SMALL BUSINESSES UNDER GST (PART-II) (Composition Scheme)

[Dr. Sanjiv Agarwal]

Composition Levy

Composition levy has been in vogue in indirect taxes to address the compliance issues vis-a-vis revenue in case of small business units or specific business units having complexity in determination of valuation of taxable amount.

Under GST regime, there is also a concept of composition levy. An alternate levy for small businesses, whose aggregate turnover in financial year doesn't exceed ₹ 50 lakh, composition levy in lieu of tax will be payable at a rate not less than 2.5 per cent in case of manufacturer and 1 per cent for others (basically traders).

Under GST regime, 'aggregate turnover' includes the aggregate value of-

• all taxable supplies,
• exempt supplies,
• exports of goods and/or services and
• inter-State supplies of a person having the same PAN,

 to be computed on an all India basis

However, following amounts will be excluded -

• Taxes, if any, charged under the CGST Act, SGST Act and the IGST Act, as the case may be;
• value of inward supplies on which tax is payable by a person on reverse charge basis and the value of inward supplies.
• Value of non-taxable supplies.

Composition scheme will result in lesser compliance requirements. However, composition scheme is likely to be successful in B to C transactions rather than B to B segment. At present, almost all the state VAT laws normally have provisions for tax payers to opt for composition scheme. Broadly, two types of taxpayers are having option to avail the composition scheme subject to restrictions and conditions, i.e., works contractor (including real estate, builders) and retail traders having turnover up to specified threshold limit. At present, with the current understanding of law it can viewed that the composition scheme would only be available to small traders or specific manufactures up to turnover limit of ₹ 50 lakh.

Example

Mr. A, a taxable supplier supplied goods valuing ₹ 30 lakh. He also supplied exempt goods valuing ₹ 10 lakh. He also supplied goods in inter-State valuing ₹ 10 lakh. During this period, Mr. A returned goods valuing ₹ 5 lakh to the supplier from whom he had received such goods.

In this case, the outward turnover of A would be ₹ 55 lacs  (30 + 10 + 10 + 5). Whereas his aggregate turnover would be ₹ 50 lacs i.e ₹ 55 lacs – ₹ 5 lacs.

Registration under Composition

Registration as taxable person is compulsory to opt for the scheme. Minimum exemption limit under GST will be ₹ 20 lakh and for special category states (north eastern and hill States), it will be ₹ 10 lakh. Further, composition levy is to be applied on an all India basis as per PAN. It would mean that all the registrations across India belonging to same PAN shall have to avail the scheme. If the aggregate turnover exceeds ₹ 50 lakh, the scheme will be deemed to be withdrawn.

Restrictions for the Composition scheme

Composition scheme is not allowed for the following classes of taxable persons:

• Who is engaged in the supply of services (for example AMC services, Manpower supply  services etc.)
• Who makes any supply of goods which are not leviable to tax under this Act.(for example export of goods, alcoholic liquor etc.)
• Who makes any inter-State outward supplies of goods.(for example from Rajasthan to Haryana)
• Who makes any supply of goods through an electronic commerce operator who is required to collect tax at source under section 56(for example through Flipkart, Amazon etc.)
• Who a manufacturer of such goods is as may be notified on the recommendation of the Council.
• All the registered taxable persons, having the same PAN as held by the said taxable person, also opt to pay tax under the provisions of this sub-section.(for example all the units of traders in same or different state opt for composition)

Composition scheme only for supply of goods

Section 9 of the Model GST Law (version-II) specifically allowed the composition scheme only to supply of goods and not services. It may be noted that as per Schedule II, all the supplies effected as works contract (including real estate, construction contracts) would be regarded as services and not goods.

For the small dealers in majority of states who are already operating within the existing turnover limit of ₹ 50 lakh, the impact may not be much. Assessees may find composition scheme beneficial where turnover is upto ₹ 50 lakh. However, turnover includes exempt turnover and exports. It is not taxable turnover. Business with multi-State business under the same PAN may find it difficult to compute aggregate turnover correctly.  Works contracts shall be treated as services in GST and as such, will not be allowed composition levy whereas presently, works contracts are allowed composition under VAT and abatement under Service Tax law.

(To be continued......)