Composition Levy under GST

  • Contributed by CA. Ashit Shah

    Goods and Services Tax (GST), a biggest Indirect Tax Reform in the country of India is going to be reality in the near future though some political interference cannot be ruled out. Fundamental principal of introduction of GST is to cover maximum number of people in the GST net so that seamless chain of credit would not brake and tax rate can be maintained at reasonably same level which is prevailing as per the existing indirect tax laws.

    It would result in to involvement of almost all the people carrying out business activities within the ambit of GST and hence threshold limit exemption is kept at Rs. 20 Lakhs had been accepted by the GSTS Council so that very small business entrepreneur would be out of the tax net. It was further observed that small business community would not be able to go hand-in-hand with the new legislations as sufficient infrastructure, knowledge and awareness about the new law might be missing. Hence, alternate methods of discharging tax liability was envisaged and introduce a scheme known as composite levy by incorporating Section 9 to the Model GST Law – November 2016 (hereinafter referred as MGL).

    Salient features of the “composite levy” are as under:

    1. Who can opt for the scheme?
    Registered Taxable Persons (herein after referred as RTP) whose aggregate turnover in the preceding financial year did not exceeds Rs. 50 Lakhs. It appears that in first year on implementation of GST, tax payer who opts for composition levy in first year, it would be difficult for him to determine “aggregate turnover in preceding financial year” as same has not been defined under the GST law.

    2. What would be the tax rate?
    Council has provided two rates of composite levy for manufacturers and other than manufacturers. Manufacturers have to discharge tax liability amounting not less than 2.5% of the turnover in a State during the year and other than manufactures, they have to discharge tax liability amounting not less than 1% of the turnover in a State.

    3. Person’s in-eligible under the scheme?
    Following class of persons are categorically denied the benefit of composition levy –
    (i) who is engaged in the supply of services; or
    (ii) who makes any supply of goods which are not leviable to tax under this Act; or
    (iii) who makes any inter-State outward supplies of goods; or
    (iv) who makes any supply of goods through an electronic commerce operator who is required to collect tax at       source under section 56; or
    (v) who is a manufacturer of such goods as may be notified on the recommendation of the Council.

    4. Permission:
    RTP who wanted to avail the benefit of Composition Levy has to obtain permission from the Proper Officer. Multi-State located RTP would be eligible to be permitted to discharge tax liability unless all the RTP having same PAN as held by the said taxable person also opts to pay the tax under composition levy. Permission of Composition levy would be withdrawn from the day on which his aggregate turnover during financial year exceeds Rs. 50 Lakhs.

    5. Collection of Tax:
    RTP is not eligible to collect the tax levied under Composition levy scheme from the recipient for supply of goods and / or services. Moreover, he is also not eligible to avail credit of Input tax paid at the time of procurement of goods and / or services.

    6. Violation of conditions of composition levy:
    RTP who are not eligible for Composition levy due to non-fulfilment of conditions prescribed under the law but he is still discharging tax liability under the scheme, Proper Officer may demand tax at regular rate of tax. RTP is also liable for interest & penalty and the provisions of Section 66 and 67 would be applicable.

    7. Effect on un-utilized Input Tax Credit when RTP opts for Composition Levy under GST:
    RTP holding un-utilized Input Tax Credits of Inputs and un-availed credit of capital goods, in the return filed by the RTP immediately preceding the introduction of GST Law, under earlier law are not eligible to carry forward their un-utilized Input Tax Credit in the Electronic Credit Ledger if they opt to discharge tax liability in GST regime under Composition levy.

    8. Registered Taxable Person who discharges tax liability under composition scheme under earlier law:
    RTP who discharges tax liability under composition scheme (paying tax at fixed rate or paying a fixed amount in lieu of tax payable) under earlier law are eligible to Input tax Credit of inputs held in stocks, semi-finished goods and finished goods on the appointed date i.e. immediately preceding the introduction of GST Law subject to following conditions –

    (i) such inputs and / or goods are used or intended to be used for making taxable supplies under this Act;
    (ii) the said person is not paying tax under composition levy under section 9;
    (iii) the said taxable person is eligible for input tax credit on such inputs under this Act;
    (iv) the said taxable person is in possession of invoice and/or other prescribed documents evidencing payment of duty under the earlier law in respect of inputs; and
    (v) such invoices and /or other prescribed documents were issued not earlier than twelve months immediately preceding the appointed day.

    These eligible Input Tax Credit held in Stocks would be transferred to Electronic Credit Ledger of the RTP maintained by the Goods and Services Tax Network (GSTN).

    Eligible duties or taxes to be carried forwards are –
    • Excise Duty specified under 1st & 2nd Schedule to CETA;
    • Additional Duty of Excise on Textile and Textile Article;
    • Additional Duty of Excise on Goods of Special Importance;
    • National Calamity Contingent Duty;
    • Counter Veiling Duty;
    • Special Additional Duty;
    • Service Tax
    • Value Added Tax and Entry Tax

    New Draft Model Law of GST – November 2016 has fine tune the scheme so that small tax payers would go hand-hand in the GST regime. It is expected that Council have to clarify in the matter of determining turnover limit of preceding financial year for the tax payers who wanted to avail the benefit of composition levy.



    Views presented in this article are personal view of the author. Information presented in this article is intended for information purpose only and does not constitute any legal opinion or advice. Readers and Users are requested to seek formal legal advice prior to acting upon any of the information provided herein.