COMPOSITION SCHEME UNDER GST

Q 1. What is the threshold limit for opting composition scheme? Ans Notwithstanding anything to the contrary contained in the CGST Ac...

Q 1. What is the threshold limit for opting composition scheme?

Ans Notwithstanding anything to the contrary contained in the CGST Act but subject to the provisions of Sections 9(3) and 9(4), a registered person, whose aggregate turnover in the preceding financial year did not exceed one crore rupees, may opt to pay, in lieu of the tax payable by him under section 9(1) an amount of tax calculated at such rate 12 as may be prescribed.

In other words, composition tax payers shall, in lieu of the tax payable on the invoice value of the transactions under section 9(1) (applicable to regular taxpayers), pay tax as a percentage of their turnover.

Further, this limit, is rupees seventy -five lakhs in the case of an eligible registered person, registered under section 25 of the CGST Act, in any following States, namely: -

• Arunachal Pradesh,
• Assam,
• Manipur,
• Meghalaya,
• Mizoram,
• Nagaland,
• Sikkim,
• Tripura,
• Himachal Pradesh

It may be noted that aforesaid limit of Rs 1 crore/ 75 lakh is notified vide Notification No. 46/2017- Central Tax dated 13.10.2017. Prior to such change the threshold limit was Rs 75 and Rs 50 lakh respectively as stated in Notification No. 8/2017-Central Tax dated 27.06.2017.

Moreover, on recommendation of the Council, the Government may, by notification, increase the aforesaid limit of  Rs 1 crore upto Rs 1.5 crore . The limit is being raised from Rs 1 crore to Rs 1.5 crore as a measure of facilitate trade. Effective date yet to be notified.

Q 2. What is the rate of tax applicable to a taxable person opting to pay tax under composition scheme?

Ans. As per Section 10(1) of the CGST Act, 2017 read with Notification No. 1/2018 -Central Tax dated 1.1.2018 and subject to such conditions and restrictions as may be prescribed, with effect from 1.1.2018, the rate of tax, shall be:

• Half per cent of the turnover in State or turnover in Union territory in case of a manufacturer;
• two and a half per cent, of the turnover in State or turnover in Union territory in case of persons engaged in making supplies referred to in clause (b) of paragraph 6 of Schedule II; and
• half per cent, of the turnover of taxable supplies of goods in State or turnover in Union territory in case of other suppliers.

It may be noted that prior to 1.1.2018, the rates as per Notification No. 8/2017-Central Tax dated 27.06.2017 were:

• one per cent of the turnover in State or turnover in Union territory in case of a manufacturer;
• two and a half per cent, of the turnover in State or turnover in Union territory in case of persons engaged in making supplies referred to in clause (b) of paragraph 6 of Schedule II; and
• half per cent, of the turnover in State or turnover in Union territory in case of other suppliers.

Q3. Can every taxable person opt to pay tax under composition scheme?

Ans. Registered person whose aggregate turnover in the preceding financial year does not exceed one crore rupees or seventy-five lakhs rupees in case of specified States as prescribed under Notification 46/2017-Central Tax, dated 13.10.2017), may opt to pay tax under composition scheme, subject to satisfaction of the following conditions and restrictions:

• Save as provided in Section 10(1), he is not engaged in the supply of services 
• he is not supplying goods which are not leviable to tax e.g. petrol;
• he is not engaged in making any inter-State outward supplies of goods;
• he is not supplying goods through an electronic commerce operator who is required to collect tax at source under Section 52; and
• he is not a manufacturer of such goods as may be notified by the Government on the recommendations of the Council. In this regard, following goods have been notified vide Notification No. 8/2017-Central Tax dated 27.06.2017.
• Ice cream and other edible ice, whether containing cocoa
• Pan masala
• All goods, i.e. Tobacco and manufactured tobacco substitutes (It may be noted, there is no restriction in case the person is engaged in trading of such goods.)
• he is not entitled to input tax credit
• he is neither casual taxable persons nor non-resident taxable persons.

This is a consequential amendment, as a new proviso is being added to section 10(1) to provide that a person who opts to pay tax under composition scheme may supply services (other than restaurant services), of value not exceeding 10%. of turnover in a State or Union territory in the preceding financial year or Rs. 5 lakh, whichever is higher.Effective date yet to be notified. Earlier it was - he is not engaged in the supply of services other than supplies referred to in clause (b) of paragraph 6 of Schedule II;

• 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. (Would be applicable for all transactions under the same PAN)
• To clarify further, if a taxable person has multiple business verticals and if he has opted for separate registrations for each such vertical, composition scheme would become applicable for all the business verticals and it cannot be applied for selected verticals only.
• e.g.: If a taxable person has the following businesses separately registered: Sale of footwear (Registered in Karnataka), Sale of mobiles (Registered in Karnataka), Franchisee of McDonalds (Registered in Kerala). In the above scenario, the composition scheme would be applicable for all the 3 units. Taxable person will not be eligible to opt for composition scheme say for sale of footwear and sale of mobiles and opt to pay taxes under the regular scheme for franchisee of McDonalds.

• the 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, where the option is exercised under Rule 3(1) of the CGST Rules;
• the goods held in stock by him have not been purchased from an unregistered supplier and where purchased, he pays the tax under Section 9(4);
• he shall pay tax under Section 9(3) or 9(4) of the CGST Act on inward supply of goods or services or both. However, for the time being, provisions of Section 9(4) have been suspended till 30.09.2019 vide Notification No. 22/2018-Central Tax (Rate) dated 06.08.2018;
• he shall mention the words “composition taxable person, not eligible to collect tax on supplies” at the top of the bill of supply issued by him; and 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.

Q4. Whether an application/ intimation needs to be made by supplier opting for composition scheme?

Ans Yes, the taxable person should make an application exercising his option to pay tax under composition scheme. There are three possibilities in which such option can be exercised:

Taxable Person migrating from old registration to GST registration : As per Rule 3(1) of the CGST Rules, in cases involving migration, there is need to exercise option of composition in FORM GST CMP 01 prior to appointed date or within 30 days after the appointed date. In this case, the option to pay tax under composition scheme shall be effective from the appointed date. This date has further been extended to 16th August 2017. Such person would be required to file stock statement under Rule 3(4) in FORM GST CMP-03 within a period of 90 days (extended from 60 days to 90 days by Notification No. 22/2017–Central Tax w.e.f.17.08.2017) from the date on which the option for composition levy is exercised or within such further period as may be extended by the Commissioner in this behalf.

Taxable Person obtaining new registration under GST laws : Such option can be exercised at the time of obtaining registration under Section 22 in Part B of FORM GST REG-1. In this case, the option to pay tax under composition scheme shall be effective from the effective date of registration. [Refer Rule 3(2) of CGST Rules]

Taxable Person paying tax under normal levy in one financial year and wants to opt for composition scheme in next financial year, under the GST regime : Such option can be exercised by filing intimation in FORM GST CMP 02 prior to commencement of the year for which the option to pay tax under composition scheme is exercised. In this case, the option to pay tax under composition scheme shall be effective from the beginning of the financial year. Moreover, provisions of Section 18(4) shall become applicable and person shall be required to file statement containing details of stock and inward supply of goods received from un-registered persons, held in stock, on the date immediately preceding the date from which he opts for composition levy, in FORM GST ITC 03 within 60 days from the commencement of the relevant financial year. [Refer Rule 3(3) of CGST Rules].The option exercised by a registered person to pay tax under composition scheme is valid as long as the conditions stipulated in GST law to avail such scheme are complied with or option withdrawn by the assessee or proper officer has reasons to believe that the registered person was not eligible to pay tax under section 10 or has contravened the provisions of the Act or Chapter on Composition scheme in the CGST Rules.

A new sub-rule (3A) was inserted vide Notification No. 34/2017-Central Tax dated 15.09.2017 which had an overriding effect on provisions of sub-rule (1), (2) and (3). As per the said rule, it was provided that, in all cases involving (a), (b) and (c) above, the option of composition scheme can be obtained only from 01.10.2017 by filing application in FORM CMP-02 and furnishing stock statements in FORM GST ITC-03, within 90 days from 01.10.2017.

Since, this was not the intended interpretation of the said amendment, sub-rule 3A was once again amended vide Notification No. 45/2017–Central Tax dated 13.10.2017. By making the said amendment, the government clarified that, sub-rule 3A was intended to cover those cases, where either at the time of migration or by taking registration under GST if any person who has availed normal scheme wishes to opt for composition scheme, then such person may opt for composition scheme under Section 10 with effect from the first day of the month immediately succeeding the month in which he files an intimation in Form GST CMP-02 on or before 31.03.2018. In this case, such person would be required to furnish stock statements in FORM GST ITC -03 within 180 days from the day on which such person commences to pay tax under Section 10. It may be noted that, the purpose of rule (3A) is only to enable the persons to opt for composition scheme in the first year of GST implementation, without making them to wait up to the next financial year. This is on account of the fact that, the threshold limit for the purposes of composition scheme under Section 10 was enhanced twice i.e. once on 27.06.2017 and then again on 13.10.2017. Hence, Rule 3(3A) would only cover cases, where the application is made prior to 31.03.2018. For all applications made after 31.03.2018, the matter would be governed by Rule 3(3) above.

Summary

Taxable Person	Form to be filed
Migrating from old registration to GST registration	Form GST CMP-01
Obtaining new registration under GST laws	Part B of Form GST REG-1.
Paying tax under normal levy in one financial year and	Form GST CMP-02
wants to opt for composition scheme in next financial
year, under the GST regime

Q5. Whether a supplier of services is eligible to pay tax under composition scheme?

Ans. No, a supplier of services is not eligible to opt for composition scheme. However, a supplier supplying composite supply involving supply of service or goods being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption) is eligible to opt for payment of taxes under composition scheme.

However, CGST (Amendment) Act 2018 dated 29.08.2018  Effective date yet to be notified. vide inserting a proviso to Section 10 to provide that a person who opts to pay tax under composition scheme may supply services (other than restaurant services), of value not exceeding 10%. of turnover in a State or Union territory in the preceding financial year or Rs. 5 lakh, whichever is higher.

Q6. Whether a taxable person having same PAN can opt to pay tax under composition scheme by seeking separate registration for branches?

Ans. No, a registered person shall not be eligible to opt for the composition scheme unless all such registered persons (branches having separate registration under a single PAN) opt to pay tax under composition scheme.

Q7. Whether a taxable person under composition scheme eligible to claim input tax credit? 

Ans. No, a taxable person under composition scheme is not eligible to claim input tax credit.

However, if the taxable person becomes ineligible to remain under composition scheme, the taxable person will become entitled to take input tax in respect of inputs held in stock (as inputs, contained in semi- finished or finished goods) on the day immediately preceding the date from which he becomes liable to pay tax under Section 9. (Refer Section 18(1)(c) read with Rule 40 of the CGST Rules). A statement of stock shall be filed in Form GST ITC-01 within 30 days from the date from which the option is withdrawn or the order cancelling the composition option is passed.

Q8. Can a customer who buys from a taxable person who is under composition scheme claim composition tax as input credit?

Ans. No, the recipient is not eligible to take input tax credit of composition tax paid. Moreover, a taxable person paying taxes under composition scheme is not entitled to collect taxes from the recipient in terms of Section 10(4) of the CGST Act, 2017. Accordingly, there does not arise a question for the recipient to claim input tax credit.

Q 9. What is aggregate turnover?

Ans. In terms of Section 2(6) of the CGST Act, 2017, "aggregate turnover" means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis but excludes Central tax, State tax, Union territory tax, integrated tax and cess.

Q10. Whether a taxable person can still pay tax under composition scheme even after the turnover in the current financial year exceeds threshold limit?

Ans. In terms of Section 10(3), the option availed for paying tax under composition scheme shall lapse with effect from the day on which his aggregate turnover during a financial year exceeds the threshold limit of composition scheme.

Q 11. What are the consequences, if a taxable person violates the conditions prescribed for composition scheme?

Ans. Following are the consequence for non-compliance with the conditions specified for composition scheme:

• shall be liable to pay additional taxes at the rates applicable to regular taxable person;
• shall be liable to penalty; and
• the amount of tax and penalty shall be recovered in terms of Section 73 or 74 of the CGST Act, 2017.

Q12. Is there any option for registered taxable person to withdraw from the composition scheme?

Ans. The registered taxable person who intends to withdraw from the composition scheme shall, before the date of such withdrawal, file an application in FORM GST CMP-04. Where the option of composition scheme is lapsed due to non-compliance of any of the eligibility conditions under Section 10 or rules made thereunder, then taxable person shall file an intimation of withdrawal in the same FORM GST CMP-04 within 7 days of the occurrence of event leading to disability under the scheme. An intimation for withdrawal or cancellation of permission in respect of any place of business in a State or UT shall be deemed to be an intimation in respect of all other places of business registered on the same PAN.

Q13. Can the proper officer cancel the registration of supplier who has opted composition scheme?

Ans. Yes. Where the proper officer has reasons to believe that the taxable person was not eligible to the composition scheme, the proper officer may cancel the permission and demand the following:

Differential tax and interest – viz., tax payable under the other provisions of the Act after deducting the tax paid under composition scheme.

Penalty determined based on the demand provisions under Section 73 or 74.

However, it is essential to issue show cause notice in FORM GST CMP 05 and provide an opportunity of being heard to the taxable person before proceeding with the demand.

The proper officer shall within 30 days of receipt of reply, either accept the reply (in FORM GST CMP 06) to SCN or deny the option to pay tax under section 10 from the date of option or from the date of event occurring the contravention of section 10 or rules thereunder, by passing an order in Form GST CMP 07.

Q14. State the clarifications made vide CGST (Removal of Difficulties Order), 2017 Order No. 1/2017-Central Tax dated 13.10.2017-, in respect of composition scheme?

Ans. CGST (Removal of Difficulties Order), 2017 Order No. 1/2017– Central Tax dated 13.10.2017 has provided the following two clarifications in respect of composition scheme:

if a person supplies goods and/or services referred to in clause (b) of paragraph 6 of Schedule II of the said Act and also supplies any 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, the said person shall not be ineligible for the composition scheme under Section 10 subject to the fulfillment of all other conditions specified therein.

In computing his aggregate turnover in order to determine his eligibility for composition scheme, value of supply of any 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, shall not be taken into account.

Q15. What will be the rate of tax for bakery items supplied where eating place is attached - manufacturer for the purpose of composition levy?

Ans. The Government vide Circular No. 27/01/2018 dated 4.01.2018 has clarified that any service by way of serving of food or drinks including by a bakery qualifies under section 10(1)(b) of the CGST Act and hence GST rate of composition levy for the same would be 5%.

Q16. Whether a restaurant serving alcohol along with other foods etc. to its customers can opt for composition scheme under Section 10?

Ans. In terms of Section 10(2) (a) read with clause (b) of Entry No. 6 of Schedule II of CGST Act, 2017, such restaurant cannot opt for composition scheme.