TOPIC 5–COMPOSITION LEVY

Contents:

1. Introduction
2. Composition Levy
3. Practice Problems

1. INTRODUCTION

The composition levy is an alternative method of levy of tax designed for small
taxpayers. The objective of composition scheme is to bring simplicity and to
reduce the compliance cost for the small taxpayers. Composition scheme is
Optional.

2. COMPOSITION SCHEME

a) Who are the persons eligible/not eligible for composition scheme?

Composition scheme for goods suppliers is provided in section 10(1) &
(2). Further, Composition scheme for Services suppliers is provided in
section 10(2A).

Eligible persons-Supplier of Goods

Small taxpayers engaged in supply of goods whose aggregate turnover in
the preceding financial year did not cross `1.5 crore (`75 lakhs in case of
few States1)- Notification No. 14/2019 dated 7.3.2019 are eligible to
opt for composition scheme u/s 10(1)/(2).
The scheme can be opted by:
 Exclusive supplier of goods- i.e Manufacturers other than
manufacturing specified products, all traders
 Mixed supplier (i.e. manufacturer or trader) of goods (i.e. who also
provides small percentage of services/marginal services other than
Restaurant services)

1
Few States - a) Arunachal Pradesh b) Uttarakhand c) Manipur d) Meghalaya e) Mizoram f) Nagaland g) Sikkim h)
Tripura
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 Composition Levy

However, mixed supplier of goods can opt for the scheme if, value of supply
of services is ≤ prescribed limit. The limit for marginal services prescribed
is 10% of turnover in the State/UT of PFY or `5 lakhs, whichever is
higher. While determining marginal services limit interest on
loan/deposit/advance will not be taken into account.
 Restaurant services not serving alcohol including restaurants
providing other marginal services subject to prescribed limit

e.g
Ramsewak is engaged in supply of goods. His turnover in preceding FY is ₹ 60
lakh. Since his aggregate turnover in the preceding FY does not exceed ₹ 1.5
crore, he is eligible for composition scheme for goods in current FY. Further, in
current FY, he can supply services [other than restaurant services] upto a
value of not exceeding:
(a) 10% of ₹60 lakh, i.e. ₹6 lakh or
(b) ₹ 5 lakh, whichever is higher.
Thus, he can supply services upto a value of ₹ 6 lakh in current FY. If the
value of services supplied exceeds ₹ 6 lakh, he becomes ineligible for the
composition scheme for goods and has to opt out of the same.
Eligible persons-Supplier of Services other than Restaurant services

Further, suppliers of services whose aggregate turnover in the preceding

financial year is upto `50 lakh are eligible to opt for composition scheme
u/s 10(2A).

The option lapses wef the day on which

AT in FY > above limits

Goods • Turnover upto `1.5 Cr /`75

lakh in case of few states

Services • Turnover upto `50 lakh

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Composition Levy

b) How will the aggregate turnover be computed for the purpose of

composition?
Aggregate turnover will be computed on the basis of turnover on an all India
basis and will include value of all taxable supplies, exempt supplies and
exports made by all persons with same PAN but would exclude inward supplies
under reverse charge as well as central, State/Union Territory and Integrated
taxes and cess.

Aggregate Turnover PAN India Basis = [Taxable supplies +Exempt

Supplies +Exports+ ISS]
Excludes: GST & Compensation Cess, Inward RCM supplies, 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

Note: Aggregate turnover includes value of supplies made by

registered person from 1 April of FY upto the date when he becomes
liable for registration under this Act.

c) What is the tax rate applicable under composition scheme?

A registered taxpayer, who is registered under the Composite Scheme will pay
tax at following prescribed percentage on turnover in the State or UT.

Sr No Category of registered person CGST SGST Total Rate of

Rate Rate Tax
1. Manufacturers other than who 0.5% 0.5% 1%
are ineligible (ie ice cream, pan
masala, tobacco & aerated
waters)
2. Restaurant not serving alcohol 2.5% 2.5% 5%
3. Other suppliers of goods 0.5% 0.5% 1%
4. Supplier of services 3% 3% 6%
It may be noted that composition supplier is liable to pay tax under
RCM if applicable to him u/s 9(3) and 9(4) at applicable rates.

Example 1
Taxpayer ‘Bholaram’ is a trader, who has opted for composition levy for
goods, of both taxable and exempted goods. It has one retail showroom –
A1 in Punjab and another retail showroom – A2 in Rajasthan, both selling
taxable as well as exempted goods. Total turnover (including taxable and
exempted goods) of the two showrooms in last FY was ₹ 115 lakh (₹ 85

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 Composition Levy

lakh + ₹ 30 lakh). Turnover of showrooms A1 and A2 in the first quarter of

current financial year is ₹ 35 lakh [A1 - ₹ 15 lakh (₹ 5 lakh from sale of
taxable goods and ₹ 10 lakh from sale of exempted goods) and A2 - ₹ 20
lakh (₹ 10 lakh from sale of taxable goods and ₹ 10 lakh from sale of
exempted goods)]. Compute the amount payable under composition levy by
‘Bholaram’.

Example 2
Taxpayer ‘Padmavati’ is a salon stylist, who has opted for composition levy for
services, having one branch – B1 in Vasant Kunj, Delhi and another branch –
B2 in Gurgaon, Haryana. Total turnover of two branches in last FY was ₹ 45
lakh (₹ 25 lakh + ₹ 20 lakh). Turnover of branches B1 and B2 in the first
quarter of current financial year is ₹ 5 lakh and ₹ 10 lakh respectively.
Compute the amount payable under composition levy under section 10(2A) of
the CGST Act by ‘Padmavati’.

d) How Turnover in State or UT is computed under composition levy?

Tax at fixed rate is payable under section 10(1) or 10(2A) of CGST Act
(composition scheme) on ‘turnover in a State or turnover Union Territory’.

‘Turnover in State’ means the aggregate value of all taxable supplies

(excluding the value of inward supplies on which tax is payable by a person on
reverse charge basis) and exempt supplies made within a State by a
taxable person, exports of goods and / or services and inter-State
supplies of goods or/ and services made from the State by the said
taxable person but excludes:
 CGST/SGST/IGST/Compensation Cess
 Supplies from the first day of April of a financial year up to the date
when such person becomes liable for registration under this Act (till
taxable person crosses exemption limit of Rs. 10/20/40 lakhs)
 Interest on loans/deposits.

Note: In case of traders however, exempt supplies shall not be

considered.

e.g.

A photographer ‘Champak’ has commenced providing photography services in

Delhi from April this year. His turnover for various quarters till December is as
follows:
April-June ₹ 20 lakh
July-Sept ₹ 30 lakh
Oct-Dec ₹ 20 lakh
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Composition Levy

In the given case, since Champak has started the supply of services in the
current financial year, his aggregate turnover in the preceding FY is Nil.
Consequently, in the current FY, he is eligible for composition scheme for
services. He becomes eligible for the registration when his aggregate turnover
exceeds ₹ 20 lakh. While registering under GST, he opts for composition
scheme for services.

For determining his turnover of the State for payment of tax under
composition scheme for services, turnover of April-June quarter [₹20 lakh]
shall be excluded as the value of supplies from the first day of April of a
financial year up to the date when such person becomes liable for registration
under this Act are to be excluded for this purpose.

On next ₹ 30 lakh [turnover of July-Sept quarter], he shall pay tax @ 6% [3%

CGST and 3% SGST], i.e. CGST ₹ 90,000 and SGST ₹ 90,000.

By the end of July-Sept quarter, his aggregate turnover reaches ₹ 50 lakh*.

Consequently, his option to avail composition scheme for services shall lapse
by the end of July-Sept quarter and thereafter, he is required to pay tax at the
normal rate of 18%. Thus, the tax payable for Oct-Dec quarter is ₹ 20 lakh ×
18%, i.e. ₹ 3,60,000.

*while computing aggregate turnover for determining Champak’s eligibility to

pay tax under composition scheme, value of supplies from the first day of April
of a financial year up to the date when such person becomes liable for
registration under this Act (i.e. turnover of April-June quarter), are included.

e) Who are not eligible to opt for composition scheme?

Non eligible persons in case of composition scheme for goods:

Following persons are not allowed to opt for the composition scheme:
 Suppliers whose aggregate turnover in the PFY crossed the prescribed
limit;
 Exclusive supplier of services other than Restaurant services
 Supplier of goods who also provide marginal services other than
Restaurant exceeding the prescribed limit
 Supplier supplying non-taxable goods
 Persons making any inter-State outward supplies of goods
 Suppliers making any supply of goods through an electronic commerce
operator who is required to collect tax at source under section 52
 a manufacturer of Ice cream and other edible ice, whether or not containing
cocoa, Pan masala, Tobacco and manufactured tobacco substitutes,
manufacturers of aerated waters

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 Composition Levy

 A casual taxable person or a non-resident taxable person;

Note: There is no restriction on procuring goods from inter-state

suppliers by persons opting for the composition scheme. Further
inward and outward supply of services interstate is also allowed in
case of marginal services

Non eligible persons in case of composition scheme for Services:

Following persons are not allowed to opt for the composition scheme:
 Suppliers whose aggregate turnover in the PFY crossed the prescribed
limit;
 Suppliers of goods providing marginal services and eligible for composition
u/s 10(1)
 Supplier supplying non-taxable supply
 Persons making any inter-State outward supplies of goods/services
 Suppliers making any supply through an electronic commerce operator who
is required to collect tax at source under section 52
 Supplier of Ice cream and other edible ice, whether or not containing
cocoa, Pan masala, Tobacco and manufactured tobacco substitutes, supplier
of aerated waters and supplier of notified services
 A casual taxable person or a non-resident taxable person;

f) What are the other conditions and restrictions subject to which a

person is allowed to avail of composition scheme?
The person exercising the option to pay tax under section 10 shall comply with
the following other conditions: -
 The person should not be engaged manufacture of notified goods or should
not be CTP/NRTP
 He shall mention the words “composition taxable person, not eligible to
collect tax on supplies” at the top of the bill of supply issued by him; and
 He shall mention the words “composition taxable person” on every notice or
signboard displayed at a prominent place at his principal place of business
and at every additional place or places of business.
 All registered persons having the same Permanent Account Number (PAN)
have to opt for composition scheme. If one such registered person opts for
normal scheme, others become ineligible for composition scheme.
 The goods held in stock by him have not been purchased from URD and
where purchased he pays tax under RCM u/s 9(4) (This condition is mainly
for builders/promoters who opt for composition scheme)
 He pays RCM tax on inward supplies as applicable u/s 9(3)/9(4)

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Composition Levy

g) Is the scheme optional or mandatory? When a person can opt for it?
The scheme is optional and the eligible person opting to pay tax under this
scheme can pay tax at a prescribed percentage of his turnover every
quarter, instead of paying tax at normal rate.

URD opting - Any person who is not registered and applies for registration
may give an option to pay tax under composition levy in Part B of the
registration form, viz., FORM GST REG-01. The same shall be considered as
an intimation to pay tax under Composition Levy. Such intimation shall be
considered only after the grant of registration to the applicant and his option
to pay tax under composition levy shall be effective from the date
from which registration is effective.

RD opting- A registered person who opts to pay tax under composition levy
scheme shall electronically file an intimation in prescribed form on the
Common Portal [www.gst.gov.in], prior to the commencement of the FY
for which said option is exercised. He shall also furnish the statement in
prescribed form in accordance with CGST Rules within 60 days from the
commencement of the relevant FY. Any intimation in respect of any place of
business in a State/UT shall be deemed to be an intimation in respect of all
other places of business registered on the same PAN. The option to pay tax
under composition levy shall be effective from the beginning of the FY.

Further in case of multiple registrations in different states the option to pay

tax under composition scheme will have to be exercised for all States
(PAN India base).

h) When will a person opting for composition levy pay tax?

A person opting for composition levy will have to pay tax on quarterly basis
before 18th of the month succeeding the quarter during which the supplies
were made. Further, such persons requires to file a return annually (will be
discussed in topic of Returns).

i) Can a person who has opted to pay tax under the composition scheme
avail Input Tax Credit on his inward supplies? Can buyer of
composition supplier avail ITC?

No. A taxable person opting to pay tax under the composition scheme
is out of the credit chain. He cannot take credit on his input supplies.

However, when a person switch over from composition scheme to

normal scheme, (e.g. due to crossing of turnover above prescribed limit

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 Composition Levy

ITC in respect of the stock of inputs and inputs contained in semi-

finished or finished goods held in stock by him and on capital goods
held by him on the date of withdrawal allowed. (will be discussed in
topic of Registration).

As the composition dealer cannot collect tax paid by him on outward

supplies from his customers, the customers cannot avail ITC.

j) Can a person paying tax under the composition scheme issue a tax
invoice under GST and collect tax?

No. Taxable person opting for the composition scheme shall not collect tax
from the recipient on supplies made by him. It implies that a composition
scheme supplier cannot issue a tax invoice. He can issue a “bill of supply”
in lieu of tax invoice.

k) A person availing composition scheme during a financial year crosses

the prescribed turnover say in December/ceases to satisfy the
eligibility condition? Will he be allowed to pay tax under composition
scheme for the remainder of the year i.e. till 31st March?
No. The option to pay tax under composition scheme lapses from the day on
which his aggregate turnover during the financial year exceeds the specified
limit/condition broken. He is required to file an intimation for withdrawal from
the scheme within seven days from the day on which the threshold limit has
been crossed/any other condition is broken. Such person is required to pay
tax and issue tax invoice for every taxable supply made thereafter. The
effective date of withdrawal from the composition scheme shall take effect
shall be the date indicated by him in his intimation but not prior to
commencement of FY in which such intimation is filed.

l) Can a person paying tax under composition levy, withdraw voluntarily

from the scheme? If so, how?
Yes. The registered person who intends to withdraw from the composition
scheme can file a duly signed or verified application in prescribed form. Every
person who has filed an application for withdrawal from the composition
scheme, may electronically furnish, a statement in prescribed form containing
details of the stock of inputs and inputs contained in semi-finished or finished
goods held in stock by him on the date of withdrawal. The effective date of
withdrawal from the composition scheme shall take effect shall be the date
indicated by him in his intimation but not prior to commencement of FY in
which such intimation is filed.

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Composition Levy

m) What are the consequences in case of irregular availment of the

composition scheme?
 If a taxable person has paid tax under the composition scheme though he
was not eligible for the scheme, the person would be liable to penalty and
the provisions of section 73 or 74 of the CGST Act shall be applicable for
determination of tax and penalty.
 Further, where the proper officer has reasons to believe that the registered
person was not eligible to pay tax under composition levy or has
contravened the provisions of the Act/provisions of this Chapter, he may
issue a show cause notice to such person in prescribed form. Upon receipt
of the reply to such show cause notice from the registered person in
prescribed form, the proper officer shall issue an order in prescribed form
either accepting the reply, or denying the option to pay tax under
composition levy from the date of the option or from the date of the event
concerning such contravention, as the case may be.
 In case of denial of option to pay tax under composition levy by the tax
authorities, the effective date of denial shall be from a date including any
retrospective date as may be determined by tax authorities.

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3. PRACTICE PROBLEMS

Problem 1
Whether following persons can opt for composition scheme u/s 10(1)
a) Raju a trader is selling tobacco and pan masala from his shop at Delhi. His
turnover for PFY is <`1.5 crore.
b) A registered in Rajasthan, who is selling goods from Rajasthan to Gujrat.
Turnover of Mr. A is `99 Lakh in the preceding financial year. Whether Mr. A is
eligible for Composition? Whether your answer will change if Mr. A is making
purchase from Gujrat and selling goods in Rajasthan itself?
c) Mr. X is selling goods from through e commerce operator. Turnover of
preceding financial year is `71 lakh.
d) Mr. Y has obtained a registration of casual taxable person to make a display in
exhibition. His turnover from the exhibition is `15 lakh.
e) Mr Z from Maharashtra is a seller of goods and also provides some incidental
consultancy services in connection with the goods.
 His turnover from sale of goods for PFY is `90 lakh and that from consultancy
services is `8 lakh.
 His turnover from sale of goods for PFY is `90 lakh and that from consultancy
services is `10 lakh.
 His turnover from sale of goods for PFY is `1.4 crore lakh and that from
consultancy services is `13 lakh.
f) Mr P from Arunachal Pradesh, is a trader of goods and his turnover for PFY is
`77 lakh

Problem 2
Mr. Ajay has a registered repair centre where electronic goods are repaired /
serviced. His repair center is located in State of Rajasthan and he is not
engaged in making any inter-State supply of services. His aggregate turnover in
the preceding financial year (FY) is ₹ 45 lakh.
With reference to the provisions of the CGST Act, examine whether Mr. Ajay can opt
for the composition scheme under section 10(1) &10(2) of the CGST Act in the
current financial year? Or whether he is eligible to avail benefit of composition
scheme under section 10(2A)? Considering the option of payment of tax available
to Mr. Ajay, compute the amount of tax payable by him assuming that his
aggregate turnover in the current financial year is ₹ 35 lakh. Will your answer be
different if Mr. Ajay procures few items required for providing repair services from
neighboring State of Madhya Pradesh?

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Composition Levy

Problem 3
M/s United Electronics, a registered dealer, is supplying all types of electronic
appliances in the State of Karnataka. Their aggregate turnover in the preceding
financial year by way of supply of appliances was ₹ 120 Lakh.
The firm also expects to provide repair and maintenance service of such appliances
from the current financial year.
With reference to the provisions of the CGST Act, examine:
(i) Whether the firm can opt for the composition scheme, under section 10(1)
and 10(2) of the CGST Act, for the current financial year, as the turnover may
include supply of both goods and services?
(ii) If yes, up to what amount, the services can be supplied?

Problem 4
Discuss the Merits and demerits of composition scheme

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