply for registration.

(2) Goods held in stock should not be purchased from an un-registered supplier and where purchased, he should pay tax under reverse charge provisions (discussed below).

Dealer will report his stock in Form GST CMP-03 within 90 days. In this Form, details of stock to be mentioned along with the detail of tax payment made against stock purchased from un-registered dealer.


What are the tax rates for Composition Dealers

Nature of Business

CGST Tax rate

SGST /UTGST Tax Rate

IGST Tax Rate

Manufacturer (w.e.f. 01.01.2018)*

0.5%

0.5%

1%

Trader

0.5%

0.5%

1%

Restaurant Service

2.5%

2.5%

5%

*Before 01.01.2018, tax rate for manufacturers was 1% + 1% = 2%. Refer N/N CGST-1/2018 dtd 01.01.2018


How to calculate tax under Composition Scheme

For Traders:- It is very simple to calculate tax under composition scheme. At the end of every tax period (i.e. Quarter), dealer will calculate Sales value of all taxable supplies of goods during the tax period. On the sum total of such sales, he will apply tax rate of particular tax type and tax liability will be computed.

For Manufacturer :- At the end of every tax period (i.e. Quarter), manufacturer will calculate Sales value of all supplies during the tax period. On the sum total of such sales, he will apply tax rate of particular tax type and tax liability will be computed.


Reverse Charge Provisions

Reverse charge is the one of the most harsh and difficult provision under GST for every dealer whether he is a regular dealer or availing composition scheme.

Under Reverse Charge mechanism, purchaser of goods or services or both is responsible for paying tax to government on such supplies. In general, seller is responsible to collect tax from customer and liable to pay to government. However, where buyer is responsible to pay tax to government, it is called Reverse Charge Mechanism.

Government has provided two types of supplies under reverse charge:

1)  Where government has specifically provided a list of goods or services or both

2)  Where any registered person is buying taxable goods/services or both from an un-registered dealer

If a composition dealer is buying goods/services/both and it falls under any of above listed category, he has to pay tax on purchases to government on quarterly basis by 18th of next month succeeding to quarter.

Further, as the composition dealer is not eligible for any input tax credits, so any such payment is also not legible as input tax credit.

In a broader view, it is just a shifting of responsibility of tax collection from seller to buyer, however it is a very costly to comply this provision. Understanding the position of small taxpayers, government has provided an exemption to dealers to comply with this provision where:-

  • such purchases of goods or services or both within same state does not exceed Rs 5000/- per day from any or all un-registered persons collectively. (i.e. only 2nd category is mentioned here). This exemption was valid till 12th October 2017.
  • From 13th October 2017 to 30th September 2019, full exemption being provided for such purchases from un-registered dealers whether it  intra-state or is inter-state purchases and without any monetary limit.
  • CGST Amendment Act 2018, as applicable w.e.f. 01.02.2019, has amended reverse charge provisions for purchases from un-registered persons to make it leviable only on notified supplies. However, till date, no such notification issued for the same.

Other Important Points:-

    1. Composition scheme will lapse on the day when turnover exceeds specified limit during the financial year.
    2. Composition dealer will not charge any tax (under GST) separately from its customer. In the invoice, tax should not be written separately.
    3. Composition dealer will not be eligible to claim any input tax credits.
    4. If a registered person wishes to opt for composition scheme, he can exercise such option only at the beginning of Financial Year. Till 31.03.2018, government has relaxed this rule and allowed to opt the scheme in immediate next month by filing an application in FORM GST CMP-02 before commencement of such month. Refer CGST-45/2017
    5. He shall mention the words “Composition Taxable Person” on every notice or signboard displayed at a prominent place at his principal place of business and at every additional place or places of business.
    6. Inter-state purchases are not restricted under Composition Scheme.

Invoicing requirements for Composition Dealer

Dealer under composition scheme will issue a simple ‘Bill of Supply’ instead of Tax invoice to its customers. A bill of supply should have following contents :-

  1. On the top of every bill, it should be mentioned Composition taxable person, not eligible to collect tax on supplies’.
  2. name, address and Goods and Services Tax Identification Number of the supplier;
  3. a consecutive serial number not exceeding sixteen characters, in one or multiple series, containing alphabets or numerals or special characters – hyphen or dash and slash symbolized as “-” and “/” respectively, and any combination thereof, unique for a financial year;
  4. date of its issue;
  5. name, address and Goods and Services Tax Identification Number or Unique Identity Number, if registered, of the recipient;
  6. description of goods or services or both;
  7. value of supply of goods or services or both taking into account discount or abatement, if any; and
  8. signature or digital signature of the supplier or his authorized representative:

Sample invoice format for Composition Dealer :- Invoice Format – Composition Dealer

Manner of Bill of Supply

The Bill of Suppy shall be prepared in triplicate, in case of supply of goods, in the following manner:-

(a) the original copy being marked as ORIGINAL FOR RECIPIENT;

(b) the duplicate copy being marked as DUPLICATE FOR TRANSPORTER.

(c) the triplicate copy being marked as TRIPLICATE FOR SUPPLIER.

No Need to issue bill of supply

Registered person may not issue a bill of supply if the value of the goods or services or both supplied is less than two hundred rupees.

Bill of supply of such value may not be issued, if:

  1. the recipient is not a registered person; and
  2. the recipient does not require such invoice.

In this case, a consolidated bill of supply shall be issued at the close of each day in respect of all sales.


Return and Payment due dates

Return due date : for every quarter- 18th of next month succeeding to quarter in Form GSTR-4

Payment due date : for every quarter- 18th of next month succeeding to quarter


Procedure to opt for Composition Scheme

There is a different procedure for different type of situations, we will understand this through following matrix:

Situation 1

Person was registered under previous laws (VAT/Excise)

Situation 2

Person was not registered anywhere and wish to get fresh registration under GST

Situation 3

Person was already registered under GST as a regular dealer and wish to avail composition scheme

1) File intimation in Form GST CMP-01 within 30 days from the appointed date (i.e. 22 June 2017).

{On 21.07.2017, date extended till 16.08.2017 to file Form GST CMP-01 vide order no. 01/2017}

2) File Form GST CMP-03 within 90 days from the date on which option for composition levy is exercised in respect of stock held on the date of such option.

Select the option to pay tax under Composition Scheme while filing

Form GST REG-01.

1) File an intimation in Form GST CMP-02 prior to the commencement of a Financial year 

2) File a Form GST ITC-03 within 60 days from the commencement of relevant Financial Year to declare value of stock at the beginning of such financial year.

Effective Date of Registration :

Composition scheme will be valid from the date given below for each type of above said situation:

If form filed within 30 days from appointed date, appointed date will be deemed as date of registration Actual date of registration as per Registration certificate Beginning of Financial Year (i.e. 1st April)

Validity of composition levy scheme

The option exercised by a registered person to pay tax under this scheme shall remain valid so long as he satisfies all the eligibility conditions and other conditions as discussed above.

The registered person paying tax under composition scheme need not to file a fresh intimation every year and he may continue to pay tax under this scheme subject to the fulfillment of all conditions.


Cancellation of registration under Composition Scheme and becoming a Regular Dealer

In case of cancellation of registration under Composition scheme (due to any reason), dealer will file intimation in Form GST CMP-04 for such request within seven days from happening of such event due to which such intimation need to file.

However, if a dealer voluntarily wishes to withdraw from this scheme, he has to file Form CMP-04 before the date of such withdrawal.


Input Tax Credits: A person who ceases to be a dealer registered under Composition Levy

A person who was registered under Composition Levy provisions of GST laws, and now he ceases to become such a dealer due to any reasons like turnover exceeds prescribed limit or he voluntarily wishes to become as normal dealer under GST or otherwise, he shall be entitled to take credit of Input tax in respect of:

    • Inputs held in Stock; and
    • Inputs contained in semi-finished goods in stock; and
    • Inputs contained in Finished goods held in stock; and
  • Capital goods

Such stock of goods and capital goods will be counted on the day immediately preceding the date from which he becomes liable to pay tax under the provisions of this act.

Important Notes:-

  • Input Tax Credits on Capital Goods will be allowed after reduction by 5% per quarter or the part thereof from the date of invoice of such capital goods.

  • Input Tax Credit will not be allowed in respect of goods including capital goods or services or both held in stock where Purchase invoice of such goods belongs to a date older than one year from the date immediately preceding the date from which he becomes liable to pay tax.

  • The registered person shall within a period of thirty days from the date of his conversion shall make a declaration, electronically, on the common portal in FORM GST ITC-01 to the effect that he is eligible to avail the input tax credit as aforesaid.

  • The details furnished in the declaration in form GST ITC-01 shall be duly certified by a practicing chartered accountant or a cost accountant if the aggregate value of the claim on account of central tax, State tax, Union territory tax and integrated tax exceeds two lakh rupees.

This is all about Composition Scheme under GST. Government, in its next phase, is planning on following matters to make the scheme more lucrative:-

  • To increase threshold limit to Rs 1.50 Crore. It’s done w.e.f. 01.02.2019
  • To allow inter-state sale by Composition dealers. (Till date, purchase from inter-state are allowed).

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