Sec 10 – Composition levy

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Sec 10 – Composition levy 2017-04-14T11:40:22+00:00
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  • Ashish BadalaCA Ashish Badala
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    (1) Notwithstanding anything to the contrary contained in this Act but subject to the provisions of sub-sections (3) and (4) of section 9, a registered person, whose aggregate turnover in the preceding financial year did not exceed fifty lakh rupees, may opt to pay, in lieu of the tax payable by him, an amount calculated at such rate as may be prescribed, but not exceeding,–
    (a) one per cent. of the turnover in State or turnover in Union territory in case of a manufacturer,
    (b) 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
    (c) half per cent. of the turnover in State or turnover in Union territory in case of other suppliers,
    subject to such conditions and restrictions as may be prescribed:
    Provided that the Government may, by notification, increase the said limit of fifty lakh rupees to such higher amount, not exceeding one crore rupees, as may be recommended by the Council.
    (2) The registered person shall be eligible to opt under sub-section (1), if:-
    (a) he is not engaged in the supply of services other than supplies referred to in clause (b) of paragraph 6 of Schedule II;
    (b) he is not engaged in making any supply of goods which are not leviable to tax under this Act;
    (c) he is not engaged in making any inter-State outward supplies of goods;
    (d) 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; and
    (e) he is not a manufacturer of such goods as may be notified by the Government on the recommendations of the Council:
    Provided that where more than one registered persons are having the same Permanent Account Number (issued under the Income-tax Act, 1961), the registered person shall not be eligible to opt for the scheme under sub-section (1) unless all such registered persons opt to pay tax under that sub-section.

    (3) The option availed of by a registered person under sub-section (1) shall lapse with effect from the day on which his aggregate turnover during a financial year exceeds the limit specified under sub-section (1).
    (4) A taxable person to whom the provisions of sub-section (1) apply shall not collect any tax from the recipient on supplies made by him nor shall he be entitled to any credit of input tax.
    (5) If the proper officer has reasons to believe that a taxable person has paid tax under sub-section (1) despite not being eligible, such person shall, in addition to any tax that may be payable by him under any other provisions of this Act, be liable to a penalty and the provisions of section 73 or section 74 shall, mutatis mutandis, apply for determination of tax and penalty.

    Priya MadrechaPriya Madrecha
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    10.1    Introduction
    This provision deals with the composition scheme for payment of tax by eligible taxable persons, subject to certain conditions. The conditions, restrictions, procedures and the documentation would be contained in the Rules, to be prescribed.

    10.2    Analysis
    Composition scheme is an option:
    Tax payment under this scheme is an option available to the taxable person. This scheme would be available only to certain eligible taxable persons (conditions / criteria discussed). The taxable person should make an application exercising his option to pay tax under this scheme. There are three possibilities in which such option can be exercised:
    (a)    Taxable Person migrating from existing registration to GST registration: Exercising Option 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.
    (b)    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 GSTREG-1. In this case, the option to pay tax under composition scheme shall be effective from the effective date of registration.
    (c)    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. In such case, 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 immediately preceding the date from which he opts for composition levy, in Form GST CMP 03 within 60 days of the date from which such option is exercised.
    Once granted, the eligibility would be valid unless the permission is cancelled or is withdrawn or the person becomes ineligible for the scheme.
    Scheme will be applicable for all goods:
    Composition scheme may be opted for by taxable persons, in respect of supply of any goods (without any reference to classification or type of goods). The option of the scheme will be qua-taxable person and not qua-class of goods – once opted it will be applicable for all supplies by the taxable person; it must be noted that a taxable person cannot opt for payment of taxes under composition scheme, say 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.
    Suppliers who are engaged in making any supply of goods which are not leviable to tax under CGST/SGST (UTGST) Act are not entitled to avail composition scheme. Hence, suppliers supplying alcoholic liquor for human consumption, petroleum crude, high speed diesel, motor spirit (petrol), natural gas and aviation turbine fuel, or making inter-state outward supply of goods on which tax is levied under IGST Act are apparently not eligible for composition scheme. Besides, supplier engaged in making any supply of goods through an electronic commerce operator who is required to collect tax at source under section 52 is also not eligible for this scheme. The scheme is also not applicable to the manufacturers of notified goods (i.e. goods which are notified by the Government on recommendations of the Council).
    Composition scheme is not available for services:
    Suppliers of services are excluded from opting to pay tax under composition scheme, except composite supply, by way of or as a part of any service, in any other manner whatsoever of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption) which is deemed to be a service under Schedule II, Para 6 (b) (i.e. food/restaurant services) Rate of tax:
    The rate of tax would be as under:
    (a)    2% (CGST+SGST) of the turnover in the State/UT in case of manufacturers.
    (b)    5% (CGST+SGST) of the turnover in the State/UT in case of food/restaurant services.
    (c)    1% of the turnover in the State/UT in case of other suppliers (like traders / agents) Eligibility to pay tax under composition scheme:
    Only taxable persons whose ‘aggregate turnover’ (aggregate of turnover in all States) does not exceed ` 50 lacs in the preceding financial year will be eligible to opt for payment of tax under the composition scheme.
    Since the composition scheme is applicable only in respect of persons making intra-state supply, in terms of Section 2(6) of the CGST Act, 2017 ‘aggregate turnover in a State’ means ‘Value of all (Taxable supplies + Exempt supplies) – (GST Value of inward supplies taxable under reverse charge) of all persons having the same PAN. The permission granted for paying tax under this scheme would stand withdrawn from the day on which this threshold limit is exceeded.
    The Government, by notification and with recommendation of Council, is empowered to increase this threshold limit up to Rs.1 crore.
    The threshold of ` 50 lacs would be applicable to a person having the same PAN and should be understood as follows:
    —     All taxable persons covered by the same PAN shall be under composition across India. Any intimation of option to avail composition scheme in respect of any place of business in any State or UT shall be deemed to be an intimation in respect of all other places of business registered on the same PAN;
    —     Goods supplied by the person which are chargeable to tax on reverse charge basis will not be includable in computing the aggregate turnover; such inward supplies will be liable to tax in the hands of the composition dealer, as it will be liable to tax when received by non-composition taxable persons.
    —     Will include value of supply of goods in all forms (supply of goods simplicitor and mixed and composite supplies which are taxed as supply of goods);
    —     Will include value of supplies of all business verticals of the same taxable person.
    Conditions for opting to pay tax under composition scheme:
    (i)    Restricted from making supply of goods which are not liable to GST: Certain goods are not liable to GST, e.g. petroleum, alcohol for human consumption, etc. – a person opting for composition scheme shall not be entitled to make any supply of nonGST goods. A plain reading of the proviso to Section 9(1) would imply that the restriction on supplies would be applicable only to sales / dispatches (outwards supplies).
    (ii)    Restricted from effecting inter-State outward supplies: The taxable person should not affect any inter-State outward supplies. This means that even stock transfers to branches outside the State would not be permitted. However, insofar as it relates to inter-State inward procurements / receipts, there is no restriction.
    To explain further, where a taxable person effects inter-State barter transaction (supply) or inter-State warranty contract (supply), he will not be eligible to opt for composition scheme.
    (iii)    Restricted from making supplies through an e-commerce operator: A person opting for composition scheme is not allowed to affect any supply of goods through an ecommerce portal, unless such portal is owned by the same person.
    (iv)    Restriction on manufacture of notified goods: The person opting for the scheme should not be a manufacturer of certain goods as are notified in this regard. However, there is no restriction in case the person is engaged in trading of such goods.
    (v)    Would be applicable for all transactions under the same PAN: 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.
    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 select 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.
    (vi)    Shall not collect tax: Taxable person opting to pay tax under the composition scheme is prohibited from collecting tax on the outward supplies.
    (vii)    Not entitled to input tax credit: Taxable person opting to pay tax under the composition scheme will not be eligible to claim any input tax credits.
    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) for the provision. A statement of stock shall be filed in Form GST ITC-1 within 30 days from the date from which the option is withdrawn or the order cancelling the composition option is passed).
    (viii)    Additional conditions under the Rules: The following additional conditions are prescribed in the Composition Rules, in order to be eligible for the composition scheme
    —     Not applicable to persons who are casual taxable persons or non-resident taxable persons.
    —     In case of migration of existing registration into registration under GST, option to avail composition scheme under GST 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.
    Composition scheme not applicable for tax payable under RCM: It is important to note that for any tax payable under reverse charge mechanism, the option of payment under this scheme will not be available. In other words, a taxable person opting for composition scheme will be required to pay tax on supplies taxable under RCM at regular rates and not the composition rate.
    Withdrawal of application under composition scheme:
    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.
    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:
    —     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 that a show cause notice is issued and the taxable person is afforded an opportunity of being heard before proceeding with the demand. Such show cause notice shall be issued in Form GST CMP 05. The reply to such notice shall be filed in Form GST CMP 07. On receipt of such reply, the proper officer shall within 30 days of receipt of such reply, either accept the reply 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.
    Please note:
    Exemption under CGST Act                Deemed to exempt under SGST Act
    Deemed to exempt under UTGST Act
    Exemption under IGST Act                  No auto-application of exemption

    10.3 Comparative review
    Under the current tax laws, the scheme of composition is Provided for in most State level VAT laws. The conditions prescribed under the GST law for composition scheme is broadly comparable to the conditions / restrictions under the State level VAT laws.  10.4 Related provisions
    Section                                  Description                                                Remarks
    Section 9(3) &(4)                  Levy of CGST                                This is the other charging Section for levy of tax payable on reverse charge by person receiving goods and/ or services and is not withstanding
    the regular tax payable under Section 9
    Section 2(6)                         Meaning of ‘aggregate turnover’      Only if the value of aggregate turnover is less than ` 50 lacs, composition scheme can be opted for

     

    Section 2(112)                    Meaning of ‘turnover in a State’         The composition rate of tax will be                           payable   on     the ‘turnover in a State’

    Sections 73, 74      Demand provisions     These provisions would determine the quantum of penalty, if any

     

    <strong>10.5 FAQ </strong>

    Q1. Can the composition tax be lower than 1%?

    Ans.  No. Composition tax cannot be lower than 1%.

    Q2. Will a taxable person be eligible to opt for composition scheme only for one out of 3 business verticals?

    Ans.  No. Composition scheme would become applicable for all the business verticals / registrations which are separately held by the person with same PAN.

    Q3. Can composition scheme be availed if the taxable person effects inter-State supplies?

    Ans.  No. Composition scheme is applicable subject to the condition that the taxable person does not affect inter-state outward supplies.

    Q4. Can the taxable person under composition scheme claim input tax credit?

    Ans.  No. Taxable person under composition scheme is not eligible to claim input tax credit.

    Q5. Can the customer who buys from a taxable person who is under the composition scheme claim composition tax as input tax credit?

    Ans.  No. customer who buys goods from taxable person who is under composition scheme is not eligible for composition input tax credit.

    Q6. Can composition tax be collected from customers?

    Ans.  No. The taxable person under composition scheme is restricted from collecting tax.

    Q7. What is the threshold for opting to pay tax under the composition scheme?

    Ans.  The threshold for composition scheme is upto 50 Lakhs of aggregate turnover in the preceding financial year.

    Q8. How to compute ‘aggregate turnover’ to determine eligibility for composition scheme?

    Ans.  The methodology to compute aggregate turnover is given in Section 2(6). However, since composition scheme is applicable only to suppliers making intra-state supplies, ‘aggregate turnover’ means ‘Value of all (taxable supplies + Exempt supplies) – (Taxes + Value of inward supplies taxable under reverse charge) of a person having the same PAN (i.e., across India).

    Q9. What does a person having the same PAN mean?

    Ans.   “Person having the same PAN” means all the units across India having the same PAN as is issued under the Income Tax Law.

    Q10. What are the penal consequences if a taxable person is not eligible for payment of tax under the Composition scheme?

    Ans.  Taxable person who is not eligible for the said scheme, could be imposed penalty as determined under Section 73 or 74.

    Q11. What happens if a taxable person who has opted to pay taxes under the composition scheme crosses the threshold limit of ` 50 lakhs during the year?

    Ans.  In such case, from the day the taxable person crosses the threshold, the permission granted earlier is deemed to stand withdrawn, and he shall be liable to pay taxes under the regular scheme i.e. section 9 from such day.

    10.6 MCQ 

    Q1. What is the minimum rate of tax prescribed for composition scheme?

    • 4%
    • 2%
    • 1%
    • 5%

    Ans. (c): 1%

     

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