Composition Levy – Why, Present Regime, Applicability, Restrictions

Composition Levy – Recently Cabinet approved GST bills and we expect that GST is roll out from 1st July 2017. In this article you may find complete information regarding Composition Levy like – Why Composition Levy is introduced in GST Regime, what is present regime, applicability of Composition Levy etc.. Now check more details from below…..

Small taxpayers with an aggregate turnover in the preceding financial year not exceeding up to Rs 1.5 Crore are eligible for composition levy. Under the scheme, a taxpayer has to pay tax as a percentage of his turnover in a state or union territory during the year without the benefit of Input Tax Credit (ITC). The rate of tax for CGST and SGST under Composition levy scheme is as under:

  • Manufacturer = 2% (1% CGST and 1% SGST)
  • Trader/Supplier/Vendor of Goods = 1% (0.5% CGST and 0.5% SGST)
  • Restaurant Service only = 5% (2.5% CGST and 2.5% SGST)

A Manufacturer, Trader/Supplier/Vendor of Goods who has opted for composition levy cannot collect any tax from the recipient and cannot issue a Taxable Invoice as such. Instead of Invoice, such Taxpayer has to raise a Bill of Supply. A small taxpayer may not opt for composition levy even if his aggregate turnover in a financial year is within Rs 1.5 Crore. No service other than Restaurant Services is eligible for composition levy.

Composition Levy – Why

Indian Business Canvas – Unorganized Sector – Small / Not So Educated Entrepreneurs (Fundamental Right to do business as guaranteed under the Constitution of India (Article 14-19))

Tax Payer Point of View – Legacy of Cash Transactions – Not capable of keeping elaborate records – Easy Compliance

Tax Collector Point of View – Cost of collection / Administration, Expanding Tax Base

Solution – Composition Scheme, the registered person has the option to pay tax at a specified % of the turnover, without entering the credit chain (applicable only for persons with turnover up to a certain threshold limit)

Composition Levy – Present Regime

  • No provisions for composition scheme in Excise Duty Law
  • No composition scheme in Service Tax Law at present i.e. after negative list ( Before 01.07.2012 – Optional Scheme for Works Contract Service – Work Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 Notification 32/2007 w.e.f. 01-06-2007
  • Sales Tax – provisions are present in VAT Laws of major states
    • State Subject – Vary from state to state
    • Turnover limit and the tax rate (1% to 4%) – Not even in some state
    • Typical Business – Small Retailers, Restaurants, Hotels, Caterers, Bakery, Canteens, Clubs
    • Existing Scheme – Main Restrictions
    • Can’t collect tax from customers – Continued in GST
    • Can’t claim input tax deduction on purchases – Continued in GST
    • Can’t do interstate procurement of goods – Relaxed in GST
  • Optional Scheme for registered taxable person
  • Permission from the proper officer of the Central or State Government
  • Pay an amount in lieu of tax; minimum rate to be;
    • 2.5% of the turnover in case of manufacturers;
    • 1% of the turnover in other cases of the turnover in a State during the year
  • No tax to be collected (to be borne by the person out of the sales proceeds)
  • No input Tax Credit available

Applicability

Applicable to a registered Taxable Person⇒ Eligible even if registered voluntary
Having Aggregate Turnover < Rs. 1.5 crore (Across all Business Verticals and across the country for each PAN number)⇒ Aggregate Turnover = Value of all supplies (taxable + non-taxable + exempt + exports) – Value of (RCM Supplies + Inward Supplies) – taxes under GST

RCM supplies – Value of supplies on which tax is levied on reverse charge basis

Needs to make an application (Getting a permission)⇒ Even in Composition under the Current Vat Regime, advisable to make application
Would need to pay taxes at usual rates on RCM, if applicable Reverse Charge Mechanism would apply even in such persons

Restrictions / Limitations

No Composition Option in the following specific cases

  • Services Supplied
    • Any / all services (includes goods treated as supply of services by Schedule II)
  • Goods Supplied
    • Non Taxable Goods
    • Inter-state outward supplies
    • Through e-commerce operators(Section 56)
    • Notified goods manufactured by the supplier

All registered taxable persons, having the same PAN as held by the said taxable person, has to opt to pay amount in lie of tax under the scheme

If permission granted to a registered taxable person stands withdrawn from the day on which his aggregate turnover during a financial year exceeds 50 lacs

Easy of doing business

Quarterly Returns(GSTR-4) – within18 days after end of each quarter – Section 34(2) As against 3 to 4 returns monthly
Lower rate of Tax Specified at not less than 1% (2.5% in case of manufacturer)- Expected to be in range of 1% to 3%
In place of a Tax Invoice, the document required is a Bill of Supply – Section 28(3)(b) Convenient since details required are not as much

 

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