Mohandas Pai, a former director of Infosys and the current Chairman of Manipal Global Educators, shared an educational video on the concept behind the composition levy scheme available within the Goods and Services Tax (GST) regime.
The video is a short one, showing a patron at a restaurant asking his server to remove the 5% GST component in his bill as the restaurant was under the composition levy. Under this scheme, the restaurant (or any establishment) cannot collect GST on their sales. The video ends with an awareness message showing users how they can verify if an establishment has opted for the scheme or not.
The video can be seen below.
It was quote-tweeted by the Central Board of Indirect Taxes and Customs reaffirming that businesses under the composition scheme could not issue tax invoices or claim input credit.
They also linked their website where users can ascertain whether a business is within the composition levy or not.
Here's five things to know about the composition levy.
1. What is the composition levy scheme?
For business whose aggregate turnover is below ₹1.5 crores (₹75 lakhs for the seven states in the North-East and in Uttarakhand), the government has allowed the composition levy as an alternative tax mechanism where businesses who opt for the scheme are able to only pay a fixed and concessional percentage of their turnover instead of the normal rate.
The scheme is optional, but those who opt for the scheme must mandatorily register for it. Registration is needed only once and it remains valid till the taxpayer is eligible to be under the scheme, which can be done online.
As indicated by turnover threshold, this provision is only for small businesses owners, with this scheme aimed at bringing about an ease of compliance. Such businesses, the government argues, may not find it easy to comply with the GST rules in their entirety.
The fixed rate ensures that their payments under this levy are simplified. Further, they only need to pay this tax quarterly, or four times a year, instead of monthly, which further eases their compliance liability.
While the GST rates are primarily in five slabs: 0%, 5%, 12%, 18% and 28% (with some lesser used slabs like 3%), the levy rates under the composition scheme differ:
2. Who can and cannot opt for the composite scheme?
All eligible businesses under the threshold may opt for the scheme.
However, the manufacturers of the following goods cannot opt for the scheme:
- Ice cream, edible ice whether or not containing cocoa
- Pan masala
- Tobacco and manufactured tobacco substitutes
Further, the following also renders a business ineligible for the scheme:
- A business undertaking interstate supply of goods (a person may buy goods from another state, but may not supply interstate).
- Businesses supplying goods for export or to special economic zones
- A business that uses online e-commerce portals through which Tax Deduction at Source/Tax Collected at Source (TDS/TCS) provisions apply
- A resident taxpayer who occasionally supplied to states/union territories where he has no fixed place of business
- Businesses engaged in supply of goods not taxable under GST (like alcohol)
3. What should sellers who opt for the composite scheme know?
One of the hallmark features of this scheme is that taxpayers who opt for it cannot claim input tax credits.
When an ordinary business purchases goods to serve as inputs to what they finally produce, they pay GST on that input good. This can even extend to services, like cellular services, internet or transport. When they sell a finished product, they levy GST on its price from their buyers. This business can then claim the GST paid on the input(s) to offset the GST it owes the government from what it sells. This is called an input tax credit. This mechanism also prevents the cascading of taxes (or double taxation) anywhere across India, according to the CBIC.
When a business in the composite levy scheme buys goods as an input, it pays GST on it. But by virtue of being within the scheme, it cannot bill potential buyers GST, therefore, cannot claim this input tax credit.
Further, the business must adhere to:
- Display the words "Composite Taxable Person" prominently at his place of business
- Display the words "“Composition Taxable Person not eligible to collect tax on supplies" on their bills
- Pay taxes on purchases (since they cannot claim input tax credit)
- Withdrawing from the scheme if their turnover crosses the threshold or they supply to another state
With respect to restaurants, Sudhakar Shetty, a General Secretary of AHAR - a lobbying group for small and medium restaurants - told BOOM, "We hold regular briefings and consultations for our members on tax issues as and when the need arises".
He added that they had not faced any complaints with respect to restaurants charging GST despite being under the composite scheme, and whether to be under it was an individual choice.
4. What should consumers buying from businesses under the composite levy scheme know?
First, they should know that such businesses cannot levy GST as they are bearing this as a percent of their revenue (at a lower rate).
Therefore, like the video shared above conveys, consumers must look out for signs that a business is under the composite levy scheme. They may do so online, as the next section explains.
Therefore, they should know that their invoices would not include GST components.
5. How should I check if a business is under the composite levy scheme?
The GST website has a public portal to see if a taxpayer has opted in, or opted out if they were previously in the scheme.
Taxpayers can visit the GST website on https://services.gst.gov.in/services/listoftaxpayer.
They may then select if want to know if a business has opted in or out of the scheme.
Next, they can filter either by the business' GST number or by the name of the business within a particular state.
Third-party websites and mobile apps like Peridot also draw on this data and show a business' GST compliance history, including whether they are in the composite levy scheme or not.
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