3B Composition Scheme

CHAPTER

THEORY
Composition Scheme Section 10
The composition levy is an alternative method of levy of tax designed for small taxpayers whose
turnover is up to a prescribed limit. The objective of the composition scheme is to bring simplicity and
to reduce the compliance cost for the small taxpayers.
Section 10(1) & (2) Composition Scheme for Goods & Restaurant Services
Initially, the scheme was designed to benefit the small traders, manufacturers and restaurant service
providers. So, the scheme was fundamentally for the supplier of goods and only for restaurant service
providers. However, subsequently, suppliers availing the composition scheme were permitted to
supply other services also, though only up to a small specified value.
Small taxpayers with an aggregate turnover in a preceding financial year up to `1.5 crore shall be
eligible for composition levy. However, Threshold limit is `75 lakh in respect of 8 of the Special
Category States namely:
Nagaland Uttarakhand Sikkim Tripura
Arunachal Pradesh Mizoram Manipur Meghalaya
However as per second proviso to section 10(1), composition suppliers are permitted to supply other
services up to:
(a) 10% of turnover in the state or union territory in the preceding financial year or
(b) `5,00,000 whichever is higher.
Eg. Ramsewak is engaged in the supply of goods. His aggregate turnover in preceding FY is `60
lakh. Since his aggregate turnover in the preceding FY does not exceed `1.5 crore, he is eligible for
composition scheme in current FY.
Calculation of Aggregate Turnover
While computing the threshold limit of `1.5 crore, inclusions in and exclusions from ‘aggregate
turnover’ are as follows:
Inclusions Exclusions
Value of all outward supplies ‰ Value of inward supplies on which tax is payable
1. Taxable supplies under reverse charge
‰ Taxes Under GST (i.e. CGST/SGST/UTGST/IGST/
2. Exempt supplies
Compensation Cess)
3. Exports ‰ Value of supply of exempt services by way of extending
4. Inter-State supplies of persons having the deposits, loans or advances in so far as the consideration
same PAN be computed on all India basis is represented by way of interest or discount.
Explanation 1 to section 10 clarifies that for the purposes of computing aggregate turnover of a
registered person for determining his eligibility to pay tax under this section, aggregate turnover
includes value of supplies from 1st April of a FY up to the date of his becoming liable for registration.
As per Section 10(3), the option of a registered person to avail composition scheme for
services shall lapse with effect from the day on which his aggregate turnover during a
financial year exceeds the threshold limit of `150 Lakh /75 Lakh.

The rate shall be as given under Rule 7

S. No. Category of Registered Person Rate of Tax

1 Manufacturer, other than manufacturer 0.5% CGST + 0.5% SGST of Turnover
of Ice cream, Pan masala, Tobacco & in the State/Turnover in the Union
Aerated Water Territory
2 Person engaged in restaurant services 2.5% CGST & 2.5% SGST of Turnover
in the State/Turnover in the Union
Territory
3 Any other Supplier of goods 0.5% CGST + 0.5% SGST of Taxable
Supplies in the State/Turnover in the
Union Territory

As per section 2(112) of the CGST Act, 2017, turnover in State/turnover in Union territory means
Inclusions Exclusions

Value of all outward supplies ‰ Value of inward supplies on which tax is

1. Taxable supplies payable under reverse charge
2. Exempt supplies ‰ Taxes Under GST (i.e. CGST/SGST/UTGST/
IGST/Compensation Cess)
3. Exports
‰ Value of supply of exempt services by way
4. Inter-State supplies of goods or services
of extending deposits, loans or advances in
or both made from the State or Union
so far as the consideration is represented
territory by the said taxable person
by way of interest or discount.

Further, explanation 2 to section 10 clarifies that for the purposes of determining the tax payable by
a person under this section, the expression turnover in State or turnover in Union territory shall not
include the value of following supplies, namely:
(i) supplies from 1st April of a FY up to the date when such person becomes liable for registration
under this Act; and
(ii) exempt supply of services provided by way of extending deposits, loans or advances in so far as
the consideration is represented by way of interest or discount.
Note: While computing turnover in a State/UT of a supplier, other than manufacturer and restaurant
service provider, eligible for composition levy for goods [eg-trader], the exempt supplies will not be
taken into consideration
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 As per Rule 3,
A person applying for registration may give option for composition scheme in part B of REG-
01. Such intimation shall be considered only after the grant of registration to the applicant
and his option to pay tax under composition levy shall be effective from the date from which
registration is effective.
As per Rule 4,
A registered person who opts to pay tax under composition levy scheme shall electronically
file an intimation in prescribed form on the GST Common Portal, prior to the commencement
of the FY for which said option is exercised. Option to pay tax under section 10 shall be
effective from the beginning of the next financial year but such person shall also furnish
statement in ITC-03 for reversal of tax credit within a period of 90 days from the date of
commencement of composition scheme.
As per Rule 5,
Such person should be neither casual taxable person nor non – resident taxable person.
As per Rule 6,
If turnover exceeds `1,50,00,000/75,00,000 he will be shifted to normal scheme with
immediate effect and he will give an intimation in CMP-04 within 7 days of exceeding the limit.
Any person who is in the composition scheme may opt out of the scheme at any time and
shall file an application in CMP-04 and he will get shifted to normal scheme with immediate
effect. He shall be required to submit ITC-01 for availing ITC within 30 days from the date of
withdrawal. Such withdrawal shall be applicable to all the places in all the states/UTs.

Section 10(2A) Composition Scheme for Service Provider

This section provides an option to a registered person whose aggregate turnover in the preceding
financial year is up to `50 lakh and who is not eligible to pay tax under sub section (1), to pay tax @ 3%
[Effective rate 6% (CGST & SGST/ UTGST)] on first supplies of goods and/or services up to an aggregate
turnover of `50 lakh made on/after 1st April in any financial year, subject to specified conditions.

Section 10(2)/(2A) Conditions for Opting to Pay Tax under Composition Scheme
(i)  Restricted from making supply of goods or services which are not liable to GST: Certain
goods and services are not liable to GST, e.g. petroleum, alcohol for human consumption, etc.
– a person opting for composition scheme shall not be entitled to make any supply of non-GST
goods and services.
(ii) Restricted from affecting inter-State outward supplies: The taxable person should not
affect any inter-State outward supplies. This means that even stock transfers to branches
outside the State would not be permitted. However, insofar as it relates to inter-State inward
procurements/receipts, there is no restriction.
Restricted from making supplies through an e-commerce operator: A person opting
(iii) 
for composition scheme is not allowed to affect any supply of goods or services through an
ecommerce portal, unless such portal is owned by the same person.
(iv) Restriction on manufacture of notified goods: The person opting for the scheme should
not be a manufacturer of certain goods as are notified in this regard. However, there is no
restriction in case the person is engaged in trading of such goods.

64 Taxation (Goods and Services Tax)

 Notified Goods:
(i) Ice cream and other edible ice, whether or not containing cocoa
(ii) Pan masala
(iii) Tobacco and manufactured tobacco substitutes
(iv) Manufacture of Aerated Water
(v) Fly ash bricks or fly ash aggregate with 90% or more fly ash content; Fly ash blocks
(vi) Bricks of fossil meals or similar siliceous earths
(vii) Building bricks
(viii) Earthen or roofing tiles
(ix) Would be applicable for all transactions under the same PAN: Composition scheme
would become applicable for all the business verticals having separate registrations
within the State and all other registrations outside the State which are held by the person
with the same PAN.
(x) Shall not collect tax: Taxable person opting to pay tax under the composition scheme is
prohibited from collecting tax on the outward supplies.
(xi) 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.
(xii) Such supplier shall mention the words “composition taxable person not eligible to collect
tax on supplies” at the top of the bill of supply. (not allowed to issue tax invoice)
Example
A photographer ‘Champak’ has commenced providing photography services in Delhi from April this
year. His turnover for various quarters till December is as follows:
April–June `20 lakh
July–Sept `30 lakh
Oct–Dec `20 lakh

In the given case, since Champak has started the supply of services in the current financial year,
his aggregate turnover in the preceding FY is Nil. Consequently, in the current FY, he is eligible for
composition scheme for services. He becomes eligible for the registration when his aggregate turnover
exceeds `20 lakh.
While registering under GST, he opted for a composition scheme for services.
For determining his turnover of the State for payment of tax under composition scheme for services,
turnover of April-June quarter [`20 lakh] shall be excluded as the value of supplies from the first day
of April of a financial year up to the date when such person becomes liable for registration under this
Act are to be excluded for this purpose.
On next `30 lakh [turnover of July–Sept quarter], he shall pay tax @ 6% [3% CGST and 3% SGST], i.e.
CGST `90,000 and SGST `90,000.
By the end of July-Sept quarter, his aggregate turnover reaches `50 lakh.
Consequently, his option to avail composition scheme for services shall lapse by the end of July–Sept
quarter and thereafter, he is required to pay tax at the normal rate of 18%. Thus, the tax payable for
Oct-Dec quarter is `20 lakh × 18%, i.e. `3,60,000.
Imposition of penalty in case of irregular availment of composition scheme [Section 10(5)]
If a taxable person has paid tax under the composition scheme though he was not eligible for the
scheme, the person would be liable to penalty and the provisions of section 73 or 74 of the CGST Act
shall be applicable for determination of tax and penalty.
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