What are the conditions for availing the composition scheme?

Conditions for Availing the Composition Scheme in GST

The Composition Scheme under GST simplifies compliance for small businesses by allowing them to pay tax at a fixed rate on their turnover. However, businesses must meet certain conditions to be eligible. Below are the details:

Eligibility and Conditions for Composition Scheme

Legal Basis:
The Composition Scheme is governed by Section 10 of the CGST Act, 2017 and corresponding rules under Rule 5 of the CGST Rules, 2017.

1. Turnover Limits

• Aggregate annual turnover should not exceed:
  • ₹1.5 crores for most states.
  • ₹75 lakhs for Special Category States (e.g., Mizoram, Tripura).

2. Type of Taxpayer

• Applicable for:
  • Manufacturers (excluding manufacturers of notified goods like tobacco and ice cream).
  • Traders (suppliers of goods).
  • Service providers with turnover up to ₹50 lakhs (introduced via Notification No. 2/2019-Central Tax (Rate)).

3. Interstate Supply

• Businesses must not engage in interstate supply of goods or services. Only intra-state supplies are allowed.

4. Excluded Activities

• Not available to:
  • Casual taxable persons.
  • Non-resident taxable persons.
  • E-commerce operators or those supplying goods/services through an e-commerce operator.

5. Input Tax Credit (ITC)

• Composition taxpayers cannot claim input tax credit on purchases.

6. Tax Invoice

• Composition taxpayers must issue a bill of supply (not a tax invoice) and cannot charge GST from customers.

7. Display of Status

• The words “Composition Taxable Person” must be prominently displayed:
  • At the principal and additional places of business.
  • On invoices or bills of supply issued by the taxpayer.

8. Compliance Requirements

• File quarterly returns using CMP-08 and an annual return using GSTR-4.
• Maintain simplified records as prescribed.

9. Tax Rates

• Manufacturers and traders: 1% of turnover.
• Restaurants (not serving alcohol): 5% of turnover.
• Service providers (up to ₹50 lakh turnover): 6% of turnover.

Constitutional Provisions

The authority for the Composition Scheme is derived from the Constitution (101st Amendment) Act, 2016, specifically:

1. Article 246A: Grants concurrent powers to the Union and States for GST legislation.
2. Article 279A: Establishes the GST Council, which recommended the Composition Scheme.
3. Seventh Schedule: Amended to unify taxation on goods and services under GST.

Landmark Cases on Composition Scheme

1. M/s. Rajeev Bansal and Sons v. Union of India (2020):
   • Issue: Eligibility of traders supplying goods to special economic zones (SEZs) under the Composition Scheme.
   • Ruling: The court clarified that SEZ supplies are considered inter-state and disqualify the taxpayer from the scheme.
2. Clay Craft India Pvt. Ltd. v. Union of India (2020):
   • Issue: Applicability of the scheme to service providers with minimal turnover.
   • Ruling: AAR ruled that small service providers could opt for the scheme if their turnover was within prescribed limits.
3. Baidyanath Ayurveda Bhawan Pvt. Ltd. v. Union of India (2019):
   • Issue: Whether manufacturing exempted goods allows for composition scheme eligibility.
   • Ruling: Composition scheme applies only to taxable supplies; businesses dealing primarily in exempt goods cannot opt in.
4. Gulbarga Jewellers v. State of Karnataka (2021):
   • Issue: Misrepresentation of turnover while applying for the scheme.
   • Ruling: Misreporting disqualifies the taxpayer and leads to penalties under Section 122 of the CGST Act.
5. Dhoot Transmission Pvt. Ltd. v. Union of India (2022):
   • Issue: Retrospective application of the scheme for previously unregistered periods.
   • Ruling: Taxpayers cannot retrospectively apply for the scheme and must comply from the effective registration date.

Key Points to Remember

1. The scheme is designed for small businesses with limited turnover and compliance requirements.
2. Taxpayers opting for the scheme cannot claim ITC or engage in interstate supplies.
3. Non-compliance with conditions may lead to penalties and disqualification under Section 10(5) of the CGST Act, 2017.

By adhering to the conditions and understanding the provisions, eligible businesses can benefit from the simplified tax regime offered by the Composition Scheme.