Is GST registration required for e-commerce operators?

Conditions for Availing the Composition Scheme under GST

The Composition Scheme under India’s Goods and Services Tax (GST) regime is designed to make tax compliance simpler and more affordable for small businesses with a lower turnover. GST registration offers a flat tax rate and simplifies paperwork, but businesses must meet specific eligibility criteria and follow conditions to avail of this scheme.

Here are the key conditions and eligibility criteria for availing the Composition Scheme:

Eligibility Conditions for the Composition Scheme

1. Turnover Limit:
   • Aggregate turnover of the business in the preceding financial year must not exceed:
     • ₹1.5 crore for most states (e.g., Maharashtra, Delhi, Gujarat, etc.).
     • ₹75 lakh for special category states (e.g., North-Eastern states, Jammu & Kashmir, Uttarakhand, Himachal Pradesh, etc.).
2. Eligible Businesses:
   • Manufacturers: Small manufacturers of goods can opt for the scheme.
   • Traders: Wholesalers or retailers dealing in goods can opt for the scheme.
   • Restaurants and Catering: Restaurants (excluding those serving alcohol) can opt for the Composition Scheme.
3. Note: Service providers are not eligible for the Composition Scheme, with an exception for restaurants that provide food and beverages.
4. Non-Eligibility for Certain Businesses:
   • Service Providers: Apart from restaurants, service providers (such as those offering consultancy, education, and IT services) are not eligible for the Composition Scheme.
   • Inter-State Supply: A business under the Composition Scheme cannot make inter-state supplies (selling goods/services to customers in other states).
   • E-Commerce Sellers: Businesses engaged in selling goods through e-commerce platforms are not eligible for the Composition Scheme.
   • Exempt Goods: Businesses dealing exclusively in exempted goods (goods on which GST is not applicable) cannot opt for the Composition Scheme.
5. Tax Rates under the Scheme:
   • Manufacturers: 1% of turnover (CGST + SGST/UTGST).
   • Traders (Suppliers of Goods): 1% of turnover (CGST + SGST/UTGST).
   • Restaurants: 5% of turnover (CGST + SGST/UTGST), excluding alcohol.
6. Businesses under the Composition Scheme must pay tax at these reduced rates on their turnover.
7. Non-Eligibility for Input Tax Credit (ITC):
   • Businesses under the Composition Scheme cannot claim Input Tax Credit (ITC) on the tax paid on their purchases. This is a key limitation compared to regular GST registration, where ITC can be claimed on inputs, capital goods, and services.
8. Invoicing and Documentation:
   • Businesses must clearly mention on their invoices that they are registered under the Composition Scheme by writing “Composition Taxable Person” or a similar statement.
   • Simplified Returns: Businesses under the scheme are required to file quarterly returns (GSTR-4), unlike the monthly returns required for regular taxpayers (GSTR-1, GSTR-3B).
9. Exit from Composition Scheme:
   • If the aggregate turnover of a business exceeds the prescribed limit (₹1.5 crore or ₹75 lakh), the business must exit the Composition Scheme and switch to regular GST registration.
   • Businesses must also exit the scheme if they violate any of the other conditions, such as making inter-state supplies.
10. Voluntary Registration:
    • Small businesses with turnover below the prescribed limit can voluntarily opt for the Composition Scheme if they wish to simplify their tax compliance.

Provisions in the Indian Constitution and GST Act for the Composition Scheme

The Indian Constitution and the GST laws govern the Composition Scheme. The main provisions are as follows:

1. Constitutional Provisions (101st Amendment)

The 101st Amendment to the Constitution of India (2016) introduced Goods and Services Tax (GST), laying the groundwork for the Composition Scheme. Key provisions include:

• Article 246A: Grants Parliament and State Legislatures the power to levy GST on goods and services. This article also empowers the GST Council to make recommendations on various aspects of GST, including the Composition Scheme.
• Article 279A: Establishes the GST Council, which is tasked with recommending the composition scheme, turnover limits, and the tax rates under GST.

2. Central Goods and Services Tax Act, 2017 (CGST Act)

The CGST Act provides the legislative framework for GST in India, including provisions related to the Composition Scheme. Key provisions include:

• Section 10 (Composition Scheme):
  • Section 10(1): Allows businesses with turnover below the prescribed limit to opt for the Composition Scheme.
  • Section 10(2): Specifies the types of businesses that are not eligible for the Composition Scheme, including those making inter-state supplies and those supplying exempt goods.
  • Section 10(3): Specifies the tax rates under the Composition Scheme (1% for manufacturers and traders, 5% for restaurants).
  • Section 10(4): States that businesses under the Composition Scheme cannot claim Input Tax Credit (ITC) on purchases.
• Section 22-23: These sections deal with mandatory registration for businesses whose aggregate turnover exceeds the prescribed limit (₹40 lakh for goods, ₹20 lakh for services). Businesses opting for the Composition Scheme must ensure their turnover does not exceed these limits.
• Section 37-39: These sections deal with filing of returns. Businesses under the Composition Scheme need to file GSTR-4 (quarterly) instead of the monthly returns that regular taxpayers file (GSTR-1, GSTR-3B).

Landmark Cases Relating to the Composition Scheme

While the Composition Scheme has not had as many landmark cases as other areas of GST, some judicial decisions have addressed issues concerning eligibility, taxability, and interpretation of the scheme. A few important cases are outlined below:

1. M/s. Home Solutions Retail India Ltd. v. Union of India (2017)

• Case Summary: This case addressed the interpretation of GST provisions and the eligibility of businesses for the Composition Scheme. The case focused on businesses involved in a mixed supply of goods and services, as well as their eligibility for opting for the scheme.
• Outcome: The court clarified that businesses providing both goods and services must evaluate whether their primary activity (whether goods or services) determines their eligibility for the Composition Scheme.

2. M/s. N.K. Metal Works v. Union of India (2021)

• Case Summary: This case dealt with the issue of Input Tax Credit (ITC) for businesses under the Composition Scheme. A business under the scheme had claimed ITC on its purchases, which is not allowed under the scheme.
• Outcome: The court upheld the provisions of the CGST Act, which exclude businesses under the Composition Scheme from claiming ITC on their purchases.

3. Karnataka Traders Federation v. Union of India (2018)

• Case Summary: The case addressed the eligibility of mixed supply businesses (those dealing in both goods and services) to opt for the Composition Scheme.
• Outcome: The court ruled that businesses engaged in mixed supplies would need to prove that their primary business involves goods (and not services) in order to avail of the scheme.

4. M/s. K. V. C. Traders v. Union of India (2019)

• Case Summary: This case dealt with compliance issues and the eligibility of businesses under the Composition Scheme based on their turnover and activities.
• Outcome: The court upheld the provisions of the CGST Act, which restrict the Composition Scheme to businesses dealing in goods and stipulates that businesses making inter-state supplies are not eligible.

Summary of Key Conditions under the Composition Scheme

Conclusion

The Composition Scheme under GST is a simplified tax system aimed at small businesses, offering lower tax rates and reduced compliance burdens. However, businesses must meet specific eligibility criteria and comply with the conditions set out in the CGST Act (Section 10) and the Indian Constitution (Articles 246A and 279A). Landmark cases have clarified issues regarding eligibility, taxability, and input tax credit under the scheme. Understanding these provisions and judicial rulings is essential for businesses considering the Composition Scheme.