A composite levy, often referred to as the Composition Scheme under the Goods and Services Tax (GST) in India, is an alternative and simplified method of GST compliance designed for small taxpayers. It allows eligible businesses to pay GST at a lower, fixed rate on their turnover, rather than the standard slab rates, and significantly reduces the compliance burden.
Eligibility for Composite Levy
The primary criteria for opting into the composite levy scheme revolve around a business's annual turnover in the preceding financial year.
- General Limit: Businesses with an annual aggregate turnover of less than Rs. 1.5 crore.
- Special Category States: For some specified states (primarily North-Eastern states and Himachal Pradesh), the turnover limit is Rs. 75 lakh.
| Category of State | Annual Turnover Limit (Previous Financial Year) |
|---|---|
| Most States/Union Territories | Less than Rs. 1.5 Crore |
| Special Category States* | Less than Rs. 75 Lakh |
*Special Category States include Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Tripura, Sikkim, Uttarakhand, and Himachal Pradesh.
Key Features and Benefits
The composite levy offers several advantages, especially for small businesses looking to streamline their tax obligations:
- Simplified Compliance: Businesses under the composition scheme need to file fewer returns (quarterly statements instead of monthly returns) and maintain simpler records.
- Lower Tax Burden: Tax is paid at a fixed, nominal rate on the turnover, regardless of the goods or services supplied.
- Ease of Operation: Reduces the need for detailed invoicing and complex tax calculations.
Typical tax rates under the composition scheme vary based on the type of business:
- Manufacturers and Traders: 1% of turnover (0.5% CGST + 0.5% SGST).
- Restaurants (not serving alcohol): 5% of turnover (2.5% CGST + 2.5% SGST).
- Service Providers: 6% of turnover (3% CGST + 3% SGST) for services or mixed supplies up to Rs. 50 lakh turnover in the preceding financial year.
Restrictions and Limitations
While beneficial, the composite levy comes with certain limitations that taxpayers must consider:
- No Input Tax Credit (ITC): Businesses opting for the composite levy cannot claim Input Tax Credit on the purchases they make. This means the GST paid on their inputs, input services, or capital goods cannot be offset against their output tax liability.
- No Inter-State Supply: Businesses cannot make inter-state (outside their state) outward supplies of goods or services. They are generally restricted to making intra-state supplies.
- Cannot Supply through E-commerce Operators: Taxpayers registered under the composition scheme are generally not allowed to supply goods or services through an Electronic Commerce Operator (ECO) that is required to collect tax at source under Section 52 of the CGST Act.
- Restricted Supply of Certain Goods: Businesses dealing in specific goods like ice cream, pan masala, and tobacco products are typically not eligible for the composite levy.
- Tax Not Collectible from Customers: A composite dealer cannot issue a tax invoice and cannot collect GST from their customers. They pay the tax out of their own pocket.
How it Differs from Regular GST Scheme
The composite levy fundamentally differs from the regular GST scheme in several ways:
| Feature | Composite Levy Scheme | Regular GST Scheme |
|---|---|---|
| Eligibility | Small taxpayers (turnover limits apply) | All taxpayers without turnover restrictions |
| Tax Rate | Fixed, lower rate on turnover | Variable rates based on goods/services (0%, 5%, 12%, 18%, 28%) |
| Input Tax Credit | Cannot claim ITC | Can claim ITC on purchases |
| Compliance Burden | Low (fewer returns, simpler records) | High (monthly returns, detailed records, invoice matching) |
| Tax Invoice | Cannot issue tax invoice; issues Bill of Supply | Can issue tax invoice and collect GST from customers |
| Inter-State Supply | Generally restricted to intra-state supplies | Can make both intra-state and inter-state supplies |
Practical Implications
The composite levy is ideal for small businesses, local retailers, and service providers who primarily deal with end consumers and do not have significant input tax credits to claim. For instance, a small local grocery store or a standalone restaurant often finds the composition scheme highly beneficial due to its simplified compliance and lower tax burden. However, businesses with large inter-state transactions or those reliant on claiming ITC for their operations would find the regular GST scheme more suitable. Opting for composite levy is a strategic decision based on the business model, customer base, and operational scale.
