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Composition Levy Scheme

An Important notification issued by Govt. notification no. 1/2018, it is related with Composition Levy Scheme. This notification came on January 1st, 2018, by virtue of this notification the tax liability for manufacturer under the composition levy scheme, reduced from 2% to 1%, i.e.,1/2% each CGST and SGST previously 1% each;

The second relief is provided to the traders, previously they were taxed on their entire turnover, by this notification, they are only liable to pay tax on their taxable turnover, thus for their exempted turnover they are no longer require to pay tax.

We have talked a lot about Composition Scheme, why not, I take Composition scheme as Topic of this week. Thus Composition Scheme I am taking as topic of this week. Let us talk about Composition levy scheme.

1. What is Composition Scheme and How it is beneficial for small taxpayer?
As we are aware that the compliance under GST is IT based and very cumbersome, in fact not only GST all tax laws are complicated and difficult to handle for small business people. It requires compliance cost, maintenance of records, payment of tax on regular interval and a lot, a big organization can do it with help of professionals, but it is difficult for small business people having GST liability of 5 – 10 K per month—and more over it is also less important for government to track these business people who are generating little revenue.
Therefore a separate set of administration have been available for these business people, which is commonly known as ‘Composition Levy Scheme‘. This mechanism is designed to simplify compliance procedure and reduce tax burden for these small taxpayers.
Therefore Composition Levy Scheme is an alternative mechanism offering simple self-governance mechanism to small taxpayers.
This scheme is offered as a choice to the small taxpayers, in the other words opting Composition levy is not mandatory for a small taxpayers, even if it has all qualification as prescribed under GST Laws to avail this mechanism.

2.Who are qualified taxpayer for Composition scheme under GST?
The most important point is that “The Composition Levy Scheme is available for ‘supplier of goods’ only it is not available to supplier of services except to a person engaged in Restaurants business where alcohol is not served”.

3. Eligibility:
Those person whose aggregate turnover of supply of goods or services in a financial year not exceeding Rs. 75 lakhs.

In 23rd GST Council Meeting held on 10th Nov 2017 Threshold for composition scheme to be increased to 1.5 crore.
For Himachal and North Eastern States, the threshold limit is Rs. 50 Lacs, in the case of Uttarakhand the turnover limit for Composition Levy purposes is Rs. 75 lakh.
We observed that a supplier having Aggregated Turnover is less than Rs. 75 Lac or 50 lac as the case may be, are eligible for getting benefits of Composition Scheme, thus the term ‘Aggregate Turnover’ become very important to understand, and the term Aggregate Turnover is defined under Section 2(6) as
“Aggregate Turnover” means the aggregate value of all taxable supplies, exempt supplies, exports of ‘goods or services or both; and inter-State supplies of persons having the same Permanent Account Number and to be computed ‘on all India basis’ but excludes ‘central tax’, ‘State tax’, ‘Union territory tax’, ‘integrated tax’ and cess”.
(excluding the value of inward supplies on which tax is payable by a person on reverse charge basis)

4. Persons not eligible to avail Composition Levy:
The objective of Composition Levy Scheme under the GST mechanism is for ease of business for the small suppliers, thus the suppliers which are not a small supplier are not entitled to avail composition scheme. The restriction are scattered at several place, in Section 10(2), Rule 5 and notifications issued under Section 10(2)(e) from time to time. Further, if a person whose exclusion would impact adversely on supply chain will not be allowed to avail compounding scheme.
The following class of suppliers are not eligible to avail Composition Levy facilities:

The aggregate turnover is not only criteria for getting registered as a Composition Supplier, in the other words all taxpayers are not eligible to avail benefits of composition levy scheme even they have aggregate turnover below Rs. 75.00 Lacs or 50 Lacs as the case may be, lets discuss about the taxpayers who are not entitled to get registered and getting benefits of composition taxpayer.

The first category of taxpayer is a Casual or non-resident taxable person.

Casual taxpayers are those who are undertaking some “temporary work or assignment” they will require to be registered as Casual Taxable Person, these persons are not entitled to get benefit of composition scheme.

The second category of taxpayer is a supplier whose turnover in the preceding financial year have crossed Rs. 75 lakhs. A person foresees that his business turnover will not be more than 75 Lac will not allow to avail Composition Levy facilities, if He had a turnover more than Rs. 75 lac in preceding year.

The third category of Supplier, who has purchased any goods or services from unregistered supplier unless he has paid GST on such goods or services on reverse charge basis, thus it is mandatory to pay GST under reverse charge mechanism to avail Composition facilities.

The fourth category of ineligible person is Service provider, as we know that a service supplier is not entitled to get benefit of composition scheme, except supplier of services, other than restaurant business where alcohol is not served;

The fifth persons who is making any inter-State outward supplies of goods;
[A person registered as a composite taxpayer is not allowed to make inter-state Supply but there is no restriction on procuring goods from inter-state suppliers by persons opting for the composition scheme].

The Sixth person is the suppliers making any supply of goods through an electronic commerce operator;

And the Seventh person is the manufacturer ice cream, pan masala and ‘tobacco & tobacco substitutes

5. Rate of GST:
The rate of GST is very nominal for the person under Composition Scheme, with a rider that these taxpayers are not entitled to take input tax credit of GST paid by them on Inward supply nor they are entitled to recover tax from their customers. As provided under Rule 7 amended by notification no. 1/2018, the rate of composition levy shall be for manufacturers and traders is 1% i.e., 1/2% CGST & 1/2% SGST or UGST and for eligible restaurant services 5% 2.5% CGST & 2.5% SGST or UGST.

6. Registration:
The benefits of Composition Scheme is not automatic, a taxpayer entitled to such benefits only if, it is registered as a Composition taxpayer and such application to be made before the commencement of Financial year for which it intend to take such benefits.
There may be two types of Entitled person.

Fist a taxpayer getting its registration for the first time and Second, a taxpayer previously under regular scheme wanted to convert itself into a composition supplier.

There is a third type of tax payer who also entitled to get registered as composition supplier which is the person who were already registered under the prior laws and decided to be registered as Composition supplier.

There are three kind of registration is possible under Composition scheme

REG-1– New – Effective date – date of registration
CMP-2 + ITC-03-Existing – beginning of the financial year
CMP-1- Migrated-22nd June

7. Conditions and restrictions for composition levy:
The composition levy scheme is exclusively provided for small suppliers, thus a person opted for composition levy shall remain to hold its small supplier’s status and not allowed to engage in Inter-State Supply. The lower tax rate is prescribed for such suppliers which will make them ineligible to take ITC Credit.

8. Conditions and restrictions for composition levy:

(a) It shall be liable to pay tax under Reverse Charge Mechanism at regular rate of tax, thus if a restaurant registered as composition supplier is buying furniture from an unregistered supplier, he has to pay GST @ 18% , not at composition rate of 5%;
(b) Taxable person opting to pay tax under the composition scheme will not be eligible to claim any input tax credits including the Tax paid by him under reverse charge, thus in the above case the restaurant business will not be entitled to get ITC on the duty paid on furniture.
(c) Taxable person opting to pay tax under the composition scheme shall not collect tax on the outward supplies, in the above case the restaurant will not collect GST from its customer.
(d) Customers who buys goods from composite tax payers are not eligible for composition input tax credit, taking the above case the customer of the restaurant will not entitled to take Input Tax Credit,[though it is difficult to understand if the composition supplier is not collecting GST, then how the customer will able to take credit of tax paid by him].
(e) The taxable person shall not affect any inter-State outward supplies. Even stock transfers to branches outside the State would not be permitted.
(f) The composition taxpayer 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.

9. Cessation of Composition Levy:
A taxpayer opted for composition scheme shall enjoy all benefits under the scheme till the validity of the scheme, after the cessation of validity of the Scheme, the taxpayer will be obligate to pay tax under regular scheme as per Section 9 of the Act and will be eligible to get ITC on its inputs. The person will cease to operate as composite supplier in the following circumstances:

a) When the composite supplier cease to satisfy the conditionsmentioned in Section 10 of the CGST/SGST Act and intimation is given in Form GST-CMP-04 within Seven days thereof;
b) Voluntary withdrawal to be levied under Composition scheme, whether condition is ceased to satisfy or not;
c) Proper officer has reasons to believe that the registered person was not eligible to pay tax under the Composition Scheme, however opportunity of being heard given to the taxpayer.

10. Compliances:
Quarterly Returns in Simple form GSTR-4 and annual Return on GSTR-9A.
The due date for filing GSTR 4 is 18th of the month after the end of the quarter, and the due date for filing of the form 9A is 31st December.

 

 

 

Sahay Vineet
“GST Blogger ” CS, Senior Manager Taxation


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