Analysis Of Composition Rules :
Tax payment under this scheme is an option available to the taxable person. This scheme would be available only to certain eligible persons.
(a) Payment of tax: The composition scheme offers to a registered person, the option to remit taxes on the turnover as against outward supply-wise payment of taxes. In other words, the registered person opting to pay tax under the composition scheme needs only to ascertain the aggregate value of outward taxable supplies, and compute the tax thereon at a fixed rate, regardless of the actual rate of tax applicable on the said outward supply. The rate of tax prescribed in this regard is as under:
i. In case of manufacturers: 1% (0.5% CGST+ 0.5% SGST) of the turnover in the State/UT (Note: The rate applicable has been reduced from 2% to 1% vide Notification No. 1/2018-Central Tax dated 23.01.2018 effective 01.01.2018);
ii. In case of food/restaurant services:5% (2.5% CGST+ 2.5% SGST) of the turnover in the State/UT(i.e., in case of composite supply of service specified in Entry 6(b) of Schedule II);
iii. In case of other suppliers: 1% (0.5% CGST+ 0.5% SGST) of the turnover of taxable supplies in the State/UT (such as like traders, agents for supply of goods, etc.)
(b) Eligibility to pay tax under composition scheme: The conditions for eligibility to opt for payment of tax under the composition scheme is as follows: i. Registered persons having an ‘aggregate turnover’ as defined under Section 2(6) of the Act (i.e., aggregate of turnovers across all States under the same PAN, including exempt supplies, supplies specified under Schedule I, etc.) does not exceed the prescribed limit in the preceding financial year will be eligible to opt for payment of tax under the composition scheme. Please refer to the discussion on aggregate turnover as explained in the definitions Chapter for a better understanding of the expression. In this regard, the following may be noted:
1. The prescribed threshold limit is Rs. 1 crore (and Rs. 75 lacs in case of Special Category States being Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Himachal Pradesh);
2. The aggregate turnover of the registered person should not exceed the said prescribed limit during the financial year in which the scheme has been availed;
3. The ‘aggregate turnover’ as computed for a composition taxpayer shall not include any interest income, which is earned by way of supply of services such as extending deposits, etc. where such interest or discount is exempted under the GST Law.
ii. The scheme cannot be opted for during the middle of a financial year, except in the case where the person obtains registration, and opts for composition scheme at the time of applying for registration under the GST Law:
1. Taxable Person obtaining a 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. Such new application may also include cases of migration from the erstwhile laws. In both cases, the option to pay tax under composition scheme shall be effective from the effective date of registration. [Refer Rule 3 of CGST Rules]
2. Registered person switches over to composition scheme: A person is required to file an intimation before the commencement of the financial year for which he opts to pay tax under the scheme. In such cases, the provisions of section 18(4) shall stand attracted and the registered person shall be required to file a 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. Please refer to the discussion in Section 18 for a better understanding.
iii. In order to be eligible to opt for the scheme, the registered person must not be in possession of stock of goods which has been purchased from unregistered persons. In any such case, due tax ought to have been paid thereon under Section 9(4);
Note: In case of migrated registrations from the erstwhile laws, the GST Law imposes an additional condition that the stock of goods held on the GST appointed day (01.07.2017) does not include any goods which have been procured in the course of inter-State trade or commerce or received from his branch / his agent /his principal situated outside the State or imported from a place outside India.
iv. The registered person would not be eligible to effect any:
1. Supply of goods through an e-commerce operator who is liable to collect tax at source (TCS) – while there is no restriction on goods supplier through a portal owned and operated by the same person; In this regard, it may be noted that the provision for TCS has not been notified as yet. Therefore, it appears that composition suppliers are not restricted from effecting supplies through an e-commerce portal, regardless of who owns/ operates the portal.
2. Supply of non-taxable goods, i.e., alcoholic liquor for human consumption, petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel;
3. Supply of services, other than services specified in Entry 6(b) to Schedule II. This would mean, a trader opting for composition scheme will not be entitled to provide any after-sales support services, howsoever trivial they may be (unless such supply is a composite or mixed supply of goods). In this regard, it must be noted that the Government has issued an order for the removal of difficulties to clarify that any services provided by a composition taxpayer shall not be taken into account where the consideration for the said service is by way of “interest” which is exempted from tax under the GST Law.
4. Inter-State outward supplies, including supplies to SEZ unit / developer. Please note that this condition implies that the registered person will not be in a position to effect inter-State stock transfers to its own establishments located outside the State. It is also important to note that the condition is not limited to taxable supplies alone, and extends to exempt supplies as well.
v. The registered person must not be:
1. A manufacturer of such goods as may be notified by the Government (based on the recommendations of the GST Council), in the year for which he opts for the scheme, or in the preceding financial year (E.g. Ice cream, pan masala, tobacco). However, there is no restriction in trading of such goods, i.e., where the person has not manufactured the goods.
2. A casual taxable person;
3. A non-resident taxable person;
vi. All the registrations obtained under a single PAN are also mandated to opt for payment under the composition scheme, i.e., all the registered persons under the PAN will also be mandated to comply with all the conditions mentioned above, including the business verticals having separate registrations within the same State under the same PAN. The scheme would become applicable for all the registrations and it cannot be applied for select verticals only. E.g.: Say a company has the following businesses separately registered:
— Sale of mobile devices (Registered in Kerala)
— Franchisee of branded restaurant (Registered in Goa)
The scheme would be applicable for the said 2 units. The company cannot opt for composition scheme for the registration in Kerala and opt to pay taxes under the regular scheme for the registration in Goa.
vii. The scheme will be applicable to all the outward supplies. The option of the scheme will be qua-person and not qua-class of goods – once opted it will be applicable for all supplies by effected by the registered person; it must be noted that a taxable person cannot opt for payment of taxes under composition scheme for supply of one class of goods and opt for regular scheme of payment of taxes for supply of other classes of goods or services.
(c) Conditions applicable on a composition supplier: Once a person has opted to pay tax under the composition scheme, the following conditions would stand attracted:
i. Every notice or signboard in every registered place of business, displayed at a prominent place, shall carry the words “Composition taxable person”;
ii. Every bill of supply issued by the composition suppliers shall carry the declaration “Composition taxable person, not eligible to collect tax on supplies” on top of the bill;
iii. RCM on inward supplies: The composition supplier shall be liable to make payment at the rate applicable on the supply in respect of every inward supply liable to tax under the reverse charge mechanism, regardless of the rate of tax that is applied by him on the outward supplies effected by him. It may be noted that the value of such inward supplies would not be included in the aggregate turnover of the composition taxpayer although the liability is discharged by him on such inward supplies;
iv. Not entitled to collect tax: The composition taxpayer is prohibited from collecting any GST / Cess applicable on the outward supplies effected by him. Accordingly, the recipients of supply would also not be eligible to claim any credits where the inward supply is from a composition taxpayer;
v. Not entitled to claim credit of taxes paid: The composition taxpayer is not entitled to claim credit in respect of taxes paid by him on any of the inward supplies effected by him, including inward supplies on which he pays tax under reverse charge mechanism.
However, if the composition taxpayer switches over to become a regular taxpayer, he will be 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 (regular taxpayer. Refer the discussion in Section 18(1)(c) for a better understanding of the provisions.
(d) Important Note: The option to pay tax under the composition scheme will remain valid so long as the registered persons comply with all of the aforesaid conditions in (b) and
(c) above. The composition suppliers will be treated as any other registered supplier with effect from the date on which any of the said conditions cease to be complied with. The composition suppliers would not be entitled to re-enter the scheme until the expiry of the financial year.
i. The registered person would be required to file an intimation (suo motu) for withdrawal from the scheme within 7 days of the non-compliance; ii. The registered person may also file an intimation if he wishes to withdraw from the scheme, before the effective date of withdrawal, and such withdrawal can be applied for anytime during the financial year. Once granted, the eligibility would be valid unless the permission is cancelled or is withdrawn or the person becomes ineligible for the scheme.
iii. Cancellation of permission: 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:
a. Differential tax and interest – viz., tax payable under the other provisions of the Act after deducting the tax paid under composition scheme;
b. Penalty determined based on the demand provisions under Section 73 or 74.
(e) Comments specific to migration cases (transition from the erstwhile law to the GST regime): In case of migration of old registration into registration under GST, option to avail composition scheme under GST Laws can be exercised only if the goods held in stock by such taxable person, 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.
(i) As per rule 3(1) of the CGST Rules, in cases involving migration, there is need to exercise such Option for 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 16.08.2017. Such person would be required to file stock statement under Rule 3(4) in Form GST-CMP03 within a period of 90 days (extended from 60 days to 90 days by Notification No.22/2017) 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. However, the due date was extended further till 31.01.2018 vide Order No. 11/2017-GST dated 21.12.2017.
(ii) A new sub-rule (3A) was inserted by Notification No.34/2017 – Central Tax dtd.15.09.2017 which has an overriding effect on provisions of sub-rule (1), (2) and
(3). 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 u/s 10 was enhanced twice i.e. once on 27.06.2017 and then again on 13.10.2017. Hence, sub-rule (3A) would only cover cases, where the application is made prior to 31.03.2018. For all applications made during the financial year 2018-19, the matter would be governed by Rule 3(3).