COMPOSITION SCHEME – A PUZZLE UNDER GST

INTRODUCTION

Indirect tax is generally perceived as a
transaction level tax, i.e., each transaction is taxed and assessed separately.
It is possible that a person may be liable to pay tax on certain transactions,
while other transactions may be exempted from tax or excluded from the levy
itself. Therefore, in order to ensure that the taxes are discharged properly,
the businessman needs to review each transaction and check for taxability
thereof. Once the taxability is looked into, the next step is reporting the
transaction, claiming input tax credits, making payment of taxes, etc.

The above process in the context of the Goods
and Services Tax (GST) has been perceived in the form of filing GSTR 1 (details
of outward supplies), GSTR 2 (details of inward supplies), GSTR 3 (monthly
return and payment of taxes) and GSTR3B (which was introduced as a stop-gap
measure in place of GSTR 2 and 3 but is a statement for claiming input tax
credit and making payment of taxes for a particular month).

Even without going into the specifics of the
above process, it is apparent that the same is rigorous and exhaustive in
nature and, most importantly, unyielding for a small businessman having small
value transactions in huge volume (typically the unorganised sector).

Considering the time and resources involved in
the above process, GST has been perceived as a hindrance to ease of doing
business because at times it is possible that the time spent on complying with
the law is more than the time spent on doing business itself, which would
perhaps render the entire activity redundant.

It is for this reason that like the VAT regime,
even the GST law provides an option to small taxpayers to opt for the
composition scheme and pay a lump sum tax on supplies made based on turnover
without claiming input tax credit and minimum compliances. In this article, we
shall discuss the salient features of the composition scheme and the various
amendments since the introduction of the law. Before proceeding further,
readers may note that the provisions relating to taxation under the composition
scheme have undergone multiple amendments and we have tried to cover the same
in this article.

STATUTORY PROVISIONS

1.         The
levy of GST is u/s 9 of the CGST Act, 2017 which applies to all suppliers
making taxable supplies. However, an exception is carved out for specific cases
u/s 10 which provides that any registered person, whose aggregate turnover in
the preceding financial year did not exceed Rs. 50 lakhs (which can be
increased up to Rs. 1.50 crores vide notification) may, instead of paying tax
u/s 9, i.e., under the normal scheme, opt to pay tax at such rate as may be
prescribed.

2.         The
turnover limit for opting for composition scheme, as notified from time to
time, is tabulated below for reference:

However, if multiple registrations are obtained
for a single PAN, the option to pay tax u/s 10 will have to be exercised for
all such registrations. It cannot be exercised only for selective
registrations. Further, the following class of registered persons are not
eligible to opt for paying tax u/s 10:

(i) A registered person engaged in the supply of
services other than those referred to in entry 6(b) of Schedule II, 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;

(ii) The registered person should not be engaged
in making supply of goods which are not liable to tax under this Act;

(iii) The registered person should not be
engaged in making inter-state supply of goods or services;

(iv)       The
registered person should not be engaged in supplying goods through e-commerce
operators required to collect tax at source u/s 54;

(v)        The
registered person should not be a manufacturer of notified goods;

(vi)       The
registered person should not be a casual taxable person or a non-resident
taxable person (condition inserted by Finance Act, 2019).

From the above it is apparent that the
composition option was introduced only for a supplier of goods. However, this
resulted in specific difficulties where a supplier was pre-dominantly engaged
in supply of goods, but occasionally undertook supply of services as well. For
instance, a trader in goods received commission for a one-off transaction.
Under the above conditions, since this would result in the registered person being
engaged in supply of services, he would become ineligible to continue under the
composition scheme requiring him to withdraw and pay tax under the normal
scheme. To overcome such difficulties, a second proviso to section 10(1) was
inserted w.e.f. 1^st February, 2019. The proviso provided that a
supplier of goods, opting for the composition scheme, may supply services
provided that the value of supply of service does not exceed 10% of turnover in
a state / UT in the preceding financial year, or Rs. 5 lakhs, whichever is
higher.

Further, vide Finance Act, 1994, the option to
pay tax under composition has been extended to suppliers of services vide
insertion of sub-section (2A). The said section provides an option to
suppliers, whose aggregate turnover was less than Rs. 50 lakhs in the preceding
financial year to pay tax under composition, provided they satisfy the
conditions prescribed therein. The conditions are similar to (b) to (f) as
stated above, with the only change being that the conditions apply for services
also.

The scope of ‘aggregate turnover’ referred to in
section 10 is to be derived from its definition u/s 2(6) which is defined to
mean aggregate value of all taxable supplies, exempt supplies, export of goods
or services or both, and inter-state supplies of a person having the same PAN
to be computed on an all-India basis, but excluding GST and cess. This resulted
in a lot of confusion because all small businesses which had opted for the
composition scheme would have interest income, which is treated as exempt
service under GST in view of entry 27 of notification 12/2017 – CT (rate) dated
28^th June, 2017, resulting in apparent non-satisfaction of the
condition prescribed u/s 10. To resolve this conflict, CBIC clarified vide
Removal of Difficulty Order No. 01/2017 – CT dated 13^th October,
2017 that while determining aggregate turnover, the value of supplies shall not
include exempt supply of services provided by way of extending deposits, loans
or advances insofar as the consideration is represented by way of interest /
discount. Further, the Finance Act, 2019 also amended section 10 by inserting
an Explanation to that effect.

The rates notified u/s 10 since the introduction
of GST are tabulated for reference:

It is not mandatory for a registered person
satisfying the above conditions to pay tax under composition. For this reason,
it has been provided that any person, including a registered person opting to
pay tax u/s 10, shall need to give intimation in the prescribed format
regarding the exercise of the said option. The same is tabulated as follows:

A person opting to pay tax under the composition scheme in form GST
CMP-01 shall also be required to declare the stock on the date of opting for
composition levy in form GST CMP-03, while a person opting to pay tax in form
GST CMP-02 shall make a declaration in form ITC-03 within 180 days from the
date on which such person commences to pay tax u/s 10.

The purpose behind GST CMP-03 as well as GST ITC-03 is to ensure that a
person opting to pay tax u/s 10 of this Act should not have claimed the benefit
of taxes paid on inputs / capital goods lying in stock on the date of opting
for the composition scheme, and for this reason such person is required under
the Act to pay back the benefit taken under the earlier regime / existing
regime either from the balance in the credit ledger or by making a deposit in
the cash ledger. It is also provided u/s 18 that the balance lying in the
credit ledger after making the above reversal shall lapse. Further, Rule 5 also
imposes additional conditions, namely:

(a) In case of registered person opting to pay tax u/r 10(3), the goods
held in stock on the appointed day should not have been purchased in the course
of inter-state trade or commerce / imported / received from branch outside the
state or from an agent / principal outside the state;

(b) The goods held in stock should not have been purchased from
unregistered persons, and if purchased from unregistered persons, the
applicable tax u/s 9(4) should have been paid;

(c) The person opting to pay tax u/s 10 shall have to comply with the
provisions of section 9(3) and 9(4), i.e., the provisions relating to payment
of tax under reverse charge shall continue to apply on them;

(d) He should not have been engaged in the manufacture of notified goods
during the preceding financial year;

(e) 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;

(f) He shall mention the words ‘composition taxable person’ on every
notice / signboard displayed at a prominent place at his principal place of
business and every additional place or places of business.

Once the option to pay tax u/s 10 has been
exercised, the same shall remain valid as long as the registered person
satisfies all the conditions mentioned in section 10 and the corresponding
Rules. Similarly, once the option is exercised, the registered person shall
continue to pay the tax under this scheme and there shall be no need to file
fresh intimation every financial year.

The important conditions to be satisfied are
that a person opting to pay tax u/s 10 cannot collect tax from the customer and
cannot claim input tax credit, including credit of tax paid u/s 9(3) and 9(4),
i.e., RCM. Further, for all supplies made by a person paying tax u/s 10, a bill
of supply needs to be issued containing the particulars prescribed in Rule 49
of the CGST Rules, 2017.

However, once the registered person ceases to
satisfy the conditions prescribed in section 10, he shall start discharging tax
u/s 9 from the day he ceases to satisfy the condition and issues tax invoices
for all supplies made after that
day. In addition, he shall also give intimation in GST CMP-04 for withdrawal
from the scheme within seven days. A person paying tax u/s 10 also has an
option to voluntarily withdraw from the composition scheme even if all the
conditions continue to be satisfied by giving prior intimation in GST CMP-04.

Similarly, even the Proper Officer can deny the
option to pay tax u/s 10 if he has reasons to believe that the registered
person is not eligible to opt for the scheme. However, before denying the
benefit, a notice has to be issued in GST CMP-05 asking such taxable person to
show cause within 15 days as to why the option should not be denied. In such
cases, the registered person shall be required to reply in GST CMP-06, post
which the Proper Officer shall issue an order in GST CMP-07 within a period of
30 days of receipt of such reply, either accepting or denying the option to pay
tax u/s 10 from the date of option or from date of occurrence of event of
contravention, as the case may be.

Any person who opts out of the composition
scheme, either voluntarily or on account of order passed in GST CMP-07, shall
file a declaration in GST ITC-01 to claim the benefit of tax paid on inputs and
capital goods held on the date when such person switched out of the composition
scheme. However, credit of such inputs / capital goods shall not be eligible
after the expiry of one year from the date of issue of tax invoice relating to
such supply. Further, in case of credit in respect of capital goods, the same
shall be allowed after reducing the tax paid by 5% per quarter of a year or
part thereof from the date of invoice / such other documents on which the
capital goods were received by the taxable person. The declaration in GST
ITC-01 has to be filed within 30 days from the date of cessation of payment of
tax u/s 10.

COMPLIANCES

At the time of introduction of GST, a person
paying tax u/s 10 was required to file quarterly returns in GSTR 4 which
contained the details of inward and outward supplies received by such
composition dealers. However, w.e.f. 23^rd April, 2019 a person
paying tax u/s 10 is required to file two returns:

(I)        Quarterly
statement in GST CMP-08 containing details of payment of self-assessment tax by
the 18^th day of the month succeeding such quarter; and

(II)       Return
for financial year in GSTR-4 by the 30^th day of April following the
end of such financial year.

A person paying tax u/s 10 has to compulsorily
discharge his tax by debiting balance from cash ledger only.

FAQs

Is a taxable person opting to pay tax u/s 10
required to discharge tax under any one of the three options or all the three
options can be opted for simultaneously?

There are different rates prescribed for payment
of tax by a person opting for composition on the basis of whether the supplier
is a manufacturer, or supplier of service covered under schedule II, entry
6(b), or any other supplier. The issue remains that there can be instances
where a supplier eligible and exercising the option to opt for composition is
getting covered under multiple rate entries. The question therefore arises
whether the person will have to opt for residuary entry or opt for specific
entry for each transaction.

One possible view is to say that GST, being a
transaction tax, each transaction needs to be analysed separately and tax has
to be paid depending on the nature of the transaction. Therefore, for a
supplier who is engaged in trading as well as manufacturing activity, for
supplies made as manufacturer he should pay tax at the rate prescribed for
manufacturer, and for other supplies (pure trading) he should pay tax under the
residuary entry.

Are there notified goods for which option to pay
tax u/s 10 is not available?

The option to pay tax u/s 10 is not applicable
for the  manufacturer of specified
products, such as ice-cream and other edible ice whether or not containing
cocoa falling under entry 2105 00 00, pan masala falling under entry
2106 90 20 and tobacco and manufactured tobacco substitutes falling under
chapter 24.

What will be the implications if a person,
though not eligible to pay tax u/s 10, does so?

There can be instances where a person not
eligible to opt for payment of tax u/s 10 opts to do so. For such cases it has
been provided that in case a person wrongly opts to pay tax u/s 10, the amount
of tax which would have been payable u/s 9 would be liable to be recovered from
such person notwithstanding the fact that the tax has already been paid u/s 10.
In addition, such person shall be also liable for penalty and the provisions of
sections 73 and
74 shall apply mutatis mutandis for determination of tax and penalty.