All about composition levy in GST

In the proposed GST law it special provision is kept in order to minimize the hassle of small and medium dealers and retailers by providing option of composition scheme to them. Composition scheme is like dealer has to pay only lump sum tax to government and remain out of GST chain. In today’s article lets understand and analyze all about composition levy in GST.

All about composition levy in GST

Section 10(1) of The CGST Act says that,

Notwithstanding anything to the contrary contained in this Act but subject tothe 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 Seventy Five lakhs 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
With a careful reading of section 10(1) it is clear that if person has a turnover less than Rs. 75 Lakhs in previous financial year then only he can opt for composition levy in GST. This option is voluntary. This scheme is not applicable for service providers except restaurant service provider.
in case of manufacturers tax rate is 1%,
in case of specified dealer (Restaurant service) tax rate is 2.5%
and in case of other dealer like traders, retailers tax rate is 0.5%
Please note that above tax rates are in CGST Act, hence same rates will be also be applicable in SGST Act. hence effective levy will be double i.e. 2%, 5% and 1% respectively for manufacturers, restaurant service providers and traders.
Section also says that benefit of this section is available subject to terms and conditions, not lets look at the T&C of the section.
  1. Service providers are not allowed to opt composition levy in GST.
  2. he is not engaged in making any supply of goods which are not leviable to tax under this Act.
  3. Dealer is not engaged in the inter state outward supply of goods. It is clear from the language that inter state outward  supply is only restricted however inter state inward supply is allowed.
  4. E-Commerce operator who is required to collect tax under the act is not allowed to opt this scheme.
  5. He is not manufacturer of specified goods i.e ice-cream and tobacco makers.

Other conditions specified in Composition Rules

  1. Person should not be casual taxable person.
  2. On the appointed date goods held in stock by the dealer should not contain goods purchased in inter state trade or imported from outside India or received from branch office situated outside state or from agent situated outside state.
  3. Goods held in stock should not be purchased from unregistered supplier or if purchased tax is to be paid by him under reverse charge basis.

Analysis of composition scheme

If we opt for composition scheme then input credit is not allowed and on the outward supply tax at 1%, 2% or 5% is to be paid depending the activity. Hence at this stage we have to decide when composition scheme is beneficial. Lets look at below comparison

composition levy in GST
Analysis Composition scheme in GST

From the above comparison (assumed trader) it can be analyzed that when the goods are purchased from a dealer who has not opted and composition scheme and if the profit margin is high then composition scheme is monetarily  beneficial, general these can be situation in the retail business. In normal scheme effective GST from our pocket is on our profit part only. From the above analysis it is to be noted that when profit margin is not such high then normal scheme will be useful. Needless to say tax cost is not the only parameter to take decision about composition scheme.

Pros of composition levy in GST

  1. One of the best benefit is to be remain out of filing return every month, unlike normal dealer composition dealer has to file return only quarterly before 18th date of next month of quarter.
  2. format for filing return is also very simple compared to composite dealer, only gross sales is to be provided, no individual bill sales details are to be given.

Cons of composition levy in GST

  1. Remain out of GST credit chain, since it is not allowed to take input credit it becomes cost to dealer.
  2. Interstate outward supply of goods is not allowed, this is one of the biggest limitation of the scheme which restrict the dealers to opt for the scheme.
  3. Practically situation may become such that dealers who have not opted the scheme will avoid purchase from composition dealer since no credit will be available to him, which may hamper the business of composition dealer.

Registration process

Registration is to be made on the common portal of GST in form GST REG – 01. While making application we has to check on the option composition scheme. Any person who has been granted registration on a provisional basis and who opts to pay tax under this scheme shall electronically file an intimation in FORM GST CMP-01. Registration once granted will be valid till conditions mention above are complied with. Check below screen while registration. At present composition scheme is to be opted on or before 21st July – 2017.

composition levy in GST
opting composition scheme in registration

Check out video how to get new GST number for step by step guide

Filing of Return

As per section 39(2) of the CGST Act, every person who has opted for the composition scheme u/s 10 has to furnish the return for every quarter within 18 days of the end of such quarter in form GSTR- 3.

Thats all we know

So this is all about composition scheme in GST regime. You can share your thoughts and queries in the comment section below, we love to answer your questions.

For rules refer

Author: smit shah

I am a passionate Chartered Accountant having deep interest in taxation with combination of blogging.

Leave a Reply