When composition scheme under GST law is applicable

Small suppliers whose aggregate turnover from supplying goods for a year is less than Rs 40 lakhs are not required to register under GST. This limit is Rs 20 lakhs for supply of services and Rs 10 lakhs for north east states. However, if you have taken registration under the GST law, then you are liable to pay goods and services tax based on supplies irrespective of your turnover. To provide relief to small taxpayers, government has introduced composition scheme in GST under section 10 of CGST Act, 2017.

gst aggregate turnover

The main objective of composition scheme is to bring simplicity for small businesses.

When composition scheme is applicable under GST

Composition scheme in GST is applicable to those persons whose aggregate turnover from supply of goods in the previous financial year did not exceed 150 lakhs rupees. Which means, if your aggregate turnover for the preceding financial year is above 1.5 Crore rupees then, you cannot take benefit of composition scheme.

Please note, the limit specified in section 10 of CGST Act, 2017 is 50 lakhs ruppes. However, government vide notification number 14/2019 CT dated 07.03.2019 has increased the limit to 1.5 Crore ruppes.

This threshold limit shall be 75 lakhs rupees for following 8 states;

  1. Arunachal Pradesh,
  2. Uttarakhand,
  3. Manipur,
  4. Meghalaya,
  5. Mizoram,
  6. Nagaland,
  7. Sikkim, and
  8. Tripura

In case of Assam, Himachal Pradesh and Jammu and Kashmir, the turnover limit is 1.5 Crore rupees.

Benefit of composition scheme in GST will lapse on the day your aggregate turnover exceeds the specified limit as applicable to you in the current financial year.

If a registered taxpayer do not want to take benefits of composition scheme, then they can do so by not opting for it, as its optional not mandatory. In this case, they will be paying tax as per the normal scheme of GST.

Please note, composition scheme is not applicable to supplier of services,except supply of food for human consumption.

Meaning of aggregate turnover

As per above discussions, GST for composition scheme taxpayers is calculated on aggregate turnover. For this purpose, aggregate turnover means the aggregate value of all taxable supplies, exempt supplies, export of goods or services or both and interstate supplies of a person having the same income tax PAN, to be computed on all India basis and excludes Central tax (CGST), state tax (SGST), union territory tax (UTGST) and integrated tax (IGST). You are also required to exclude the value of inward supplies on which tax is payable by a person on reverse charge basis.

Aggregate turnover is the total turnover of all registered persons having the same income tax PAN. This means, if you have different businesses in different or same state under one Income tax PAN, then total turnover of all such units will be considered to determine the eligibility of composition scheme.

As per removal of difficulties order number 1/2017-CT dated 13-10-2017, interest or discount received by the composition scheme taxpayer on deposits, loans or advance will not be considered for calculating aggregate turnover.

Example

XYZ corporation is based out of Delhi. Its aggregate turnover for the financial year 2018-19 is Rs 90 lakhs by supplying taxable goods. For the year 2019-20, aggregate turnover is Rs 160 lakhs. In this case composition scheme can be availed for the financial year 2018-19 and 2019-20. As aggregate turnover crosses the threshold limit in the financial year 2019-20, benefit of composition scheme is not available in the year 2020-21.

Who is not eligible for GST composition scheme

Section 10(2) of CGST Act talks about eligibility. As per this section, following taxable persons are eligible to take benefits of composition scheme in GST;

  • Not engaged is supply of services other than service of supply of food for human consumption.
  • Not engaged in making any supply of goods which are not leviable to tax under this act.
  • Not engaged in making any inter-state outward supplies of goods. Please note, interstate purchases are allowed.
  • Not engaged in making any supply of goods through an electronic commerce operator who is required to collect tax at source (TCS U/S 52 of CGST Act). and
  • Not a manufacturer of such goods as may be notified on the recommendations of the council.

As per notification number 8/2017-CT dated 27-06-2017, following manufacturers of goods will not be eligible for composition levy;

  • Ice cream and other edible ice, whether or not containing cocoa
  • Pan masala
  • Tobacco and manufactured tobacco substitutes

Can a person under composition scheme render services

As per the second proviso to section 10(1) read with section 10(2)(a), marginal supply of services other than restaurant services is allowed for a value not exceeding higher of:

  • 10% of the turnover in a state/union territory in the preceding financial year; or
  • 5,00,000 rupees

This means, if turnover of a registered person opting for composition levy is 60,00,000 rupees in the preceding financial year then, such person can supply services other than restaurant services up to a maximum value of 6,00,000 rupees (i.e. higher of 10% of 60,00,000 and 5,00,000) in the current financial year.

In above case, if value of services exceeds Rs 6,00,000 then, such person will not be eligible for composition scheme.

As per order number 01/2019 CT dated 01.02.2019, it has been clarified that the value of supply of exempt 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.

Validity

A registered person after exercising the option of composition scheme, can start paying tax under section 10 of CGST Act. He will be considered as a supplier under composition scheme as long as he satisfies all the conditions of the section and rules applicable.

Such supplier is not required to file fresh intimation every year in order to continue the composition levy.

When composition scheme is beneficial

Composition scheme in GST is a win-win formula for both government and small suppliers. Under this scheme, small taxpayers are not required to maintain elaborate records of receipt of supplies of goods and services. It will save cost and unnecessary compliance.

For government, assessment under this scheme is easy and very straightforward. The recipient of goods will not be allowed to take input tax credit as the supplier will not be charging GST in his invoice. Due to this, the amount of input tax before reaching the composition scheme supplier will be lost.

In India, composition scheme is mainly used by those suppliers who are making direct supply to consumers who can’t avail input tax credit. It’s also useful to those small taxpayers who don’t want to maintain detailed records of receipts and for input tax credit.

How to opt for GST composition scheme

While applying for fresh registration the supplier needs to indicate the option to pay tax under composition levy in part B of the application form for registration.

The intimation shall be considered only after grant of registration to the applicant. The effective date should be the date from which registration is effective.

You are not required to file fresh intimation every year. You can continue paying tax under composition levy subject to the provisions of the GST Law.

Existing registered taxpayers can switch to composition scheme only at the time of commencement of financial year. This means, option to pay tax under composition scheme can only be effective from the beginning of the financial year. If you want to switch, then prior to the financial year from which you want to pay tax under composition scheme, you need to electronically file an intimation through common portal. Within 60 days from the commencement of the financial year, you should furnish a statement in form GST ITC-3 in accordance to CGST rules. GST ITC-3 should have details of input tax credit of stock as on 31st March which need to be reversed.

What is the effective date of registration

As per GST law, in case of fresh registration, the intimation for composition levy will be effective from the date when the supplier liable to registration. This will be considered only when the supplier has applied for registration within 30 days from the date when he became liable to register.

In case the supplier has applied for GST registration beyond 30 days after he become liable for registration, then the registration will be effective only from the date on which registration is granted.

If you have opted for composition levy at the time of registration, then composition levy shall be effective from which registration is effective. If you are already registered and opted for composition scheme, then it will be effective from the beginning of the financial year even though you have opted for it in between the year.

What happens when conditions to composition scheme not satisfied

If any of the conditions are not satisfied and due to this supplier is not eligible for composition scheme, then the supplier will pay tax under section 9(1) under normal scheme. This means, it will be applicable only when all the conditions applicable as per the law are satisfied.

Such supplier has to issue tax invoices instead of bill of supply for all taxable supplies from the day he ceases to be a composition supplier. In this case, the supplier is also required to file an intimation for withdraw from the scheme within 7 days from the date when such event takes place.

If the registered person wants to withdraw from composition scheme, then he can do so by filling an application in form GST CMP 04 electronically through the common portal.

When composition scheme can be cancelled

Under the following two circumstances composition scheme option can be cancelled by a proper officer;

  • The supplier opted for composition scheme is actually not eligible for it under section 10, or
  • Contravened the provisions of the act or rules

If the proper officer has decided to cancel the composition scheme option, then he has to send a notice to show cause within 15 days of the receipt of such notice as to why option to pay tax U/S 10 should not be denied.

After receiving a reply from the registered person, the proper officer shall issue an order within 30 days from receipt of such reply.

As per CBE&C circular number 1/1/2017 dated 26/06/2017 assistant or deputy commissioner or director of central tax has been specified as proper officer for this purpose.

Withdrawal from composition scheme under GST

Withdrawal from composition scheme is possible when the taxpayer paying tax under composition levy ceases to satisfy the conditions of the scheme and when such person wants to withdraw from the scheme.

In case of withdrawal, the effective date shall be the date mentioned in the intimation or application of the applicant. However, such date may not be prior to the commencement of the financial year in which such intimation / application for withdrawal is being filed.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.