Easiest way to Learn Composition Levy in GST

You might be thinking of starting a business and as you know, in many cases, you will be required to have a GST registration. Many wholesalers also pressurize their buyers to have GST registration irrespective of their threshold limit. But, as you have just started a business, you might have lower turnover and complying with so many rules under GST would be difficult for you. To avoid these difficulties, the consultant would have suggested you opt for the “Composition levy scheme” under GST. 

In this post, I will discuss all the Sections, Rules, Forms related to Composition levy scheme under GST Act and in what circumstances you can opt for it. This will be in the simplest way so that a layman can understand the section and rules and mitigate the reliance on consultants. 

GST Sections defined for Composition Taxpayers

Section 10 – Composition levy

(1) Aggregate Turnover in the preceding Financial year is less ₹1.5 cr

1. 1% tax on turnover for manufacturers and traders of goods.
2. 5% for restaurant (as defined in Para 6 of Schedule II – goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption),
3. 6% for service providers (like salons) 

(2)The registered person shall be eligible to opt under sub-section (1), if:—

1. save as provided in sub-section (1), he is not engaged in the supply of services
2. he is not engaged in making any supply of goods 6[ or services which are not leviable to tax under this Act;
3. he is not engaged in making any inter-State outward supplies of goods or services
4. he is not engaged in making any supply of goods or services through an 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 the recommendations of the Council: Council; and
6. he is neither a casual taxable person nor a non-resident taxable person.

(2A) Registered businesses with a turnover below 50 lakhs in the previous year can choose a simpler tax payment method

• Instead of regular GST, they pay a fixed rate (not exceeding 3%) on their state or union territory turnover.
• And not eligible on the same conditions laid down in Section 10(2)

(3) Options availed under Sub-section (1) or Sub-section (2A) shall lapse from the date the turnover crosses the limit mentioned in Sub-section (1) or Sub-section (2A)

(4) Taxpayer under composition levy, should collect tax from the recipient nor entitled to take input tax credit. 

(5) You opt for this scheme even after crossing threshold of ₹1.5 cr, tax authorities can issue notice and recover the demand on rate for regular registered taxpayer under Section 73 or Section 74., along with penalty

• Turnover for the scheme includes sales from the beginning of the financial year (April 1st) until you register for GST.
• Exempt services like interest on loans, advances, deposits, loans are not included in the turnover calculation.

GST Forms under Composition levy

CMP-01 – Intimation to pay tax under section 10 (composition levy) (Only for persons registered under the existing law migrating on the appointed day)

CMP-02 – Intimation to pay tax under section 10 (composition levy) (For persons registered under the Act)

CMP-03 – Intimation of details of stock on date of opting for composition levy

CMP-04 – Intimation/Application for Withdrawal from Composition Levy

CMP-05 – Notice for denial of option to pay tax under section 10

CMP-06 – Reply to Show Cause Notice

CMP-07 – Adjudication order based on reply

CMP-08 – Statement for payment of self-assessed tax

Related Rules under GST Composition levy

Rule – 3: Intimation for composition levy

1. Registration under Composition Scheme:Those with provisional registration can opt for the scheme electronically using FORM GST CMP-01 within 30 days of the appointed day.
2. New applicants can choose the scheme during registration using FORM GST REG-01 (Part B).
3. Renewal for Each Financial Year:Existing composition scheme users need to file FORM GST CMP-02 electronically before the new financial year begins.
4. They must also submit a statement (FORM GST ITC-03) within 60 days of the year’s start (with exceptions for specific years mentioned).
5. Mid-Year Opt-in (applicable until March 31, 2018):Businesses with provisional or regular registration could opt-in using FORM GST CMP-02 by March 31, 2018, for the scheme to begin from the next month.
6. Stock Details for New Opt-ins:Businesses choosing the scheme need to submit details of their stock (including goods from unregistered suppliers) electronically using FORM GST CMP-03 within 90 days of opting in.
7. Multi-location Applicability:Opting in for the scheme at one location under a PAN applies to all other registered businesses under the same PAN.

Rule 4: Effective date of Composition Levy

1. For existing registered businesses:The scheme starts from the beginning of the financial year if you file the intimation using FORM GST CMP-01.
2. For new applicants:The scheme becomes effective from the date of registration if you choose it during application (FORM GST REG-01).

Rule 5. Conditions and restrictions for composition levy (similar to Section 10)

1. Cannot charge tax
2. Only Intra-State Supplies
3. No claiming of ITC
4. pay tax as per section 9 on inward supply of goods or services or both
5. No purchase from Unregistered persons
6. Mention “composition taxable person” on every sign board at premises.

Rule 6: Validity of Composition Levy

1. Voluntary Exit: file an intimation for withdrawal using FORM GST CMP-04 within 7 days of becoming ineligible or crosses threshold limit.
2. Involuntary Exit: if the tax authorities believe you were never eligible or violated GST rules.
3. Regardless of voluntary or involuntary exit, you need to file a statement (FORM GST ITC-01) electronically within 30 days.
4. This statement details your stock of inputs and those used in semi-finished or finished goods on the exit date.

Rule 7. Rate of Tax on Composition Levy as already discussed in Section 10(1)

1. 1% tax on turnover for manufacturers and traders of goods.
2. 5% for restaurant (as defined in Para 6 of Schedule II)
3. 6% for service providers (like salons)

Conclusions

This is a complete explanation of the Section and Rules related to the Composition levy scheme under GST. You can download the GST Act (click here) and related GST Rules (click here) to read the exact details. I have tried to explain to you in the easiest way which anyone can understand and opt for this scheme accordingly.

Read this also: Upload these documents with your GST refund application