Composition levy is not a practical proposition. Composition levy almost resembles a direct tax and once you do a cost impact analysis, it is really hard to understand as to how the scheme is beneficial to the business community and the MSMEs.

One of the Central Board of Excise & Customs (CBEC’s) flyers on composition levy scheme in GST says: “Composition levy scheme is a very simple, hassle-free compliance scheme for small taxpayers. It is a voluntary and optional scheme.
Benefits of composition scheme:

  • Easy compliance as no elaborate accounts and records to be maintained
  • Simple Quarterly Return
  • Quarterly payment of tax

Provisions related to composition levy have been provided under section 10 of the Central GST Act, 2017 and Chapter 2 of the CGST Rules, 2017. Under this scheme, a registered taxable person, whose aggregate turnover does not exceed Rs 1 crore (Rs 75 lakh for special category states except J&K and Uttrakhand) in the financial year 2016-17 may opt for this scheme.

A taxpayer registered under composition levy scheme has to pay an amount equal to certain fixed percentage of his annual turnover as tax to the government. This tax has to be paid on quarterly basis. Such taxpayer does not have to maintain elaborate accounts and records and instead of two monthly statement and a return (which a normal taxpayer has to file under GST), he has to file a simple quarterly return in FORM GSTR-04. The time limit for GSTR-4 for the quarter July to September, 2017 has been extended to 24th December, 2017 vide Notification No. 59/2017-CGST.

“However, upon opting for this scheme, he cannot issue taxable invoice under GST law and can neither collect GST from his customers nor can claim Input Tax credit on his purchases.”

Now look at the last sentence of the above paragraph. There are two significant factors, which have been incorporated as if these are in the nature of a rider. One, that the ITC is not available to a person working under this scheme and two, whatever GST, he is to pay cannot be collected from the customers.

The impact of above two factors on the costing may be analysed. Any taxable person may buy the inputs from following three categories of suppliers:

  • Non-taxable person
  • Person working under composition scheme
  • Taxable person

No GST is payable by (a) category of persons. Certain fixed percentage is payable by persons of (b) category and the applicable rate of GST is payable by a person under category (c). For supplier from persons in category (a), neither the GST is payable, nor is the question of availability of ITC.