Composition Levy under GST – Composition Scheme & Rules

GST (Goods and Services Tax) is an indirect tax used in India on the supply of goods and services. The tax came into effect from 1 July 2017 by the Indian government. Goods and services tax are divided into five different tax slabs for collection of tax – 0%, 5%, 12%, 18% and 28%. However, petroleum products, alcoholic drinks, and electricity are not taxed under GST. This tax replaced the existing multiple taxes levied by the central and state governments. GST increase rates on daily goods while reducing rates on luxury items. GST Identification Number is a unique 15 digit number issued to Businesses registered under GST based on the PAN of the business. The composition levy is a method of levy of tax designed for small taxpayers whose turnover is up to Rs. 1.5 crore. Small taxpayers are supposed to pay a flat rate of tax regardless of what they manufacture, provide as a service, or trade they carry on. The GST Composition Scheme turnover limit for North-Eastern states and hill states such as Sikkim and Himachal Pradesh was kept lower at Rs. 75 lakhs annually as they have a smaller tax base as compared to other states in India.

GST Composition Scheme Rules

A range of businesses in the manufacturing and services sectors including restaurants as well as traders are allowed to register under the composition scheme. However, the GST Composition Scheme Rules does not apply to a Non-resident taxable person or a casual taxable person, Businesses/persons engaged in inter-state supply of goods, Manufacturers of tobacco products, tobacco substitutes, and pan masala and Suppliers involved in the supply of goods that are exempt under GST Act. Businesses/individuals registered under the composition scheme can purchase goods/services from outside the state but cannot sell goods/services to consumers/businesses outside the state. Any person who opts for Composition Levy has to file electronically, intimation in FORM GST CMP-01 within 30 days of the appointed date. Otherwise, the registered person will not collect taxes and issue bills of supply for supplies. 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 include interstate purchase, imported Goods, Agents, or Principal situated outside the State. The words “Composition Taxable Person” on every notice and signboard displayed at a prominent place should be displayed on every notice and signboard displayed at a prominent place.

GST Rates and Returns

GST has to be paid by Businesses/individuals registered under the composition scheme at 1% to 6% depending on the type of business activity conducted by the registered person/business entity. Traders and other suppliers eligible for composition scheme registration have to pay 1% of the turnover, manufacturers eligible for composition scheme registration have to pay 2% of the turnover, 5% of the turnover for restaurant services and businesses providing services/mixed services (other than restaurant services) have to pay 6% of the turnover. For composition registered individuals/businesses, the returns have to be filed using the GSTR-4 Form on the Official GST Portal by the registered businesses/individuals by “the 18th of the month succeeding the last month of the previous quarter”. The Central Board of Indirect Taxes (CBIC) has notified a New Scheme in GST vide Notification No. 2/2019-Central Tax (Rate), dated March 7, 2019, in which a taxpayer has been allowed to pay GST on a presumptive basis at the rate of 6% (3% CGST and 3% SGST/UTGST). The supplier opting for this scheme shall pay GST at the rate of 6% on his total supply up to Rs. 50 lakhs. For payment of tax, he is not allowed to claim the credit of taxes paid for inputs, input services, or capital goods so procured by him. Meaning thereby he shall be paying GST at the rate of 6% from his pocket. For payment of tax, he is not allowed to claim the credit of taxes paid for inputs, input services, or capital goods so procured by him. Meaning thereby he shall be paying GST at the rate of 6% from his pocket.
GST Composition FORMS and Bill Format Businesses/individuals registered under composition scheme are required to fill out for various purposes under current GST rules: GST CMP-02 to opt for composition scheme, GST CMP-04 to withdraw from GST composition scheme, GST REG-01 to register under composition scheme etc. There are total 13 GST forms.

A composition dealer has to issue a Bill of Supply in case of outward supply of goods/services as businesses are not allowed to issue GST invoices as they cannot charge GST on outward supplies of goods/services. Bill of Supply includes Supplier name, GST Identification Number (GSTIN) and Address, Date of issue of the bill of supply, Signature/digital signature of the supplier, the quantity of goods/services, etc. The serial number of invoices issued during a tax period shall be furnished electronically through the Common Portal in FORM GSTR-1. An invoice, bill or tab is a commercial document issued by a seller to a buyer, relating to a sale transaction and indicating the products, quantities, and agreed prices for products or services the seller had provided the buyer. A bill is “an amount of money owed for goods supplied or services rendered, set out in a printed or written statement of charges”, while an invoice is “a list of goods sent or services provided, with a statement of the sum due for these”; the NOAD reports also that invoice means bill.

How should the GST be calculated?

A composition dealer is required to pay tax at a specific rate on total sales as per the given formula:
Total GST Payable =Tax on supplies (net of advance and goods returned)
+ Tax on B2B transactions where Reverse Charge is applicable
+ Tax on B2B purchases from unregistered suppliers (July and August 2017)
+ Tax on Import of Services

Conditions & Restrictions for GST Composition Levy

The person exercising the option to pay tax should be neither a casual taxable person nor a non-resident taxable person, the goods held by him in stock have not been purchased from an unregistered supplier, he should mention the statement “composition taxable person, not eligible to collect tax on supplies” on the bill of supply issued by him, a person has to pay tax under sub-section (3) or sub-section (4) of section 9 on inward supply of goods or services or both and he should not be engaged in the manufacture of goods as noticed under clause (e) of sub-section (1) of section 10, during the preceding Financial year. Compliance requirements have been reduced, hence suitable for small businesses with limited resources, Businesses have limited liability in terms of tax payable in place of composition levy. However, there is a limited area of operation as composition dealers cannot engage in inter-state sales transactions and unavailability of the input tax credit mechanism to offset GST payments. Conditions for GST composition levy under CGST Act 2017are: a person registered under GST shall not collect tax, not entitled to Input Credit, No Input tax credit to those who purchase from him and he should not be engaged in Supply of Services except Food & Drink Service, he should not be a Non-Resident Taxable Person.

SUGGESTED READING:

Levy and Collection of GST
VALUE OF SUPPLY UNDER GST
TIME OF SUPPLY UNDER GST

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