I. Introduction: Overview of the Composition Levy

Section 10 of the Central Goods and Services Tax (CGST) Act, 2017, introduces the Composition Levy, a simplified alternative taxation mechanism designed primarily for small taxpayers within the Goods and Services Tax (GST) framework. The legislative intent behind this scheme is to ease the compliance burden and reduce the associated costs for small businesses, thereby facilitating their integration into the formal tax system without subjecting them to the complexities of the regular GST regime.¹ Compared to the standard GST requirements involving detailed record-keeping, monthly or quarterly return filings (GSTR-1, GSTR-3B), and intricate Input Tax Credit (ITC) reconciliations, the Composition Scheme offers significantly reduced procedural formalities, typically involving quarterly tax payments and a single annual return.⁴ This report provides a comprehensive legal, procedural, and practical analysis of Section 10, examining its core provisions, eligibility criteria, associated conditions and restrictions, tax liability computation, procedural requirements under the CGST Rules, interpretive guidance from administrative and quasi-judicial sources, legislative evolution, and the practical implications for taxpayers considering this option.

II. Analysis of Section 10 Provisions

Section 10 outlines the framework for the Composition Levy, detailing eligibility, restrictions, tax rates, and consequences of non-compliance.

A. Section 10(1): Eligibility and Basic Levy

Section 10(1) establishes the primary conditions for opting into the scheme. It permits a registered person, whose aggregate turnover in the preceding financial year did not surpass a specified threshold (initially set at ₹50 Lakhs), to opt to pay tax at a prescribed rate in lieu of the standard tax levied under Section 9(1).³

The first proviso to Section 10(1) empowers the government, upon the GST Council’s recommendation, to increase this threshold limit up to ₹1.5 Crores.¹⁰ Pursuant to this, the effective threshold has been progressively raised and currently stands at ₹1.5 Crores for suppliers of goods and restaurant services in most states.¹ For specified Special Category States, a lower threshold of ₹75 Lakhs applies.¹

Tax under this subsection is calculated at prescribed rates applied to the ‘turnover in State or Union territory’.¹⁰ The maximum rates specified are 1% for manufacturers, 2.5% for restaurant service providers (as defined in Schedule II, paragraph 6(b)), and 0.5% for other eligible suppliers (like traders).

Recognizing that businesses primarily dealing in goods might have incidental service income, the second proviso to Section 10(1) was introduced. It allows taxpayers opting under clauses (a), (b), or (c) of Section 10(1) to supply services (excluding restaurant services) up to a value not exceeding 10% of their turnover in the State/UT during the preceding financial year, or ₹5 Lakhs, whichever amount is higher.¹⁰ An Explanation further clarifies that for calculating this marginal service limit, the value of exempt services provided by way of extending deposits, loans, or advances (where consideration is interest or discount) shall not be considered part of the turnover.¹⁰

The evolution of the threshold limit from ₹50 Lakhs to ₹1.5 Crores ¹ and the subsequent allowance for marginal service income ¹³ demonstrate a legislative pattern of adapting the scheme. Initially conservative, the limits were likely expanded in response to feedback from the MSME sector, acknowledging that the original thresholds were too restrictive. The strict prohibition on supplying any services (barring restaurants) was also found to be impractical for many traders who might earn minor service income (e.g., repair, commission). The introduction of the 10%/₹5 Lakh allowance represented a pragmatic adjustment, reflecting an iterative process aimed at balancing the scheme’s simplicity with the practical realities faced by small businesses.

B. Section 10(2): Ineligibility Criteria

Section 10(2) delineates specific categories of registered persons who are ineligible to opt for the scheme under Section 10(1), thereby establishing crucial operational boundaries.¹⁰ These include:

1. Suppliers of Services (Sec 10(2)(a)): Initially, this barred most service suppliers, except those providing restaurant services. This is now significantly qualified by the second proviso to Section 10(1) allowing marginal services, and the introduction of Section 10(2A) for other service providers.³
2. Suppliers of Non-Leviable Goods/Services (Sec 10(2)(b)): Persons engaged in supplying goods or services outside the GST net (e.g., alcoholic liquor for human consumption, specified petroleum products) cannot opt for the scheme.¹⁰ This prevents businesses dealing primarily in non-taxable items from utilizing the simplified regime.
3. Inter-State Outward Suppliers (Sec 10(2)(c)): The scheme prohibits making any inter-state outward supplies of goods or services.² This restriction is fundamental to maintaining simplicity, as inter-state supplies involve IGST calculations and place of supply rules, which contradict the scheme’s objective. Notably, there is no restriction on receiving inter-state inward supplies.¹⁶
4. Suppliers through E-commerce Operators (ECO) (Sec 10(2)(d)): Originally, this clause barred any person supplying goods or services through an ECO required to collect tax at source (TCS) under Section 52.³ However, a significant amendment vide the Finance Act, 2023 (effective from 1st October 2023) omitted the words “goods or”.²³ Consequently, registered persons supplying goods through ECOs are now eligible for the composition scheme, while those supplying services through ECOs remain ineligible. This amendment likely stemmed from representations highlighting that the blanket ban unfairly disadvantaged small goods sellers increasingly reliant on online platforms. The continued restriction for services suggests perceived complexities in tax administration for services supplied via ECOs persist.
5. Manufacturers of Notified Goods (Sec 10(2)(e)): The government can notify certain goods whose manufacturers are ineligible. Currently notified items include ice cream, pan masala, tobacco and manufactured tobacco substitutes.¹ Aerated waters were initially notified but later excluded.³³ Specific brick manufacturers were also notified as ineligible but subsequently provided with a special composition rate option.³³
6. Casual Taxable Persons / Non-Resident Taxable Persons (Sec 10(2)(f)): These categories are explicitly excluded due to their temporary or non-resident nature.²
7. PAN-Based Eligibility (Proviso): A crucial condition stipulates that if a person holds multiple GST registrations under the same Permanent Account Number (PAN), all such registrations must collectively opt into the Composition Scheme, or none can.¹⁰ This prevents selective application of the scheme within the same legal entity.

C. Section 10(2A): Alternative Scheme for Service/Mixed Suppliers

Introduced formally by the Finance (No. 2) Act, 2019, Section 10(2A) created an alternative pathway for taxpayers not eligible under the primary scheme of Sections 10(1) and 10(2), particularly targeting service providers and those with mixed supplies exceeding the marginal limits of Section 10(1).² This addressed a significant gap in the original scheme, which largely excluded the substantial small service provider segment of the economy.³²

Eligibility under Section 10(2A) requires the aggregate turnover in the preceding financial year not to exceed ₹50 Lakhs.² Eligible persons can opt to pay tax at a prescribed rate (currently notified as 6% combined – 3% CGST + 3% SGST, under Rule 7) on their turnover in the State/UT, in lieu of the regular tax under Section 9(1).² The statutory cap for this rate is 3% CGST and 3% SGST.

The restrictions applicable under Section 10(2) largely mirror those for Section 10(2A), including prohibitions on supplying non-leviable goods/services, making inter-state outward supplies, supplying services through ECOs (post-Finance Act 2023 amendment), manufacturing notified goods or supplying notified services, and being a casual or non-resident taxable person.¹⁰ The PAN-based eligibility rule also applies equally.¹⁰

D. Section 10(3): Lapsing of Option

This subsection mandates that the option exercised under either Section 10(1) or Section 10(2A) automatically lapses from the very day the taxpayer’s aggregate turnover during the financial year crosses the respective eligibility threshold (₹1.5 Cr/₹75L for Sec 10(1) or ₹50L for Sec 10(2A)).¹⁰ From that point onwards, the taxpayer is obligated to pay tax under the regular provisions of Section 9(1), issue tax invoices for subsequent supplies, and formally withdraw from the scheme by filing Form GST CMP-04 within seven days.²¹ This provision ensures a sharp cut-off, reinforcing that the scheme is strictly intended for taxpayers remaining below the specified turnover limits throughout the year, although it imposes a continuous monitoring burden on the taxpayer.³¹

E. Section 10(4): ITC and Tax Collection Restrictions

Section 10(4) contains the fundamental trade-offs inherent in the Composition Scheme. It explicitly prohibits a taxpayer opting under Section 10(1) or 10(2A) from collecting any tax from the recipients of their supplies.¹ Furthermore, such taxpayers are not entitled to claim any Input Tax Credit (ITC) on their inward supplies.¹

The practical consequences are significant: composition dealers must issue a ‘Bill of Supply’ instead of a tax invoice ¹ and must bear the composition tax liability from their own funds.¹ The denial of ITC breaks the credit chain, making supplies from composition dealers less attractive to B2B customers who rely on ITC.² This core compromise – sacrificing ITC and tax collection rights for lower rates and simpler compliance – shapes the scheme’s suitability, primarily favoring B2C businesses or those with negligible input tax costs.⁹

F. Section 10(5): Penalties for Improper Availment

To deter misuse, Section 10(5) stipulates that if a proper officer determines a taxpayer has wrongly paid tax under the composition scheme despite being ineligible, that person shall be liable to a penalty in addition to the tax payable under the regular provisions of the Act.² The determination of the correct tax liability and the applicable penalty follows the procedures laid down in Section 73 (for cases not involving fraud, willful misstatement, or suppression of facts) or Section 74 (where such elements are present), applied mutatis mutandis.² This procedural linkage incorporates the established mechanisms for issuing show-cause notices (Form GST CMP-05) and orders (Form GST CMP-07) as detailed in Rule 6 of the CGST Rules.² This provision underscores the importance of accurately assessing eligibility before opting into the scheme, as the consequences of improper availment extend beyond merely paying the differential tax.⁴⁸

III. Determining Eligibility: Aggregate Turnover and Thresholds

Accurate determination of eligibility hinges on understanding the calculation of “aggregate turnover” and the applicable thresholds.

A. Calculation of “Aggregate Turnover” (Section 2(6))

Section 2(6) of the CGST Act defines “aggregate turnover” comprehensively. It encompasses the aggregate value of:

• All taxable supplies (excluding inward supplies subject to RCM)
• Exempt supplies
• Exports of goods or services or both
• Inter-State supplies between distinct persons having the same PAN. This calculation must be performed on an all-India basis.³

The definition explicitly excludes taxes levied under the CGST, SGST, UTGST, and IGST Acts, as well as GST Compensation Cess. It also excludes the value of inward supplies on which the recipient pays tax under the Reverse Charge Mechanism (RCM).²

A critical nuance exists specifically for determining eligibility for the Composition Scheme under Section 10. Explanation 1 to Section 10 modifies the general definition for this specific purpose. It states that aggregate turnover shall include the value of supplies made from the 1st of April of a financial year up to the date the person becomes liable for registration. However, it crucially excludes the value of exempt supply of services provided by way of extending deposits, loans, or advances where the consideration is represented by way of interest or discount.³

This specific exclusion of interest/discount income for composition eligibility contrasts with the calculation for the general registration threshold under Section 22, where such income might be included as part of exempt supplies contributing to aggregate turnover, as suggested by certain Advance Rulings (e.g., Gujarat AAR).⁶³ This divergence arises because the broad definition in Sec 2(6) applies generally, while Explanation 1 to Sec 10 provides a specific carve-out tailored to the composition scheme’s intent. Including passive income like interest could easily disqualify small businesses with low operational turnover, defeating the scheme’s purpose. Failure to recognize this distinction between the calculation for registration versus composition eligibility is a potential pitfall that could lead to incorrect assessments.

B. Current Turnover Thresholds (Section 10(1) & 10(2A))

Based on the legislative provisions and subsequent notifications, the current aggregate turnover thresholds (calculated based on the preceding financial year) for opting into the Composition Scheme are summarized in Table 1.

Table 1: Composition Scheme Eligibility Thresholds

Scheme Section	Applicable To	Threshold (General States)	Threshold (Special Category States*)	Relevant Snippets
Sec 10(1)	Suppliers of Goods / Restaurant Services	₹1.5 Crores	₹75 Lakhs	1
Sec 10(2A)	Suppliers of Services / Mixed Suppliers (Not under 10(1))	₹50 Lakhs	₹50 Lakhs	2

*Special Category States for the ₹75 Lakh limit under Sec 10(1) typically include Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, and Uttarakhand.⁷ Check current notifications for the definitive list.

IV. Conditions, Restrictions, and Tax Liability

Operating under the Composition Scheme involves adhering to specific conditions and understanding the tax liability calculation.

A. Key Conditions and Restrictions (Section 10 & Rules)

Beyond the eligibility criteria based on turnover and supply type (as detailed in Sec 10(2) and 10(2A)), several operational conditions and restrictions apply:

• No ITC: Input Tax Credit cannot be claimed.¹
• No Tax Collection: Tax cannot be collected from customers.¹
• Bill of Supply: Must issue a Bill of Supply instead of a Tax Invoice.¹
• Mandatory Wording: The Bill of Supply must mention “composition taxable person, not eligible to collect tax on supplies” (Rule 5(1)(f)).¹ Signboards at all places of business must display “composition taxable person” (Rule 5(1)(g)).¹ These ensure transparency for buyers regarding their inability to claim ITC.
• RCM Liability: Composition taxpayers are still liable to pay tax under the Reverse Charge Mechanism (RCM) on applicable inward supplies (e.g., from unregistered persons prior to its suspension, or specific notified services like GTA) as per Section 9(3) and 9(4). This tax must be paid via the electronic cash ledger.⁵ This ensures that tax on certain inward supplies is not entirely escaped.
• Other Restrictions: Reiteration of prohibitions on inter-state outward supplies, supply of non-leviable goods/services, supply of services via ECOs, manufacturing notified goods, and being a casual/non-resident taxpayer.¹⁰

Failure to comply with these conditions can lead to the denial of the option to pay tax under the scheme, as per Rule 6.⁴⁰

B. Composition Tax Rates (Rule 7 & Notifications)

The tax payable under the scheme is a percentage of the turnover, as specified in Rule 7 of the CGST Rules and relevant notifications. Explanation 2 to Section 10 clarifies that for calculating the tax payable, the ‘turnover in State or Union territory’ excludes the value of supplies made before the date of liability for registration and the value of exempt services involving interest or discount.¹⁰

Table 2 summarizes the current applicable rates:

Table 2: Composition Tax Rates (Rule 7)

Category	Scheme Section	CGST Rate	SGST Rate	Total Rate	Tax Base	Relevant Snippets
Manufacturers (Eligible)	10(1)/(2)	0.5%	0.5%	1%	Turnover in State/UT	2
Restaurant Services	10(1)/(2)	2.5%	2.5%	5%	Turnover in State/UT	2
Traders / Other Suppliers (Eligible)	10(1)/(2)	0.5%	0.5%	1%	Turnover of Taxable Supplies of Goods/Services in State/UT	2
Service / Mixed Suppliers	10(2A)	3%	3%	6%	Turnover in State/UT	2
Brick Manufacturers* (Specific types)	Special Rate	3%	3%	6%	Turnover in State/UT (without ITC)	33

*Refer Notification No. 02/2022-Central Tax (Rate) for specifics.

Note the subtle difference in the tax base for traders under Sec 10(1) (taxable turnover) compared to manufacturers and restaurants (total turnover in State/UT).

C. Tax Calculation and Payment (Form GST CMP-08)

The tax liability for a quarter is calculated by applying the relevant rate from Table 2 to the appropriate turnover base (considering exclusions from Explanation 2 to Sec 10). This self-assessed tax, including any RCM liability, must be paid quarterly using Form GST CMP-08.¹ The due date for filing CMP-08 and paying the tax is the 18th day of the month following the end of the quarter.¹ Payment must be made exclusively through the electronic cash ledger, as the ITC ledger is unavailable to composition taxpayers.¹⁶ Even if no tax is due for a quarter, a Nil CMP-08 must be filed.⁶⁶ While the quarterly payment via a simple statement simplifies compliance significantly compared to the regular scheme, the mandatory use of the cash ledger necessitates careful cash flow management by the taxpayer.¹⁶

V. Procedural Aspects (Rules 3-7 & Forms)

The CGST Rules, specifically Rules 3 to 7, along with associated forms, govern the procedures for opting into, complying with, and withdrawing from the Composition Scheme.

A. Opting-In Procedure (Rule 3 & Forms)

• New Registrants: Persons applying for new GST registration can opt for the scheme directly in Part B of the registration application, Form GST REG-01.¹⁸ The effective date of the scheme will align with the effective date of registration as determined under Rule 10.⁴¹
• Existing Regular Taxpayers: A taxpayer already registered under the regular scheme can switch to the Composition Scheme by electronically filing an intimation in Form GST CMP-02 via the GST portal.¹ This intimation must be filed before the commencement of the financial year for which the option is being exercised.⁴¹ The scheme then becomes effective from the beginning of that financial year.⁴¹ When switching from regular to composition, the taxpayer must also reverse eligible ITC on stock held by filing Form GST ITC-03 within the prescribed time (typically 60 days).³⁴
• Validity & Scope: Once opted, the scheme remains valid as long as the eligibility conditions are met, without needing annual renewal.⁴⁰ An intimation filed for one place of business under a PAN is deemed applicable to all other places of business registered under the same PAN.⁴¹

B. Compliance: Payment (CMP-08) & Return (GSTR-4)

Ongoing compliance primarily involves:

• Quarterly Tax Payment: Filing the statement Form GST CMP-08 by the 18th of the month following each quarter to declare self-assessed tax liability and make the payment.²
• Annual Return: Filing the annual return Form GSTR-4 by the 30th of April following the end of the financial year.¹ This return consolidates information for the year, including details auto-populated from filed CMP-08s and information on inward supplies.⁷ (Note: The 53rd GST Council proposed shifting the GSTR-4 due date to June 30th from FY 2024-25 ⁷⁵). Late filing of GSTR-4 attracts late fees.⁷

C. Withdrawal and Denial Procedures (Rule 6 & Forms)

Rule 6 outlines the procedures for exiting or being removed from the scheme:

• Voluntary Withdrawal: A taxpayer wishing to opt out voluntarily must file Form GST CMP-04 electronically before the intended date of withdrawal.²¹ The effective date is as indicated by the taxpayer, but cannot be earlier than the start of the FY in which the application is filed.⁴⁵
• Compulsory Withdrawal (Lapsing/Ceasing Conditions): If the turnover threshold is exceeded or any other condition of Section 10 or the Rules is no longer satisfied, the taxpayer must file Form GST CMP-04 within seven days of the event triggering ineligibility.²¹ The withdrawal is effective from the day the condition ceased to be met.⁴⁰
• Denial by Proper Officer: If the proper officer believes the taxpayer is ineligible or has contravened provisions, the process involves:

• Issuance of a Show Cause Notice (SCN) in Form GST CMP-05.²
• Taxpayer’s reply to the SCN in Form GST CMP-06 within 15 days.⁴²
• Officer’s order in Form GST CMP-07 within 30 days of receiving the reply, either accepting the reply or denying the option.² Denial can be effective retrospectively from the date of contravention.⁴⁵
• Transition to Regular Scheme: Upon withdrawal or denial, if the taxpayer becomes liable under the regular scheme, they may be eligible to claim ITC on inputs held in stock (raw materials, semi-finished, finished goods) on the day preceding the date from which the option is withdrawn/denied. For this, they must file a statement in Form GST ITC-01 within 30 days of withdrawal/denial order.²

These procedures, while aiming for simplification, require adherence to specific forms and timelines to ensure smooth transitions and avoid disputes.⁴²

VI. Interpretive Guidance: Rulings and Clarifications

Given the nuances of the scheme, administrative clarifications and rulings play a significant role in interpretation.

A. Impact of Judicial Pronouncements and Advance Rulings

While binding High Court or Supreme Court precedents specifically interpreting Section 10 may be relatively scarce compared to broader GST litigation, the Authority for Advance Rulings (AAR) and Appellate Authority for Advance Ruling (AAAR) have addressed specific queries related to the Composition Scheme.¹²

A notable area of AAR interpretation involves the calculation of ‘aggregate turnover’ for eligibility. As discussed earlier, the Gujarat AAR, in one instance, ruled that interest income from sources like PPF, bank accounts, and personal loans should be included when calculating the aggregate turnover for the registration threshold under Section 22.⁶³ While this ruling focused on registration, it created potential confusion regarding composition eligibility. However, as established, Explanation 1 to Section 10 specifically excludes such interest income when determining eligibility for the composition scheme.¹⁰ This highlights how AARs, while providing certainty to the applicant on specific facts ⁷⁸, can sometimes lead to broader uncertainty if not carefully distinguished based on the specific legal provision being interpreted (Sec 22 vs. Sec 10). Other areas potentially clarified by AARs might include the eligibility of specific mixed supplies or activities under the marginal service rules.

B. Key CBIC Circulars and Notifications

The Central Board of Indirect Taxes and Customs (CBIC) utilizes Notifications to operationalize statutory provisions (like setting thresholds and rates) and Circulars to provide clarifications on interpretation and procedure.⁸⁰ Key issuances relevant to Section 10 include:

• Notifications increasing Thresholds: E.g., Notification No. 14/2019-Central Tax dated 07.03.2019 raising the Sec 10(1) limit to ₹1.5 Cr.¹⁵
• Notifications prescribing Rates: E.g., Notification No. 2/2019-Central Tax (Rate) dated 07.03.2019 prescribing the 6% rate for Sec 10(2A) ⁴; Notification No. 02/2022-Central Tax (Rate) for brick manufacturers.³³
• Notifications listing Ineligible Goods: Specifying goods under Sec 10(2)(e).¹⁸
• Circulars clarifying Procedures: E.g., Circular No. 77/51/2018-GST dated 31.12.2018 clarifying the effective date for withdrawal/denial ⁴⁵; Circular No. 124/43/2019-GST dated 18.11.2019 regarding optional filing of GSTR-9A.⁸⁶
• Recent Clarifications: Circulars arising from GST Council recommendations, such as those following the 55th meeting, clarifying issues like the temporary RCM applicability on commercial rent for composition dealers.⁸⁰

This continuous stream of administrative guidance highlights the dynamic nature of the scheme’s interpretation and implementation, necessitating ongoing vigilance from taxpayers and professionals to remain compliant.⁸⁰

VII. Legislative Evolution: Key Amendments

The Composition Levy scheme has undergone significant evolution since its inception in 2017, reflecting adaptations to practical challenges and economic realities.

• Initial Framework (2017): The scheme launched with a base threshold of ₹50 Lakhs, extendable up to ₹1 Crore by notification. It was primarily available to manufacturers, traders, and restaurant service providers, with a strict exclusion of other service suppliers.¹¹
• Threshold Enhancements: The threshold under Section 10(1) was increased via notifications, first to ₹75 Lakhs, then ₹1 Crore ²⁰, and finally to ₹1.5 Crores following the CGST (Amendment) Act, 2018, which raised the statutory enabling limit.¹
• Inclusion of Marginal Services: The CGST (Amendment) Act, 2018, introduced the second proviso to Section 10(1) (effective 01.02.2019), allowing suppliers under the main scheme to provide other services up to the 10%/₹5 Lakh limit, acknowledging practical business needs.¹
• Scheme for Service Providers (Sec 10(2A)): Recognizing the exclusion of a large segment, Notification No. 2/2019-Central Tax (Rate) introduced a scheme for service providers (and mixed suppliers) with turnover up to ₹50 Lakhs, effective 01.04.2019.⁴ This was later codified into the Act as Section 10(2A) by the Finance (No. 2) Act, 2019.¹⁸
• E-commerce Supplier Eligibility: The Finance Act, 2023, removed the restriction barring suppliers of goods through ECOs from opting into the scheme, effective 01.10.2023, reflecting the growing importance of online sales channels for small businesses.²³
• Return Filing Simplification: The compliance mechanism shifted from filing quarterly returns (originally GSTR-4) to making quarterly payments via a statement (Form GST CMP-08) and filing a single Annual Return (Form GSTR-4).¹

This legislative journey showcases the scheme’s adaptability, responding to stakeholder feedback and evolving business practices to broaden its applicability and refine its procedures.

VIII. Practical Assessment: Pros, Cons, and Decision Factors

Choosing whether to opt for the Composition Scheme requires a careful weighing of its advantages and disadvantages against the specific circumstances of the business.

A. Advantages for Taxpayers

• Simplified Compliance: This is the primary draw. Fewer returns (quarterly payment statement CMP-08, annual GSTR-4) compared to the regular scheme’s monthly/quarterly filings, reduced record-keeping burden, and no need for detailed HSN/SAC classification or rate determination at the invoice level.¹
• Lower Tax Liability: The concessional fixed tax rates (1%, 5%, or 6% of turnover) are generally lower than standard GST rates, reducing the direct tax outgo.¹
• Predictable Tax Payments: Tax calculation based on turnover provides a degree of predictability for quarterly payments.¹
• Potential Liquidity Benefit: Lower tax payments can improve cash flow compared to paying standard rates ², although this is offset by the inability to use ITC and the need to pay from the cash ledger.

B. Disadvantages for Taxpayers

• Denial of Input Tax Credit (ITC): This is the most significant drawback. Composition dealers cannot claim ITC on any inward supplies (goods, services, capital goods), including tax paid under RCM. This leads to tax cascading, as the input tax becomes part of the cost.¹
• Inability to Collect Tax: The composition tax liability must be paid by the dealer out of their own pocket and cannot be charged to the customer on the Bill of Supply, directly impacting profit margins.¹
• Limited Market Access (B2B): Since composition dealers cannot issue tax invoices and their buyers cannot claim ITC, they become unattractive suppliers for businesses registered under the regular scheme. This severely restricts participation in B2B supply chains.²
• Territorial Restriction: The prohibition on inter-state outward supplies limits business expansion beyond state borders.¹
• Restrictions on Supply Channels/Types: Ineligibility to supply services through ECOs, supply non-leviable goods, or manufacture notified goods restricts business avenues.¹

C. Key Considerations for Opting In/Out

The decision between the Composition Scheme and the Regular GST Scheme is strategic and depends on several factors:

Table 3: Composition vs. Regular Scheme – Key Decision Factors

Feature	Composition Scheme	Regular GST Scheme	Key Consideration
Eligibility Turnover	≤ ₹1.5 Cr (Goods/Rest.) / ≤ ₹50 L (Services/Mixed) 1	No Upper Limit; Mandatory > Threshold 9	Is turnover comfortably below the composition limit? 9
Tax Rate	Low Fixed Rate (1%/5%/6%) on Turnover 34	Standard Rates (0-28%) on Value Added 9	What is the applicable regular rate vs. composition rate? Is the business high-volume, low-margin? 46
Input Tax Credit (ITC)	Not Available 2	Available 9	How significant are input tax costs? High input costs favor Regular Scheme; low costs favor Composition. 5
Tax Collection	Not Allowed (Paid from pocket) 1	Allowed (Collected from customer) 9	Can the business absorb the tax cost within its margins? 46
Customer Base	Primarily suited for B2C 46	Suitable for B2C and essential for B2B 51	Are customers primarily end-consumers or other businesses needing ITC? 46
Supply Scope	Intra-State Outward Only; Goods via ECO allowed, Services via ECO not allowed 2	Intra-State, Inter-State, Exports, ECO Supplies Allowed 9	Are there plans for inter-state sales, exports, or selling services online via platforms? 5
Compliance Burden	Lower (Quarterly Payment, Annual Return) 1	Higher (Monthly/Quarterly Returns, Detailed Records) 9	Does the business have resources/capability for regular GST compliance? 5
Profitability Impact	Tax on Turnover (Impacts low margins) 46	Tax on Value Addition (Aligns better with profit) 51	How does the tax calculation impact profitability, especially during low-profit periods? 51

D. Common Compliance Challenges

Despite its aim for simplicity, taxpayers under the Composition Scheme face practical challenges:

• Turnover Monitoring: Accurately tracking PAN-India aggregate turnover (including exempt supplies, excluding specific interest income) throughout the year to avoid inadvertently crossing the threshold.⁵
• Eligibility Interpretation: Correctly applying the complex definition of aggregate turnover and understanding all restrictions (inter-state, ECO, notified goods, PAN-level).⁵
• RCM Compliance: Ensuring timely payment of RCM liabilities through the cash ledger.⁵
• Procedural Adherence: Using the correct forms (CMP-02, CMP-08, GSTR-4, CMP-04, ITC-01) and meeting filing deadlines.⁷
• B2B Interaction: Explaining the inability to issue tax invoices and the lack of ITC to potential business customers.⁴⁶
• Cash Flow: Managing funds to ensure availability in the electronic cash ledger for quarterly tax payments, as ITC cannot be utilized.¹⁶

These aspects indicate that while the scheme reduces certain compliance burdens, it introduces others, requiring diligence and often professional guidance, especially for businesses operating close to the eligibility boundaries.⁵

IX. Conclusion

The Composition Levy under Section 10 of the CGST Act, 2017, serves as a vital alternative tax mechanism aimed at simplifying GST compliance for small taxpayers. It offers the tangible benefits of lower, fixed tax rates based on turnover and significantly reduced procedural requirements compared to the regular GST scheme. Key advantages include ease of compliance through quarterly payments (Form CMP-08) and an annual return (Form GSTR-4), and potentially lower tax outgo.

However, these benefits come at a considerable cost. The fundamental trade-off involves the complete denial of Input Tax Credit and the prohibition on collecting tax from customers, which can erode profit margins and create disadvantages in B2B markets. Furthermore, restrictions on inter-state outward supplies and, for service providers, supplies through e-commerce operators limit business scope and scalability.

The legislative journey of Section 10 reveals a continuous effort to refine the scheme, evidenced by increases in turnover thresholds, the inclusion of marginal services, the creation of a separate scheme for service providers (Sec 10(2A)), and the recent allowance for goods suppliers to operate through e-commerce platforms. These amendments reflect responsiveness to the needs of small businesses and the evolving economic landscape.

Ultimately, the decision to opt for or remain outside the Composition Scheme is highly business-specific. It demands a thorough analysis of the entity’s turnover, nature of supplies (B2C vs. B2B), input cost structure, geographical reach, compliance capabilities, and future growth aspirations. While the scheme undeniably offers simplicity, its inherent restrictions and the critical impact of ITC denial necessitate careful consideration and often, expert legal and financial advice to ensure the chosen path aligns with the business’s strategic objectives and operational realities. Continuous monitoring of legislative updates and administrative clarifications remains essential for effective compliance under this evolving scheme.

Works cited

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