Section 10 of the Central Goods and Services Tax Act, 2017 deals with the Composition Levy under GST. The composition scheme is a simplified tax mechanism available to eligible registered persons whose turnover falls within the prescribed limit and who satisfy the conditions and restrictions laid down under the CGST Act and Rules.
Under the normal GST system, a registered person generally calculates tax on taxable supplies at the applicable rate, collects tax from the recipient where applicable, files the prescribed returns and follows the regular input tax credit mechanism.
The composition scheme provides an alternative framework for eligible taxpayers. A person opting for composition levy pays tax at the prescribed composition rate instead of paying tax under the normal levy under Section 9(1), subject to the conditions of Section 10.
Section 10 also contains a separate provision under sub-section (2A) for certain registered persons who are not eligible for the composition scheme under Section 10(1) and 10(2), but satisfy the conditions of the special composition mechanism for specified suppliers of goods and services.
What is Section 10 of the CGST Act?
Section 10 is titled “Composition levy.”
The section provides the legal framework for eligible registered persons to opt for payment of GST under the composition scheme instead of the normal tax payable under Section 9(1).
The basic idea is that a qualifying taxpayer pays tax at a prescribed rate based on turnover rather than following the normal GST tax calculation applicable to regular taxpayers.
However, composition levy is subject to several conditions.
A person cannot simply choose the scheme because their turnover is below the prescribed limit. The person must also satisfy the eligibility requirements and restrictions contained in Section 10 and the CGST Rules.
Who Can Opt for Composition Levy?
Under Section 10(1), a registered person whose aggregate turnover in the preceding financial year does not exceed the prescribed threshold may opt for composition levy, subject to the conditions of the Act and Rules.
The statutory provision originally specifies ₹50 lakh and allows the Government to increase the limit, by notification and on the recommendation of the GST Council, up to ₹1.5 crore. The applicable notified threshold therefore needs to be considered along with the relevant notification rather than relying only on the base figure written in the Act.
For the general composition scheme, the notified threshold has been increased to ₹1.5 crore for eligible taxpayers in most States and Union Territories. Certain specified States have a lower threshold under the applicable notifications.
Therefore, the turnover limit should always be checked with the latest applicable notification for the relevant State or Union Territory.
What is Aggregate Turnover?
The eligibility threshold under Section 10 is based on aggregate turnover.
Aggregate turnover is defined under Section 2(6) of the CGST Act.
Broadly, it is calculated on an all-India basis for the same PAN and includes the relevant taxable supplies, exempt supplies, exports and inter-State supplies of persons having the same PAN, while excluding CGST, SGST, UTGST, IGST and cess.
Therefore, a taxpayer cannot simply look at the turnover of one individual GST registration when determining eligibility.
The aggregate turnover concept is important because GST registrations of the same legal entity having the same PAN have to be considered according to the statutory definition.
Section 10(1): Basic Composition Scheme
Section 10(1) provides the main composition levy mechanism.
A registered person who satisfies the prescribed turnover requirement may opt to pay tax under composition levy instead of the normal tax payable under Section 9(1).
The tax is calculated at rates prescribed under the CGST Rules, subject to the maximum rates provided in Section 10.
The statutory maximum rates mentioned in Section 10(1) are:
| Category | Maximum rate under Section 10(1) |
|---|---|
| Manufacturer | 1% of turnover in the State or Union Territory |
| Persons making supplies referred to in paragraph 6(b) of Schedule II | 2.5% of turnover in the State or Union Territory |
| Other eligible suppliers | 0.5% of turnover in the State or Union Territory |
The actual CGST composition rates are prescribed through Rule 7. The current Rule 7 specifies 0.5%, 2.5% and 0.5% respectively for the relevant categories. These are the Central Tax components; the corresponding State/Union Territory tax applies separately under the respective law.
Composition Levy Rates
The rates under the composition scheme are commonly understood in terms of the combined GST burden.
For the main categories, the overall composition tax is generally:
| Category | CGST component | SGST/UTGST component | Combined rate |
|---|---|---|---|
| Manufacturers | 0.5% | 0.5% | 1% |
| Restaurant/service suppliers covered by paragraph 6(b) of Schedule II | 2.5% | 2.5% | 5% |
| Other eligible suppliers | 0.5% | 0.5% | 1% |
The applicable CGST component is prescribed under Rule 7 of the CGST Rules, while the corresponding State GST or Union Territory GST component is governed by the respective State or Union Territory GST law.
Section 10(2): Conditions for Composition Levy
A registered person must satisfy specific conditions to opt for composition levy under Section 10(1).
These restrictions are important because the composition scheme is not available to every registered taxpayer whose turnover falls below the threshold.
Section 10(2) contains conditions relating to:
- Supply of services;
- Non-taxable supplies;
- Inter-State outward supplies;
- Supplies through specified electronic commerce operators;
- Certain notified manufacturers;
- Casual taxable persons;
- Non-resident taxable persons.
The applicable rules also impose additional conditions and restrictions.
Supply of Services Under the Composition Scheme
Originally, the composition scheme was primarily associated with manufacturers, traders and restaurant suppliers.
The law was subsequently amended to allow eligible composition taxpayers to make a limited amount of supplies of services, other than the restaurant service covered under paragraph 6(b) of Schedule II.
For eligible suppliers under Section 10(1), the value of such other services is permitted up to 10% of turnover in the State or Union Territory in the preceding financial year, or ₹5 lakh, whichever is higher, subject to the applicable provisions.
This means that a trader or manufacturer opting for composition is not automatically prohibited from providing every form of service.
However, the statutory limit and other conditions must be satisfied.
Inter-State Outward Supplies
One of the important restrictions under Section 10 is that a person opting for the normal composition scheme cannot make inter-State outward supplies of goods or services in the manner prohibited by the provision.
This is an important distinction between a composition taxpayer and a regular taxpayer.
A business that regularly makes outward supplies across State borders therefore needs to examine whether the composition scheme is available before opting for it.
The condition should be read together with the current wording of Section 10 and applicable amendments.
Supplies Through Electronic Commerce Operators
Section 10 also contains restrictions relating to supplies made through an electronic commerce operator who is required to collect tax at source under Section 52.
Therefore, businesses using online marketplaces or other electronic commerce platforms need to examine the nature of their supplies and the applicable provisions before choosing the composition scheme.
The restriction in Section 10 should not be confused with Section 9(5), which deals with tax liability of electronic commerce operators for specified services.
Casual Taxable Persons and Non-Resident Taxable Persons
Section 10 specifically provides that the composition scheme is not available to:
- A casual taxable person, or
- A non-resident taxable person.
The CGST Rules also list these categories among the conditions applicable to persons opting for composition levy.
Therefore, satisfying the turnover condition alone is not enough.
Section 10(2A): Composition Scheme for Certain Service Suppliers
Section 10(2A) provides a separate composition mechanism.
It applies to a registered person who:
- Is not eligible to opt for composition under Section 10(1) and 10(2);
- Has aggregate turnover in the preceding financial year within the specified ₹50 lakh limit; and
- Satisfies the conditions specified under Section 10(2A).
The provision allows such a person to pay tax at a rate prescribed by the Government, subject to a maximum of 3% of turnover in the State or Union Territory.
Rule 7 currently prescribes the rate under Section 10(2A) at 3% of the turnover of supplies of goods and services in the State or Union Territory for the Central Tax component.
With the corresponding State/Union Territory tax, the combined rate is generally 6%.
Who Can Use Section 10(2A)?
Section 10(2A) is intended for certain taxpayers who are not eligible for the normal composition scheme under Section 10(1) and 10(2), but satisfy the specific conditions of the separate scheme.
It is therefore sometimes referred to as the special composition scheme for service suppliers and other eligible persons.
The scheme was introduced to provide a simplified tax mechanism for eligible small taxpayers who fall outside the normal composition categories.
The GST Council explained that Section 10(2A) was introduced as a residual composition scheme for taxpayers who were not eligible under Section 10(1) and 10(2), subject to its conditions.
Rate Under Section 10(2A)
The prescribed Central Tax rate under Rule 7 is:
3% of turnover of supplies of goods and services in the State or Union Territory.
The corresponding State GST or Union Territory GST component is generally another 3%, making the combined rate 6%.
Therefore, a taxpayer eligible under Section 10(2A) generally considers the composition tax burden at 6% when the Central and State/Union Territory components are combined.
Important Conditions Under Section 10(2A)
Section 10(2A) contains specific restrictions.
Among other conditions, the person opting for the scheme must not:
- Make certain non-taxable supplies;
- Make inter-State outward supplies of goods or services;
- Make supplies through an electronic commerce operator where the relevant restriction applies;
- Be a manufacturer of notified goods;
- Be a casual taxable person; or
- Be a non-resident taxable person.
The exact conditions should be checked against the current statutory text and applicable rules before opting for the scheme.
Composition Levy and Input Tax Credit
One of the major differences between the composition scheme and the normal GST scheme is the treatment of Input Tax Credit (ITC).
A person paying tax under Section 10 does not operate under the normal input tax credit mechanism applicable to regular taxpayers.
The composition taxpayer pays tax at the prescribed composition rate on the applicable turnover instead of calculating output tax in the normal manner and utilising eligible input tax credit against that liability.
This is one of the major reasons why the composition scheme is designed as a simplified taxation mechanism.
Can a Composition Taxpayer Collect GST Separately From Customers?
No.
A person paying tax under the composition scheme is generally not eligible to collect tax from the recipient of supplies.
Instead of issuing a normal tax invoice showing separately charged GST, the composition taxpayer issues a Bill of Supply for eligible supplies.
The CGST Rules require a composition taxpayer to mention the prescribed wording indicating that the person is a composition taxable person and is not eligible to collect tax on supplies.
What Document Does a Composition Taxpayer Issue?
A composition taxpayer generally issues a Bill of Supply rather than a tax invoice for taxable supplies.
The bill of supply should contain the particulars prescribed under the applicable GST rules.
The composition taxpayer must also mention:
“composition taxable person, not eligible to collect tax on supplies”
at the top of the bill of supply, as prescribed by the CGST Rules.
Can a Composition Taxpayer Charge GST on the Invoice?
No.
A composition taxpayer cannot separately collect GST from the customer as a tax charged on the supply.
The tax liability under the composition scheme is the taxpayer’s own liability under the composition mechanism.
Therefore, a composition taxpayer should not issue a normal GST tax invoice charging CGST and SGST separately in the manner applicable to a regular taxpayer.
Composition Taxpayer and Signboard Requirement
The CGST Rules also require a composition taxpayer to display the words:
“composition taxable person”
on every notice or signboard displayed at a prominent place at the principal place of business and at every additional place of business.
This requirement helps customers and other persons identify that the business is operating under the composition scheme.
Composition Scheme and Turnover
Turnover is one of the most important factors in determining eligibility.
The taxpayer needs to consider the aggregate turnover in the preceding financial year, rather than looking only at the turnover of one particular transaction or one GST registration.
If a taxpayer becomes ineligible because the applicable turnover limit is exceeded or another condition is violated, the composition option cannot continue from the relevant point as prescribed under the law.
The CGST Rules provide that a person becomes liable to pay tax under Section 9(1) from the day the person ceases to satisfy the conditions of Section 10 or the applicable rules.
What Happens When a Composition Taxpayer Becomes Ineligible?
A composition taxpayer must move out of the composition scheme when the person ceases to satisfy the eligibility conditions.
The CGST Rules provide that the person becomes liable to pay tax under Section 9(1) from the day the relevant condition ceases to be satisfied.
The person must then issue tax invoices for taxable supplies made thereafter.
The rules also prescribe the procedure for withdrawal, including FORM GST CMP-04 in the relevant circumstances.
Voluntary Withdrawal From Composition Scheme
A registered person can also voluntarily withdraw from the composition scheme.
The CGST Rules provide for filing FORM GST CMP-04 before the date of withdrawal.
After withdrawal, the taxpayer becomes subject to the normal GST provisions from the applicable date.
Can a Person Continue Composition Scheme Every Year?
A composition taxpayer does not generally need to submit a fresh composition option every financial year merely to continue under the scheme.
The option can continue as long as the taxpayer continues to satisfy the conditions of Section 10 and the relevant rules.
The CGST Rules specifically provide that a registered person paying tax under Section 10 may continue to pay tax under the section without filing a fresh intimation every year, subject to the provisions of the Act and Rules.
What Happens if the Composition Scheme Is Wrongly Availed?
If the proper officer has reasons to believe that a registered person was not eligible to pay tax under Section 10 or has violated the Act or the relevant rules, the officer can initiate the prescribed proceedings.
The CGST Rules provide for:
- FORM GST CMP-05 – Show-cause notice;
- FORM GST CMP-06 – Reply to the notice;
- FORM GST CMP-07 – Order accepting the reply or denying the composition option.
The rules also provide for the relevant consequences when the composition option is withdrawn or denied.
Composition Levy and Stock on Withdrawal
When a taxpayer exits or is denied the composition scheme, the GST Rules provide a mechanism relating to stock of inputs and inputs contained in semi-finished or finished goods.
The rules refer to FORM GST ITC-01 for furnishing the relevant stock details in the prescribed circumstances.
The applicable input tax credit provisions should also be considered when moving from the composition scheme to the normal taxation system.
Composition Scheme and Same PAN
GST law treats the option under Section 10 in relation to the registered persons having the same PAN.
The CGST Rules provide that an intimation relating to composition levy for a place of business in one State or Union Territory is deemed to be an intimation for the other places of business registered on the same PAN.
Similarly, withdrawal or denial of the composition option for one such place can have consequences for other registrations having the same PAN.
Therefore, businesses operating in multiple States should examine the PAN-level implications before opting for composition levy.
Composition Levy for Manufacturers
Manufacturers can generally opt for the composition scheme if they satisfy the turnover and other conditions.
However, Section 10 allows the Government to notify certain goods whose manufacturers are not eligible for composition levy.
Therefore, a manufacturer should check whether the goods manufactured by the business fall within any notified exclusion.
The applicable composition rate prescribed under Rule 7 for eligible manufacturers is 0.5% of turnover in the State or Union Territory as the Central Tax component, subject to the applicable provisions.
Composition Levy for Traders
Eligible traders can also opt for composition levy subject to the prescribed turnover and other conditions.
For an eligible supplier falling under the general composition category, Rule 7 prescribes the Central Tax component at 0.5% of the turnover of taxable supplies of goods and services in the State or Union Territory.
The corresponding State GST or Union Territory GST component is governed by the respective law.
Composition Levy for Restaurant Businesses
Certain suppliers making supplies referred to in paragraph 6(b) of Schedule II are covered by a separate composition rate.
Rule 7 prescribes the Central Tax component at 2.5% of turnover in the State or Union Territory for this category.
With the corresponding State GST or Union Territory GST component, the combined rate is generally 5%.
Composition Scheme for Small Service Providers
The special provision under Section 10(2A) is particularly relevant for certain small service providers who are not eligible for the normal composition scheme under Section 10(1) and 10(2).
The prescribed Central Tax rate under Rule 7 is 3% of turnover of supplies of goods and services in the State or Union Territory, with the corresponding State/Union Territory tax component making the combined rate generally 6%.
However, the taxpayer must satisfy the specific eligibility conditions of Section 10(2A).
Composition Levy vs Regular GST Scheme
The main differences can be understood from the following table:
| Particular | Composition Scheme | Regular GST Scheme |
|---|---|---|
| Tax calculation | Prescribed composition rate | Applicable GST rate on taxable supply |
| Input Tax Credit | Not available in the normal manner | Eligible ITC available subject to conditions |
| Tax collection from customer | Not permitted | Generally permitted |
| Tax document | Bill of Supply | Tax Invoice |
| Inter-State outward supplies | Restricted | Generally permitted subject to law |
| Compliance structure | Simplified in several respects | Regular GST compliance |
| Eligibility | Subject to turnover and conditions | Subject to normal registration provisions |
The composition scheme therefore offers a different compliance and taxation structure rather than simply being a lower GST rate.
Composition Scheme and Inter-State Purchases
A common misunderstanding is that a composition taxpayer cannot purchase anything from another State.
The important restriction concerns inter-State outward supplies, not every inward purchase.
A composition taxpayer may have inward supplies from another State, but the applicable GST provisions, including reverse charge where relevant, need to be examined.
The CGST Rules also require a composition taxpayer to comply with applicable reverse charge provisions for inward supplies in the circumstances prescribed by law.
Composition Scheme and Reverse Charge
Opting for composition levy does not automatically remove all reverse charge obligations.
Section 10 itself is subject to Sections 9(3) and 9(4).
The CGST Rules also specifically state that a composition taxpayer must pay tax under the applicable reverse charge provisions on inward supplies from unregistered persons where required by law.
Therefore, a composition taxpayer must separately examine whether a particular inward supply attracts reverse charge.
Composition Scheme and E-Commerce
The rules and Section 10 contain restrictions concerning certain supplies made through electronic commerce operators.
A business selling products through an online platform should therefore not assume that the composition scheme is automatically available simply because its turnover is below the threshold.
The taxpayer should check:
- The nature of the supply;
- Whether the operator is covered by Section 52;
- Whether the restriction under Section 10 applies;
- The applicable notifications and rules.
Advantages of Composition Levy
The composition scheme can provide certain practical benefits to eligible small businesses.
Simplified Tax Structure
The taxpayer pays tax at a prescribed composition rate rather than calculating normal GST on every taxable outward supply in the same manner as a regular taxpayer.
Reduced Compliance Burden
The scheme is designed as a simplified mechanism for eligible small taxpayers.
Predictable Tax Calculation
Tax can generally be calculated using the prescribed composition rate and applicable turnover.
Suitable for Certain Small Businesses
Small traders, manufacturers and eligible restaurant businesses may find the structure suitable depending on their business model.
However, the scheme also has important restrictions, including restrictions on collecting tax and claiming input tax credit.
Disadvantages and Restrictions of Composition Levy
The composition scheme is not suitable for every business.
No Normal Input Tax Credit
A composition taxpayer cannot claim input tax credit in the same manner as a regular taxpayer.
Cannot Collect GST Separately
The taxpayer cannot separately collect GST from customers.
Restrictions on Inter-State Outward Supplies
The scheme has restrictions relating to inter-State outward supplies.
Limited Business Flexibility
Businesses with substantial inter-State operations or business models involving restricted supplies may not qualify.
Turnover Limit
The taxpayer must continue to satisfy the applicable turnover conditions.
Therefore, eligibility should be considered based on the complete business model rather than only the tax rate.
Example of Composition Levy
Suppose an eligible trader has turnover of ₹50 lakh in a financial year and qualifies for the general composition scheme.
Assume the applicable combined composition rate is 1%.
The composition tax would be:
₹50,00,000 × 1% = ₹50,000
The exact liability must be calculated according to the applicable State/Union Territory, turnover rules and composition provisions.
The example is only for understanding the calculation mechanism.
Example of Section 10(2A)
Suppose an eligible service-oriented business falls under Section 10(2A) and has turnover of ₹40 lakh in the State during the relevant period.
If the combined composition rate is 6%, the simplified calculation would be:
₹40,00,000 × 6% = ₹2,40,000
The Central Tax component would generally be 3%, with the corresponding 3% State/Union Territory component, subject to the applicable law.
The business must first establish that it satisfies all conditions of Section 10(2A).
Important Forms Related to Composition Levy
Several GST forms are associated with the composition scheme.
| Form | Purpose |
|---|---|
| GST CMP-01 | Intimation for opting for composition in specified circumstances |
| GST CMP-02 | Intimation to opt for composition by an existing registered person |
| GST CMP-03 | Details of stock in specified circumstances |
| GST CMP-04 | Intimation/application for withdrawal from composition |
| GST CMP-05 | Show-cause notice where eligibility or compliance is questioned |
| GST CMP-06 | Reply to show-cause notice |
| GST CMP-07 | Order regarding acceptance or denial of composition option |
| GST ITC-01 | Stock/input details in specified withdrawal or denial situations |
The exact form and filing requirement depend on the taxpayer’s circumstances and the applicable provisions of the CGST Rules.
Important Points About Section 10 of CGST Act
The key points are:
- Section 10 deals with composition levy.
- The scheme is available only to eligible registered persons.
- Eligibility depends on aggregate turnover and several other conditions.
- The general composition scheme is subject to the prescribed turnover threshold.
- The statutory provision allows the Government to increase the basic ₹50 lakh threshold up to ₹1.5 crore, subject to the recommendation of the GST Council.
- The notified threshold should be checked for the relevant State or Union Territory.
- Eligible manufacturers, traders and specified restaurant suppliers can fall under the normal composition framework.
- Eligible suppliers can also provide a limited amount of services subject to the applicable statutory conditions.
- Section 10(2A) provides a separate composition mechanism for certain registered persons who are not eligible under Section 10(1) and 10(2).
- Rule 7 prescribes the applicable composition tax rates.
- A composition taxpayer cannot collect GST separately from customers.
- A composition taxpayer generally issues a Bill of Supply instead of a tax invoice for supplies covered by the scheme.
- A composition taxpayer cannot claim input tax credit in the normal manner.
- Restrictions apply to inter-State outward supplies.
- Restrictions apply to certain supplies through electronic commerce operators.
- Casual taxable persons and non-resident taxable persons cannot opt for the composition scheme.
- Reverse charge provisions under Sections 9(3) and 9(4) continue to be relevant.
- The composition option remains valid as long as the taxpayer continues to satisfy the applicable conditions.
- If the taxpayer becomes ineligible, the taxpayer becomes liable under the normal GST provisions from the applicable date.
Conclusion
Section 10 of the CGST Act, 2017 provides the legal framework for the Composition Levy, a simplified GST mechanism for eligible registered persons who satisfy the prescribed turnover limits and other conditions.
Under the normal composition scheme, eligible manufacturers, traders and specified restaurant suppliers can pay tax at prescribed composition rates instead of paying tax under the normal levy under Section 9(1). Rule 7 currently prescribes the Central Tax components at 0.5% for eligible manufacturers and other suppliers and 2.5% for suppliers covered by paragraph 6(b) of Schedule II.
Section 10(2A) provides a separate mechanism for certain registered persons who are not eligible under the normal composition scheme but satisfy the conditions of that provision. The Central Tax rate prescribed under Rule 7 for Section 10(2A) is 3%, with the corresponding State/Union Territory component generally resulting in a combined 6% rate.
The composition scheme also comes with important restrictions. A composition taxpayer cannot collect GST separately from customers, cannot claim input tax credit in the normal manner and is subject to restrictions relating to inter-State outward supplies and certain other activities. Therefore, a business should consider both the benefits and restrictions before opting for composition levy.
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