Composition scheme under GST for Goods

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What is Composition scheme under CGST Act, 2017 for selling or manufacturing Goods (Other than Service provider)?

Under CGST Act, 2017 Composition scheme assesses can pay the GST on conational rate. The scheme has some pros and cons which are discussed below:

The scheme is Optional:

This scheme is optional to the taxable person. This scheme is available only for certain eligible taxable persons.

Who can avail the option? I.e. Eligibility? [Section 10(1)]

A registered person, whose aggregate turnover in the preceding financial year did not exceed *₹ 1 crore, can be eligible to opt for payment of tax under the composition scheme.

Example: If sham has aggregate turnover in FY 2018-19 less than 1 Crore, then he can opt-in the Composition scheme in FY 2019-20.

For person registered under Special Category States:

The aggregate turnover in the preceding financial year should not exceed ₹ 75 lakh

Following are the Special Category States:

1. Arunachal Pradesh,
2. Assam,
3. Manipur,
4. Meghalaya,
5. Mizoram,
6. Nagaland,
7. Sikkim,
8. Tripura,
9. Himachal Pradesh.

Note: In the case of Uttarakhand and Jammu and Kashmir, the turnover limit is ₹ 1 Crore.

What does aggregate turnover means?

Aggregate turnover means the total 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

Scheme will be applicable for all goods [Section 2(6)] (3)

Composition scheme can be opted for by taxable persons, in respect of the supply of any goods (without any reference to classification or type of goods).

Point to be noted: 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.

Example: Shaam is selling Pen and pencils under trade name his trade name. If he wants to opt-in the composition scheme he has to opt-in the scheme for both goods say Pen and pencils. It is not allowed under this scheme to opt composition scheme for lets Pen and regular tax payment for Pencil. 

Rates of composite tax [Section 10(1)]:

Sr. No.

Eligible person

Rate of Tax cannot exceed (% of turnover)

Total rate of tax cannot exceed

SGST

SGST

1

Manufacturer

0.5% of the turnover in the State or Union territory

0.5% of the turnover in the State or Union territory

0.5% of the turnover in the State or Union territory

2

Restaurant
service

2.5% of the turnover in the State or Union territory

2.5% of the turnover in the State or Union territory

5% of the turnover in the State or Union territory

3

Other
Suppliers

0.5% of the turnover of taxable supplies of goods in the State or Union territory territory

0.5% of the turnover of taxable supplies of goods in the State or Union territory territory

1% of the turnover of taxable supplies of goods in the State or Union territory territory

Persons not eligible to opt for Composition Scheme [Section 10(2)]

Following five categories of registered person are not eligible for the composition scheme.

  1. Supplier of services other than supplier of restaurant service (i.e. supply, by way of or as part of any service or 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), where such supply or service is for cash, deferred payment or other valuable consideration)

Thus, supplier of restaurant service can opt for composition scheme;

  1. Supplier of goods which are not taxable under the CGST Act/SGST Act/UTGST Act;
  2. An inter-State supplier of goods;
  3. Person supplying goods through an electronic commerce operator who is required to collect tax at source under Section 52;
  4. Manufacturer of certain notified goods.

Ineligible Manufacturers: The manufacturer of the following goods will not be eligible to opt for composition scheme:

Sr. no.

Tariff item, subheading, heading or Chapter 1

Description

1

2105 00 00

Ice cream and other edible ice, whether or not containing cocoa

2

2106 90 20

Pan masala

3

24

All goods, i.e. Tobacco and manufactured tobacco substitutes

 

There is no restriction on Composition Supplier to procure goods from inter-State suppliers.

Applicable for all transactions of registered person with same PAN [Section 10(2)]: If registered

persons having the same Permanent Account Number (PAN) want to opt for a composition scheme then he has to opt composition for all units with the same PAN.

If he wants to opt for normal scheme for one unit then, all other units become ineligible for composition scheme.

Example: If a taxable person has the following businesses separately registered under the same PAN –

Sale of footwear (Registered in Punjab)
Sale of mobiles (Registered in Punjab)
Sale of ready-made garments (Registered in Delhi)

In the above scenario, the person has to opt for a composition scheme for all the 3 units. Taxable persons will not eligible to opt-in composition scheme for say sale of footwear and sale of mobiles and opt to pay taxes under the regular scheme for Ready-made garments.

Option lapses if aggregate turnover exceeds 1 crore 75 lakh [Section 10(3)]:

The benefit of the composition scheme can be availed up to the aggregate turnover of 1 Crore / 75 Lakh in the current financial year. The option availed by a registered person under Section 10(1) shall lapse with effect from the day on which his aggregate turnover during a financial year exceeds the limit of 1 crore / 75 Lakh.

Composition tax not to be collected from Recipients [Section 10(4)]:

A taxable person to whom the provisions of the composition scheme apply shall not collect any tax from the recipient on supplies made by him. It means that a composition scheme supplier cannot issue a tax invoice.

Input Tax cannot be Availed [Section 10(4)]:

A taxable person to whom the provisions of a composition scheme applies shall not be entitled to any credit of input tax.

Penal Consequences Section 10(5):

 If the proper officer has reasons to believe that a taxable person paid tax under composition scheme despite he is 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 be applicable for determination of tax and penalty.

Tax payable under Reverse Charge Mechanism (RCM) is not covered under composition scheme:

It is important to note that for any tax payable under the reverse charge mechanism, the option to pay under composition is not available. The rate of tax payable on supplies taxable under RCM is regular rates.

Customer not entitled to take credit of Composition Tax: Customer who buys goods from a registered person who is under a composition scheme is not eligible for composition input tax credit because a composition scheme supplier cannot issue a tax invoice.

Disclaimer: Due care has been taken to draft this write-up and is intended to express the Authors understanding and to start an academic discussion on the subject discussed in above write-up. it should not be considered as professional advice. Readers are advised to refer to relevant provisions of law before applying any of the above-mentioned views. The author accepts no responsibility whatsoever and will not be liable for any losses, claims or damages which may arise because of the content of this write-up.

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