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August 27, 2020

Can a Service Provider pay Tax under Composition Scheme in GST?

Can a Service Provider pay Tax under Composition Scheme in GST?

What do you mean by Composition Levy?

Composition Scheme is a simple and easy scheme under GST where small taxpayers can get rid of tedious GST formalities and pay GST at a fixed rate of turnover. This scheme can be opted by any taxpayer whose turnover is less than Rs. 1.5 crore. The provisions of the composition scheme are covered under Section 10 of the CGST Act.

The following are the advantages of opting for composition scheme:-

  • Limited tax liability
  • Lesser compliance
  • Higher liquidity as supplies are taxed at a lower rate

What is the rate of tax of Composition Levy?

Rule 7 of the CGST Rules, 2017, prescribes the rate of tax under composition levy.

The category of registered persons, eligible for composition levy under section 10 shall pay tax at the rate specified in the below mentioned table:-

Sr NoCategoryRate of tax
1In case of manufacturer0.5% of the turnover in the State or Union territory
2In case of food and restaurant  services2.5% of the turnover in the State or Union territory
3In case of any other suppliers (traders, agents)0.5% of the turnover of taxable supplies of goods and services in the State or Union territory

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Can a person supplying services pay tax under composition levy?

Section 10(2A) was inserted by the Finance (No. 2) Act, 2019. According to Section 10(2A), a registered person, not eligible to opt to pay tax under sub-section (1) and sub-section (2), whose aggregate turnover in the preceding financial year did not exceed Rs 50 lakhs, may opt to pay, in lieu of the tax payable by him under section 9(1), an amount of tax calculated at such rate as may be prescribed, if he is not:-

  • engaged in making any supply of goods or services which are not leviable to GST
  • engaged in making any inter-State outward supplies of goods or services;
  • engaged in making any supply of goods or services through an electronic commerce operator who is required to collect tax at source under section 52
  • manufacturer of such goods or supplier of such services as may be notified by the Government on the recommendations of the Council
  • casual taxable person or a non-resident taxable person

Therefore, Section 10(2A) permits service providers to be included under Composition levy.

Amendments by CBIC vide Notification No. 50/2020-Central Tax Dated 24th June, 2020.

CBIC amended Rules 7 of the CGST Rules 2017  with a new entry for Composition tax payers who are providing services to be taxed at rate of 6% (CGST – 3% & SGST/UTGST – 3%) vide Notification No. 50/2020-Central Tax Dated 24th June, 2020.

In Rule 7 of Central Goods and Services Tax Rules, 2017, the following entry has been added – Registered persons not eligible under the composition levy under sub-sections (1) and (2), but eligible to opt to pay tax under section 10(2A) to be taxed at 3% of the turnover of taxable supplies of goods and services in the State or Union territory.

What do you mean by aggregate turnover?

“Aggregate Turnover” means the aggregate value of all:-

  • taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis)
  • exempt supplies
  • exports of goods or services or both
  • inter-State supplies of persons having the same Permanent Account Number

Aggregate Turnover is to be computed on all India basis but excludes central tax, State tax, Union territory tax, integrated tax and cess.

Let us refer to the table below to understand clearly what are the rates applicable under Composition Levy:-

Category of registered personsRate Applicable  
Manufacturers, other than manufacturers of such goods as may be notified by the Government0.5% of the turnover in the State or Union territory  
Suppliers making supplies referred to in clause (b) of paragraph 6 of Schedule II  2.5% of the turnover in the State or Union territory  
Any other supplier eligible for composition levy under subsections (1) and (2) of section 100.5% of the turnover of taxable supplies of goods and services in the State or Union territory  
Register persons not eligible under the composition levy under sub section (1) and (2), but eligible to opt to pay tax under section 10(2A) (Supplier of Services)3% of the turnover of taxable supplies of goods and services in the State or Union territory

So basically service providers are eligible to opt for composition levy if their aggregate turnover in the preceding financial year did not exceed Rs 50 lakhs @3% of turnover.

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