GST Composition Levy Explained

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 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

• Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, and Himachal Pradesh – Aggregate turnover of the person having same PAN of above Rs 10 lakhs during the previous financial year but does not exceed Rs  75 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 1 crore.

Rate of Levy

• Rate
  • Manufacturer- 2% of the turnover in a state or Union Territory
  • 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.
• 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.
Note: The last date for filing the return in FORM GSTR-4 by a taxpayer under composition scheme for the quarter July-September, 2017 shall be extended to 15.11.2017. Also, GSTR-4A is not required for quarter ending July to September, 2017.
Please visit this blog post for more examples of composition levy in the GST regime.
Coming Soon 
Transition provisions related to Composition Levy