Section 10 of CGST Act

Overview

Section 10 of CGST Act provides for a registered person to opt for payment of taxes under a scheme of composition, the conditions attached thereto and the persons who are entitled, but not mandated, to make payment of tax under this Scheme.

The conditions, restrictions, procedures and the documentation in respect of this scheme are contained in Chapter II of the Central Goods and Service Tax Rules, 2017 from Rule 3 to Rule 7 (Composition Rules).

Analysis of Section 10 of CGST Act

Payment of tax

The composition scheme offers to a registered person, the option to remit taxes on the turnover as against outward supply-wise payment of taxes.

In other words, the registered person opting to pay tax under the composition scheme needs only to ascertain the aggregate value of outward taxable supplies, and compute the tax thereon at a fixed rate, regardless of the actual rate of tax applicable on the said outward supply. The rate of tax prescribed in this regard is as under:

Taxable PersonRate
In case of manufacturers1% (0.5% CGST+ 0.5% SGST) of the turnover in the State/UT.
In case of food/restaurant services5% (2.5% CGST+ 2.5% SGST) of the turnover in the State/ UT.
In case of other suppliers1% (0.5% CGST+ 0.5% SGST) of the turnover of taxable supplies in the State/ UT (such as like traders, agents for supply of goods, etc.)

Eligibility to pay tax under composition scheme

The conditions for eligibility to opt for payment of tax under the composition scheme is as follows:

1. Registered persons having an ‘aggregate turnover’ as defined under Section 2(6) of the Act (i.e., aggregate of turnovers across all States under the same PAN, including exempt supplies, supplies specified under Schedule I, etc.) does not exceed the prescribed limit in the preceding financial year will be eligible to opt for payment of tax under the composition scheme.

States27.06.2017 to 12.10.201713.10.2017 to 31.03.201901.04.2019 till date
Arunachal Pradesh, Assam , Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal PradeshRs.50 LakhsRs.75 LakhsRs.75 Lakhs
UttarakhandRs.75 LakhsRs.100 LakhsRs.75 Lakhs
Andhra Pradesh, Bihar, Chhattisgarh, Goa, Gujarat, Haryana, Jharkhand, Karnataka, Kerala, Maharashtra, Odisha, Punjab, Rajasthan, Tamil Nadu, Telangana, Uttar Pradesh, West Bengal & Jammu and KashmirRs.75 LakhsRs.100 LakhsRs.150 Lakhs

In this regard, the following may be noted:

(i) The aggregate turnover of the registered person should not exceed the said prescribed limit during the financial year in which the scheme has been availed;

The ‘aggregate turnover’ as computed for a composition taxpayer shall not include any interest income, which is earned by way of supply of services such as extending deposits, etc. where such interest or discount is exempted under the GST Law.

(ii) As per Order No. 01/2017 dated 13.10.2017 the following is clarified:-

(a) A person supplying restaurant services along with the supply of any exempt services shall not be eligible for composition scheme under section 10 of CGST Act.

(b) In computing the limit of aggregate turnover in order to determine the eligibility of composition scheme, value of supply of any exempt service shall not be taken into account.

2. The scheme cannot be opted for during the middle of a financial year, except in the case where the person obtains registration, and opts for composition scheme at the time of applying for registration under the GST Law:

(i) Taxable Person obtaining a new registration under GST laws:

Such option can be exercised at the time of obtaining registration under section 22 in Part B of Form GST-REG-1. Such new application may also include cases of migration from the erstwhile laws. In both cases, the option to pay tax under composition scheme shall be effective from the effective date of registration. [Refer Rule 3 of CGST Rules]

(ii) Registered person switches over to composition scheme:

A person is required to file intimation before the commencement of the financial year for which he opts to pay tax under the scheme. In such cases, the provisions of section 18(4) shall stand attracted and the registered person shall be required to file a statement containing details of stock and inward supply of goods received from un-registered persons, held in stock, on the date immediately preceding the date.

3. In order to be eligible to opt for the scheme, the registered person must not be in possession of stock of goods which has been purchased from unregistered persons. In any such case, due tax ought to have been paid thereon under Section 9(4);

Note: In case of migrated registrations from the erstwhile laws, the GST Law imposes an additional condition that the stock of goods held on the GST appointed day (01.07.2017) does not include any goods which have been procured in the course of inter-State trade or commerce or received from his branch/ his agent/ his principal situated outside the State or imported from a place outside India.

4. The registered person would not be eligible to effect any:

(i) Supply of goods [or services]1 through an e-commerce operator who is liable to collect tax at source (TCS) – while there is no restriction on goods supplier through a portal owned and operated by the same person;

In this regard, it may be noted that the provision for TCS has been notified to be effective from 01.10.2018.

(ii) Supply of non-taxable goods [or services]2, i.e., alcoholic liquor for human consumption, petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel;

(iii) Supply of services, other than services specified in Entry 6(b) to Schedule II or upto limit as prescribed under second proviso to Section 10(1) i.e. 10% of the of turnover in a State or Union territory in the preceding financial year or Rs. 5 lakh, whichever is higher.

In this regard, it must be noted that the Government has issued an order for the removal of difficulties to clarify that any services provided by a composition taxpayer shall not be taken into account where the consideration for the said service is by way of “interest” which is exempted from tax under the GST Law.

(iv) Inter-State outward supplies of goods [or services]3, including supplies to SEZ unit / developer.

Please note that this condition implies that the registered person will not be in a position to effect inter-State stock transfers to its own establishments located outside the State. It is also important to note that the condition is not limited to taxable supplies alone, and extends to exempt supplies as well.

Footnote 1, 2 & 3:- Inserted vide Finance Act, 2020 w.e.f. date to be notified.

5. Shall not collect tax:

Taxable person opting to pay tax under the composition scheme is prohibited from collecting tax on the outward supplies. Care must be taken when composition taxable persons are involved in supply of MRP-goods.

MRP includes output tax and selling at MRP violates this condition. The impact is far more severe as the composition facility gets rejected and full output tax is liable to be paid but input tax credit (otherwise available) would not have been availed within the relevant time permitted.

6. Not entitled to input tax credit:

Taxable person opting to pay tax under the composition scheme will not be eligible to claim any input tax credits.

However, if the taxable person becomes ineligible to remain under composition scheme, the taxable person will become entitled to take input tax in respect of inputs held in stock (as inputs, contained in semi-finished or finished goods) on the day immediately preceding the date from which he becomes liable to pay tax under Section 9. (Refer Section 18(1) (c) for the provision. A statement of stock shall be filed in Form GST ITC-1 within 30 days from the date from which the option is withdrawn or the order cancelling the composition option is passed).

7. The registered person must not be:

(i) A manufacturer of such goods as may be notified by the Government (based on the recommendations of the GST Council), in the year for which he opts for the scheme, or in the preceding financial year (E.g. Ice cream, pan masala, tobacco). However, there is no restriction in trading of such goods, i.e., where the person has not manufactured the goods.

(ii) A casual taxable person;

(iii) A non-resident taxable person;

8. All the registrations obtained under a single PAN are also mandated to opt for payment under the composition scheme, i.e., all the registered persons under the PAN will also be mandated to comply with all the conditions mentioned above, including the business verticals having separate registrations within the same State under the same PAN. The scheme would become applicable for all the registrations and it cannot be applied for select verticals only.

E.g.: Say a company has the following businesses separately registered:

— Sale of mobile devices (Registered in Kerala)

— Franchisee of branded restaurant (Registered in Goa)

The scheme would be applicable for the said 2 units. The company cannot opt for composition scheme for the registration in Kerala and opt to pay taxes under the regular scheme for the registration in Goa.

9. The scheme will be applicable to all the outward supplies. The option of the scheme will be qua-person and not qua-class of goods – once opted it will be applicable for all supplies effected by the registered person;

It must be noted that a taxable person cannot opt for payment of taxes under composition scheme for supply of one class of goods and opt for regular scheme of payment of taxes for supply of other classes of goods or services.

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Conditions applicable on a composition supplier

Once a person has opted to pay tax under the composition scheme, the following conditions would stand attracted:

1. Every notice or signboard in every registered place of business, displayed at a prominent place, shall carry the words “Composition taxable person”;

2. Every bill of supply issued by the composition suppliers shall carry the declaration “Composition taxable person, not eligible to collect tax on supplies” on top of the bill;

3. RCM on inward supplies: The composition supplier shall be liable to make payment at the rate applicable on the supply in respect of every inward supply liable to tax under the reverse charge mechanism, regardless of the rate of tax that is applied by him on the outward supplies effected by him. It may be noted that the value of such inward supplies would not be included in the aggregate turnover of the composition taxpayer although the liability is discharged by him on such inward supplies;

4. Not entitled to collect tax: The composition taxpayer is prohibited from collecting any GST/ Cess applicable on the outward supplies effected by him. Accordingly, the recipients of supply would also not be eligible to claim any credits where the inward supply is from a composition taxpayer;

5. Not entitled to claim credit of taxes paid: The composition taxpayer is not entitled to claim credit in respect of taxes paid by him on any of the inward supplies effected by him, including inward supplies on which he pays tax under reverse charge mechanism.

6. A Composition supplier shall not be entitled to issue any tax invoice. However, to effect supplies of goods/ services the supplier will have to issue “Bill of Supply” without indicating any tax amount on it.

Validity of Composition Scheme

The option to pay tax under the composition scheme will remain valid so long as the registered persons comply with all of the aforesaid conditions above. The composition suppliers will be treated as any other registered supplier with effect from the date on which any of the said conditions cease to be complied with.

The composition suppliers would not be entitled to re-enter the scheme until the expiry of the financial year.

1. The registered person would be required to file an intimation (suo motu) for withdrawal from the scheme within 7 days of the non-compliance;

2. The registered person may also file an intimation if he wishes to withdraw from the scheme, before the effective date of withdrawal, and such withdrawal can be applied for anytime during the financial year. Once granted, the eligibility would be valid unless the permission is cancelled or is withdrawn or the person becomes ineligible for the scheme.

3. Cancellation of permission: Where the proper officer has reasons to believe that the taxable person was not eligible to the composition scheme, the proper officer may cancel the permission (in order CMP-7) and demand the following:

  • Differential tax and interest – viz., tax payable under the other provisions of the Act after deducting the tax paid under composition scheme;

Frequently Asked Questions(FAQ’s)

Q1. Will a taxable person be eligible to opt for composition scheme only for one out of 3 branches, duly registered?

Ans. No. Composition scheme would become applicable for all the business verticals / registrations which are separately held by the person with same PAN.

Q2. Can composition scheme be availed if the taxable person has inter-State inward supplies?

Ans. Yes. Composition scheme is applicable subject to the condition that the taxable person does not engage in making inter-State outward supplies (subject to Notification No. 2/2019-Central Tax (Rate) dated 07th March, 2019), while there is no restriction on making any inter-State inward supplies.

Q3. Can the taxable person under composition scheme claim input tax credit?

Ans. No. Taxable person under composition scheme is not eligible to claim input tax credit.

Q4. Can the customer who buys from a taxable person who is under the composition scheme claim composition tax as input tax credit?

Ans. No. customer who buys goods from taxable person who is under composition scheme is not eligible for composition input tax credit.

Q5. Can composition tax be collected from customers?

Ans. No. The taxable person under composition scheme is restricted from collecting tax.

Q6. What is the threshold for opting to pay tax under the composition scheme?

Ans. The threshold for composition scheme is up to Rs. 1.50 crores of aggregate turnover in the preceding financial year.

Q7. How to compute ‘aggregate turnover’ to determine eligibility for composition scheme?

Ans. The methodology to compute aggregate turnover is given in Section 2(6). However, since composition scheme is applicable only to suppliers making intra-State supplies, ‘aggregate turnover’ means ‘Value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies (except interest income as discussed above), exports of goods or services or both or inter-State supplies of a person having the same PAN (i.e., across India) excluding CGST, IGST, SGST, UGST and cess.

Q8. What does a person having the same PAN mean?

Ans. “Person having the same PAN” means all the units across India having the same PAN as is issued under the Income Tax Law.

Q9. What are the penal consequences if a taxable person is not eligible for payment of tax under the Composition scheme?

Ans. Taxable person who is not eligible for the said scheme, could be imposed penalty as determined under Section 73 or 74.

Q10. What happens if a taxable person who has opted to pay taxes under the composition scheme crosses the threshold limit of Rs.1.50 crores during the year?

Ans. In such case, from the day the taxable person crosses the threshold, the permission granted earlier is deemed to stand withdrawn, and he shall be liable to pay taxes under the regular scheme i.e. Section 9, from such day.

Special Scheme In Case Of Intra-State Supply Of Goods Or Services Or Both With Tax Rate Of 6%

The Central Government vide Notification No. 2/2019-Central Tax (Rate) dated 07th March, 2019 has notified Composition scheme in case of intra-State supply of goods or services or both.

With effect from 1st April 2019 a new composition scheme has come into force in case of intra State supply of goods or services or both, at the rate of 6% (3% CGST + 3% SGST) for first supplies of goods or services or both up to an aggregate turnover of Rs. 50 lakhs made on or after the 1st day of April in any financial year by a registered person subject to certain conditions.

This is an optional facility through a rate notification that is ‘notwithstanding’ any other rate notification issued. Therefore, the notification overrides Notification No. 11/2017-Central Tax (Rate). As it is optional, registered person should carefully consider the conditions before opting for the same. This facility and composition scheme under section 10 operates as mutually exclusive. Thus, traders and manufacturers of goods and restaurant service providers who are eligible for composition (even if not opted) will not enter into this facility.

Eligibility to pay tax under composition scheme:

Supplies are made by a registered person, –

1. whose aggregate turnover in the preceding financial year was Rs. 50 lakh or below;

2. who is not eligible to pay tax under sub-section (1) of section 10;

3. who is not engaged in making any supply which is not leviable to tax;

4. who is not engaged in making any inter-State outward supply;

5. who is neither a casual taxable person nor a non-resident taxable person;

6. who is not engaged in making any supply through an electronic commerce operator who is required to collect tax at source under section 52; and

7. who is not engaged in making supplies of:

  • Ice cream and other edible ice, whether or not containing cocoa.,
  • Pan masala,
  • Tobacco and manufactured tobacco substitutes
  • Aerated Water

Conditions applicable on a composition supplier:

Once a person has opted to pay tax under the composition scheme, the following conditions would stand attracted:

1. Where more than one registered persons are having same PAN, central tax on supplies by all such registered persons is paid at the given rate.

2. The registered person shall not collect any tax from the recipient nor shall he be entitled to any credit of input tax.

3. The registered person shall issue, instead of tax invoice, a bill of supply.

4. The registered person shall mention the following words at the top of the bill of supply, namely: – ‘Taxable person paying tax in terms of Notification No. 2/2019-Central Tax (Rate) dated 07.03.2019, not eligible to collect tax on supplies’.

5. Liability to pay central tax at the rate of 3% on all outward supplies notwithstanding any other notification issued under section 9 or section 11 of said Act.

6. Liability to pay central tax on inward supplies on reverse charge under sub-section (3) or sub-section (4) of section 9 of said Act.

Where any registered person who has availed input tax credit, opts to pay tax under this notification, shall pay an amount, by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods as if the supply made under this notification attracts the provisions of section 18(4) of the said Act and the rules made thereunder and after payment of such amount, the balance of input tax credit, if any, lying in his electronic credit ledger shall lapse.

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