The Composition Levy, also known as the Composition Scheme, is a simplified taxation scheme under the Goods and Services Tax (GST) regime in India. It is designed to ease the compliance burden for small businesses and reduce their administrative complexities.
Eligibility for Composition Levy:
To be eligible for the Composition Scheme, a taxpayer’s aggregate turnover in the preceding financial year should not exceed a specified threshold. As of my last knowledge update in January 2022, the threshold for regular taxpayers to opt for the Composition Scheme was ₹1.5 crore.
Nature of Business:
Not all businesses are eligible for the Composition Scheme. Certain types of businesses, such as service providers (except specific service sectors) and manufacturers of notified goods, are not allowed to opt for this scheme.
Features of Composition Levy:
Fixed Rate of Tax:
Businesses opting for the Composition Scheme are required to pay tax at a fixed percentage of their turnover. This rate is lower than the standard GST rates applicable to regular taxpayers.
No Input Tax Credit (ITC):
Businesses under the Composition Scheme are not allowed to claim Input Tax Credit on their purchases. This means they cannot offset the GST paid on their inputs against the GST collected on their outputs.
No GST on Intra-State Supplies:
Businesses under the Composition Scheme are not allowed to make inter-state supplies. They can only make supplies within the same state or union territory.
Limited Compliance Requirements:
The compliance requirements for businesses under the Composition Scheme are significantly reduced compared to regular taxpayers. They are only required to file quarterly returns and a simplified annual return.
No Separate Invoices for GST:
Businesses under the Composition Scheme do not need to issue tax invoices showing GST separately. They can issue a bill of supply without any GST details.
Restrictions and Limitations:
Cannot Collect GST from Customers:
Businesses under the Composition Scheme are not allowed to collect GST from their customers. They are required to bear the tax themselves.
Cannot Claim Input Tax Credit:
As mentioned earlier, businesses under the Composition Scheme cannot claim Input Tax Credit on their purchases.
Limited to One State or Union Territory:
Businesses opting for the Composition Scheme can only operate within one state or union territory. They are not allowed to have business operations in multiple states.
Not Allowed to Make Exports:
Businesses under the Composition Scheme are not permitted to engage in export activities.
Limited to Specific Sectors:
Some specific sectors like restaurants, caterers, and manufacturers of certain goods have a different composition scheme with separate rates.
Opting In and Out of Composition Scheme:
Eligible taxpayers can opt for the Composition Scheme during the GST registration process or later through the GST portal. Similarly, they can also opt out of the scheme and switch to regular GST compliance if they exceed the turnover threshold or for other reasons.