COMPOSITION SCHEME IN PROPOSED GST

[Dr. Sanjiv Agarwal]

Goods and Services Tax (GST) is going to be a reality in near future – could be by April, 2017 or few months later. GST is a new tax in India which shall be levied and collected as an indirect tax on supply of goods and services. 'Goods' and 'Services' are defined in section 2(48) and 2(86) of the model law as well as in the Constitution.

What is GST is also defined in article 366 (12A) of the Constitution which is being amended. Accordingly, 'goods and service tax' means any tax on supply of goods or services or both except taxes on the supply of the alcoholic liquor for human consumption.

Section 2(94) of the model law defines 'tax'. Accordingly, 'tax' means goods and services tax levied on the supply of goods and/or services under this Act and includes any amount payable under Section 8.

As per the above definitions read in consonance, GST or Tax would mean and include –

1. GST levied on supply of goods or services, and
2. Amount payable u/s 8 of model law.

Section 8 of model GST law provides for a scheme of levy based on composition. It provides for a composition levy and is an overriding provision subject to the charging section i.e., section 7 on levy and collection of central or state GST. It provides for a levy / collection of an amount in lieu of the tax payable under the GST law.

This provision is as follows –

''1) Notwithstanding anything to the contrary contained in the Act but subject to sub-section (3) of section 7, on the recommendation of the Council, the proper officer of the Central or a State Government may, subject to such conditions and restrictions as may be prescribed, permit a registered taxable person, whose aggregate turnover in a financial year does not exceed [fifty lakh of rupees], to pay, in lieu of the tax payable by him, an amount calculated at such rate as may be prescribed, but not less than one percent of the turnover during the year:

Provided that no such permission shall be granted to a taxable person who effects any inter-State supplies of goods and/or services.

Provided further that no such permission shall be granted to a taxable person unless all the registered taxable persons, having the same PAN as held by the said taxable person, also opt to pay tax under the provisions of this sub-section.

2) A taxable person to whom the provisions of sub-section (1) apply shall not collect any tax from the recipient on supplies made by him nor shall he be entitled to any credit of input tax.

3) If the proper officer has reasons to believe that a taxable person was not eligible to pay tax under sub-section (1), such person shall, in addition to any tax that may be payable by him under other provisions of this Act, be liable to a penalty equivalent to the amount of tax payable as aforesaid:

Provided that no penalty shall be imposed without giving a notice to show cause and without affording a reasonable opportunity of being heard to the person proceeded against."

According to proposed scheme of the composition levy, following points are worth nothing –

1. Composition scheme shall be subject to section 7 on levy and collection of GST but shall override other provisions of the law.
2. Composition scheme shall be based on recommendations of the GST Council
3. Composition scheme shall be subject to prescribed conditions and restrictions (to be prescribed)
4. Under the composition scheme, the proper officer of CGST / SGST shall permit the registered taxable person to pay in lieu of the tax payable by him, a composition amount.
5. The scheme is not available to unregistered persons.
6. Composition scheme can be availed in cases where aggregate turnover of registered taxable person in a financial year does not exceed ₹ 50 lakh.
7. Under composition scheme, amount payable in lieu of tax shall be calculated at the prescribed rate which will not be less than one percent of the turnover during the year, i.e., it could be one percent or more but certainly lower than the GST rate.
8. Composition scheme shall not be available to taxable person who supply goods or services to other states, i.e., it will not be applicable to inter-state supplies where IGST is payable.
9. Composition scheme can be availed by those taxable persons only where  all the registered taxable persons, having the same PAN as held by the said taxable person, also opt to pay tax under the provisions.
10. Where composition scheme is opted for, taxable person will not be allowed or  shall not collect any tax from the recipient of supplies.
11. Taxable persons under composition scheme shall also not be entitled to any input tax credit.
12. Where composition scheme  is wrongly availed, proper officer may require such person to pay for taxes payable under the Act and an equal amount of penalty shall also be payable.
13. Such penalty shall be levied only after affording a reasonable opportunity of being heard to the taxable person being penalized.

Aggregate turnover is defined under section 2(6) to mean the aggregate value of all taxable and non-taxable supplies, exempt supplies and exports of goods and/or services of a person having the same PAN, to be computed on all India basis and excludes taxes, if any, charged under the CGST Act, SGST Act and the IGST Act, as the case may be. Aggregate turnover does not include the value of supplies on which tax is levied on reverse charge basis and the value of inward supplies.

The scheme does not seem to be attractive as the scope of aggregate turnover includes exempt and non-taxable services. One percent or more levy makes sense when entire turnover is taxable. For example, if a person has a turnover of ₹ 50 lakh with ₹ 48 lakh as exempt and only 2 lakh as taxable, his tax @ 1 percent, i.e. ₹ 50,000 come to 25 percent which may not be intended. Hence, aggregate turnover to be considered should only be taxable turnover. Further, there should be a stipulation that rate of levy shall not be more than the cap which ought to be prescribed. Like one percent, there may be a range prescribed. The scheme shall allow a person to enter or exit the scheme at any time and made applicable to inter-state supplies also. As IGST is not included, the scheme users may not be many. The restriction on inter-state supplies also goes against the concept of GST itself (one India, one tax). Penalties proposed are too harsh and high i.e., equal to amount of tax. It may best be provided to the extent of recovery of differential tax with interest.

Discussions to this article

[Ganeshan Kalyani]

Sir, nice article. Yes the provision for composition tax scheme should be made more beneficial. Thanks