Section 10 and its related draft composition rules of CGST bill talks about the composition levy. The basic principle underlying the composition scheme is, to minimize the burden of compliance for small taxpayers. There are around 8 millions taxpayers that are expected to be migrated from the current laws into the GST regime, however many of these taxpayers will have limited turnover and may not have requisite resources and expertise to comply with all the procedure envisaged under the GST. Under the proposed GST regime, a small supplier of goods can opt to pay the GST levy under composition scheme. Important provisions regarding composition levy is as follows.
Basic Conditions for Composition Levy
1. He shall be a registered person under GST
2. His aggregate turnover in the preceding financial year should be less than INR 50 lakhs.
Prohibited Activities under Composition Levy
1. Supply of Services: He is not engaged in the supply of services other than supplies referred to in paragraph 6(b) of
2. Goods not Covered under GST: He is not engaged in making any supply of goods which are not leviable to tax under this
Act. Example: Liquor
3. Inter-State Supply: He is not engaged in making any inter-state outward supplies of goods.
4. He is not engaged in making any supply of goods through and electronic commerce operator who is required to collect tax
at source under section 52.
5. He is not a manufacturer of such goods as may be notified by the Government on recommendations of the Council.
Display of Composition Levy
1. 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.
2. He shall mention the word “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.
Advantages of Composition Scheme
Limited Compliance : A normal taxpayer is required to submit a minimum of 3 returns on monthly basis and 1 yearly consolidated retrun. Thus, in a complete year he is required to furnish 37 returns to the government. Non-compliance of which will attract penalty. Further to furnish these returns, a small supplier is bound to maintain detailed books of accounts and keep records of all transactions along with supporting documents. However, under the composition scheme, taxpayer is required to furnish quarterly return and annual return only,thus he need not worry on record keeping and can focus on his business more rather than being occupied in compliance procedures.
Limited Tax Liability : Another benefit of getting registered under the composition scheme is that the tax rate for such taxpayer is nominal under the Model GST Law. Tentatively this rate is expected to be not less than 1% for manufacturer and 0.5% in any other cases instead of a standard reate of 18%
Level Playing Field : Just because a taxpayer has chosen to get registered under the composition scheme, doesn’t mean losing the competitiveness. Since the profit margin of a supplier in composition scheme is more than a large taxpayer, such supplier can outplay the economies of scale of large enterprises by offering competitive prices and key hold the local market of supply. Thus, composition scheme ensures the interest of small suppliers carrying out intrastate transactions and provides with a sustainable and competitive supply market.
Drawbacks of Composition Levy
Limited Territory for Business : A taxpayer registered under the composition scheme is barred from carrying out interstate transactions. Thus, he is compelled to carry only intra-state transactions and limits the territory of his business. Furthermore, this section is in contradiction of “One nation One tax” as this section limits the benefit only to the boundry of the state.
No Credit of Input Tax : There has been no provision of input credit on B2B model, such person will not be allowed the credit of input tax paid from the output liability. Also, the buyer of such goods will not get any credi of tax paid, resulting in price distortion and cascading. This will further result into a loss of businesss as a buyer registered as a normal taxpayer will not get any credit when buying from a person registered under composition scheme. Eventually such buyers might avoid purchases from a taxpayer under composition scheme.
No Collection of Tax : Though the rate of composition tax is kept very nominal at 1% or 2.5%, a taxpayer under composition scheme is not allowed to recover such tax from his buyer, as he is not allowed to raise a tax invoice. Consequently, the burden of such tax is kept on the taxpayer himself and this has to be paid out of his own pocket. Thus, the fundamental principle of limited compliance and tax burden on small taxpaer is defeated here.