GST Composition Levy Explained

Last updated on June 5th, 2017 at 01:03 pm

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This post has been updated on 24 April 2017 to incorporate latest changes.

The current state indirect tax regime has provided a simpler compliance for small dealers known as the Composition Scheme. Under this scheme you,

  • Pay taxes only at a certain percentage of turnover
  • File periodic returns only (usually on a quarterly basis)
  • Have an option of not having to maintain detailed records or follow tax invoicing rules
  • Are not allowed to take Input Tax Credit (ITC)
  • Are not allowed to collect tax on sales

Thus for smaller businesses, it is simpler to calculate tax liability. This saves time and energy involved in maintaining detailed records.

Let us understand how the composition scheme is different with the following example:

Composition Tax

Composition Levy in the GST Regime

Similarly, the same benefit is provided under the GST regime. Small dealers and businesses could opt for the composition scheme known as Composition Levy. Under this scheme, a Composite Tax Payer pays tax only at a certain percentage of his turnover.

Threshold Limit

  • North East India + Sikkim, J&K, Himachal Pradesh and Uttarakhand  – Aggregate turnover of the person having same PAN of above Rs 10 lakhs during the previous financial year but does not exceed Rs 50 lakhs.
  • Rest of India – Aggregate turnover of the person having same PAN of above Rs 20 lakhs during the previous financial year but does not exceed Rs 50 lakhs.

Note: As per the recommendation by the council, the government may increase the threshold limit of 50 lakhs but not exceeding 1 crore.

Rate of Levy

  • Rate of levy is yet be notified
  • Rate
    • Manufacturer-will not be less than 2.5% of the turnover in a state in the year  2% of the turnover in a state or Union Territory
    • Other than manufacturer- will not be less than 1% of the turnover in a state in the year
    • Trader-1%
    • Supplier of food or drinks for human consumption- 5% of the turnover in a state or Union Territory

Conditions for a Composite Tax Payer

Apart from the threshold limit, the following conditions are applicable for a composite tax payer:

  • Cannot be engaged in supply of services, other than supply of food or drinks for human consumption
  • Cannot be engaged in manufacture of specific notified goods
  • Cannot supply goods not taxable under GST
  • Cannot supply goods through an e-commerce operator
  • No Interstate outward supplies – A composite tax payer should not engage in interstate outward supply of goods and / or services and imports.
  • Payment of composition tax – If the composite tax payer is in the trade of supplying goods and services, then composition levy will be applicable for both supply of goods and supply of services.
  • Does not have to collect tax – The composite tax payer does not have to collect tax on all his outward supply of goods and / or services.
  • Applicable for all business verticals under the same PAN – Composition levy will be applicable for all business verticals operating within state or interstate under the same pan.
    What does this mean?

    An individual with different business verticals, like:

    • Mobiles & Accessories
    • Stationery
    • Franchisee

    In the above scenario, the composition scheme will be applicable for all three business verticals. The dealer cannot opt for any one business vertical to fall under the composition scheme.  For example, if the business vertical’s place of business is in Karnataka & Kerala for a single PAN, each of the business vertical in that particular state should have only ‘Intra-State(within state)’ supplies.

  • Cannot claim Input Tax Credit – The composite tax payer is not eligible to claim input tax credit on all his inward supply of goods and / or services.
    What does this mean?

    If a dealer chooses to be a composite tax payer, he cannot claim input tax credit even if he makes taxable purchases from a regular taxable dealer. Ideally, the taxable amount would be added to the composite tax payer’s cost.

Return Forms for a Composite Tax Payer

A composite tax payer is required to file quarterly return and annual return. Types of returns and details to be furnished are explained below:

Return Type Frequency Due date Details to be furnished
Form GSTR-4A Quarterly Auto-populated details of inward supplies made available to the recipient registered under composition scheme on the basis of FORM GSTR-1 furnished by the supplier.
Form GSTR-4 Quarterly 18th of succeeding month All outward supplies of goods and services including auto-populated details from Form GSTR-4A and tax payable details. Details of any additions, modifications, or deletions in Form GSTR-4A should also be submitted in Form GSTR-4.
Form GSTR-9A Annual 31st December of next fiscal Consolidated details of quarterly returns filed along with tax payment details.

 

In the current composition scheme, a composite dealer has to declare only the aggregate turnover of sales. He is not required to declare invoice wise details. In GST, the composite tax payer will file his returns with the invoice wise details of inward supplies which is auto-populated based on Form GSTR-1 filed by his supplier along with the aggregate turnover of outward supplies.

Please visit this blog post for more examples of composition levy in the GST regime.

Coming Soon
Transition provisions related to Composition Levy.

About the author

Pugal T & Yarab A

37 Comments

  • I am an businessman with turnover less than 20 lac in rajasthan. My business in cash oriented only.

    1) Whether i have to take registration under GST or it is optional form me ?

    2) If it is optional than what are consequences on my business for opt registration or opt non registration ?

    3) whether i need to migrate in GST as i am a VAT composit dealer in currently ?

    4) If i go for non registration, there is no compliance which i need to take care for GST ?

    • Hello Rahulji,

      Since you are a existing registered dealer in the State VAT, it is compulsory for you to migrate to GST. Now since your aggregate turnover is less than 20lac, registration in GST can be cancelled.

      Does after you cancel the GST registration, once the GST roll out you are not required to do compliance anyone after that.

    • There is no requirement of any Way Bill. The Tax Invoice in which IGST is charges will need to be shown while crossing the state border.

  • under composition scheme, if Auto-populated details of inward supplies made available only on quarterly basis to the recipient.
    How GSTR-2A. & GSTR-2 can be get reconciled by the regular dealer (supplier) on 15th of the every month?

    • In the table shown, we have compared the calculation of tax to be paid by a composition dealer and regular dealer in the current regime. Under GST, it will be CGST + SGST.

  • What the term “can not be engaged in supply of services” means? Does it means that service sector such as repair and maintainence will not be entitled to choose to pay composit GST?

  • Is textiles ( also formerly called piece-goods) like saree, dothis, shirting fabrics, cotton and blended cloth materials taxable under GST. Currently its exempted from tax in most states but in Kerala its taxed at 2%.

    My Question is if its not taxed in GST and I deal in 1. Textiles, 2. Readymades & 3. Inner Wear ( 2 & 3 are taxed at present in all states ), can I opt for COMPOSITION SCHEME ?

  • Will a composite dealer be able to purchase from other states.
    Though sales will be only within home state (intra state.)

    Is inter state purchase allowed for composite dealer ?

  • we are having tyre retreading business and want now whether we can opt for composite tax and how in GST.we retread old tyre of customer and give them back

    • If your turnover does not exceed Rs 50 Lakhs and if you fulfill the conditions for being a composition tax payer as listed in the blog, then you can register as a composition tax payer.

  • Information on GST by Tally solutions are very useful and knowledgeable . I appreciate the initiate taken by Tally people well in advance.. Thanks every body in Tally team.

  • (1) Aggregate turnover is include Export turnover ?

    (2) Conditions for a Composite Tax Payer
    No Interstate supplies – A composite tax payer should not engage in interstate supply of goods and / or services and imports.
    Yaha Export likha nahi he . Agar koi local or Export Goods / Service business karta he Wo Composition scheme me join ho sakta he ? & export turnover exclude or include in Aggregate Turnover defination ? & Export pe composition tax bharna padega ya nahi ?

  • agar koi dealer composition me hai aur tax percentage 12.35% se upar hai to composition dealer regular dealer se faide me rahega (agar margin same percentage rakkha jaye ) aur agar 12.35% se kam Tax rate hoga to composition dealer ko jada tax dena padega..
    Upar Diye example me Tax rate 5% se badal ke 18% karne per Composition dealer 325 pay karega jabki regular dealer 450 pay karega

    • try it with 50 %
      and u will get the following

      if the % of profit will be 50%.
      the sale price will be 39375.

      At this condition the composite dealer have to pay a amount of 1645 rupees. and the regular dealer have to pay the total tax of 1875.

      the composite dealer have to pay a amount of 394 as 1% of total turn over.
      But THE REGULAR DEALER HAVE TO PAY A AMOUNT OF 625 AFTER INPUT CREDIT. (625>394)

      THE NET PROFIT OF COMPOSITE DEALER WILL BE 12731. WHILE THE REGULAR DEALER WILL GET 12500.

      DOSE IS FAIR.
      I.E. THE REGULAR DEALER IS PAYING MORE TAX AND GETTING LESS PROFIT.

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