Composition of Tax Levy Scheme will be an important part of the new Central Goods and Service Tax (CGST) Act, 2017. This scheme will benefit the small businesses which form the backbone of the Indian economy. Let us look at the salient features of this COT scheme.
Eligibility for Composition of Tax (COT) Levy Scheme
Every supplier of goods whose aggregate turnover from business on pan-India basis is less than Rs.50 lakhs will be eligible to avail COT. The following persons cannot avail this scheme:
- Persons engaged in inter-state supply of goods – i.e. the supplier should operate within the boundaries of the state for which his unit is registered.
- Persons engaged in supply of services, except for restaurants
- Persons engaged in supply of goods that are not taxable under GST
- Persons engaged in supply of goods through an electronic commerce operator (i.e. vendors who are supply goods through e-commerce platforms shall not be eligible)
This means that service providers and persons engaged in inter-state sale of goods will not be eligible for COT. Furthermore, small companies who wish to do business through e-commerce platforms (say, through Flipkart, Amazon, Snapdeal etc.) will not be entitled to the COT scheme. This does not augur well for small businesses for they will not be able to sell through e-commerce platforms if they wish to take benefit of COT.
This scheme will have additional impact on those in the area of works-contract. Till date works-contracts were entitled to COT under the local VAT laws, but come GST, they will not be entitled to avail COT as works-contracts have been specifically described as a service, and service providers are not eligible to recieve this benefit.
Tax rate and restrictions for COT Levy Scheme
The CGST Act, 2017 has prescribed the following lower rates of tax on the aggregate turnover of the business in lieu of the normal rate of tax,
- For manufacturers – 1% CGST + 1% SGST = 2% GST
- For restaurants – 2.5% CGST + 2.5% SGST = 5% GST and
- Others – 0.5% CGST + 0.5% SGST = 1% GST
It is worth noting that the tax proposed is in lieu of the normal rate of tax. What this means is that the person opting for COT would be required to pay GST from his own pocket; i.e. he would not be allowed to collect GST from his customers and remit that to the government. Furthermore, for the same reason, he would not be able to take input credit on his inward supplies. Due to these restrictions, persons who are engaged in supply of goods to registered persons (popularly known as B2B sales) would not find the COT scheme remunerative. On the other hand, those engaged in supply of goods to unregistered persons (i.e. B2C sales) could make good use of this scheme.
Some more guidelines for Composition of Tax Levy Scheme
Persons opting for COT should take care of the following matters
- Invoices generated by persons opting for COT will be a Bill of Supply and not a Tax Invoice. The invoice will clearly state that the supply is under the composition scheme.
- Persons opting for COT are not exempt from paying GST on reverse charge basis. Thus, if such persons consume any goods or services on which GST under reverse charge is applicable, the person will, in addition to the payment at the rates prescribed above, pay tax on reverse charge.
- Persons opting for COT shall file returns on quarterly basis in Form GSTR – 4
There are specific provisions that deal with treatment of input tax credit on goods in stock, raw materials and work-in-progress when a dealer moves from the COT scheme to normal scheme and vice versa. A careful study of these provisions is advisable.