Composition scheme under Model GST Law and its impact on construction.
The New Model GST Law ( hence forth “MGL”) as made available on public domain as on 26th November 2016 have bring out many changes with respect to the provisons with respect to composition levy. Composition Levy have been present in indirect taxes to address the small business units or specific business units having complexity in valuation of taxable amount.MGL section 9 talks about payment of taxes in lieu of normal tax liability under section 8 of MGL , talks about Levy in general. Composition scheme also bring a lesser compliance requirements, however composition scheme normally successful in B to C segment rather than B to B segment.
At present almost all the state VAT laws normally have provisions for taxpayers to opt for composition scheme. Broadly two type of taxpayers are having option to avail the composition scheme subject to restrictions and conditions. I e. works contractor (including Real estate , builders) and Retail traders having turnover up to specified threshold Limit.
At present with the current understanding of law it can viewed that the composition scheme would only be available to small traders or specific manufactures up to turnover limit of ₹ 50 Lakhs
B. Laws of Composition Levy as per MGL
Eligibility and features for composition scheme under MGL
An alternate levy for small businesses, whose aggregate turnover in preceding financial year doesn’t exceed ₹ 50 Lakh.Eligible tax able persons may have to apply for the composition and the proper officer as per the provisions of law may grant the permission.
Registration as taxable person is compulsory to opt for the scheme. At present minimum exemption limit have been raised to 20 lakhs and for special category states it is ₹ 10 Lakhs.
Further composition levy facility is to be used on all India PAN basis. It means all the registration across India belongs to same PAN must avail the scheme.Once on a particular day the aggregate turnover exceeds ₹ 50 lakhs , the scheme deemed to be withdrawn from such date.
If the proper officer has reasons to believe that a taxable person was not eligible for the scheme , the taxable person shall pay tax under normal provisions and penalty.
Restriction for the scheme:- under provision to section 9(1) of MGL, Composition semen could not be allowed in the following class of taxable persons:-
who is engaged in the supply of services; or
who makes any supply of goods which are not liveable to tax under this Act; or
who makes any inter-State outward supplies of goods; or
who makes any supply of goods through an electronic commerce operator who is required to collect tax at source under section 56; or
Who a manufacturer of such goods is as may be notified on the recommendation of the Council.
Rate of Taxes and Input Tax credit: – Composition levy in lieu of tax is to be paid at a rate not less than 2.5 % in case of manufacturer and 1% for others (basically Traders). Further the taxable person opting for this scheme, neither entitled to collect any tax from the recipient and nor can avail any Input Tax Credit
C. Transitional provision Switching over and other Issues
Where on any day any registered taxable person become ineligible for the scheme, he shall, be entitled to take credit of input tax in respect of inputs held in stock, inputs contained in semi-finished or finished goods held in stock and on capital goods ( some percentage may be reduced as prescribed) on the day immediately preceding such date.
Section 9 of the MGL specifically allowed the composition scheme only to supply of goods and not services. As per Schedule –II to the MGL, all the supplies effected as works contract (including Real estate , builders) would be regarded as services and not goods. In this respect the following issues may found relevant:-
The transitional provisons section 172 may be use full for such cases where a composition dealer may not be eligible under MGL.
Works contractor normally be under composition scheme of Sate VAT and service tax normally be paid under abatement forging the CENVAT on inputs. In this case the Cenvat Credit on stocks, semi fished and finished stocks may not be available under section 172 of MGL. However section 169 related to general availability of credit may come for rescue. However it is subject matter of further analysis.
What would be regarded as composition scheme under earlier law gave not been provided in the MGL. For instance, there are cases in excise where special rate of duty have been allowed without taking any CENVAT credit. In the MGL it is given that, Persons Manufacturing, specified items may not opt for composition scheme. Hence in such cases whether section 172 or section 169 of MGL would come to rescue is subject to further analysis.
Some definitions which is very relevant for the subject on composition are enumerated as follows:-
“aggregate turnover” means the aggregate value of all taxable and non-taxable supplies, exempt supplies and exports of goods and/or services of a person having the same PAN, to be computed on all India basis and excludes taxes, if any, charged under the CGST Act, SGST Act and the IGST Act, as the case may be. Aggregate turnover does not include the value of supplies on which tax is levied on reverse charge basis and the value of inward supplies “inward supply” in relation to a person, shall mean receipt of goods and/or services whether by purchase, acquisition or any other means and whether or not for any consideration
outward supply” in relation to a person, shall mean supply of goods and/or services, whether by sale, transfer, barter, exchange, licence, rental, lease or disposal or any other means made or agreed to be made by such person in the course or furtherance of business.
Impact on decisions in GST
As the small dealers in majority of states are operating with the existing turnover limit of ₹ 50 lakhs. The impact may not be much. However majority of them may not covered due to enhancement of taxable limit of ₹ 20 lakhs from the exiting ₹ 10 lakhs.
The parsons present in more than one state with the same PAN may face a new difficulty to track the turnover limit of ₹ 50lkh, collectively.
Input tax credit as per section 18(3) of MGL, the carry forward credit and compliance there off may discourage to the scheme.
A majority of works contract cases were availing the composition scheme as there was no turnover limit earlier. However at present the segment were regarded as service and hence not eligible at all for the composition scheme.
In case of work contractor, builder , the credit available with respect to ITC in VAT Laws and CENVAT as far as excuse and service tax is concerned need to be reviewed in light of transitional provisions contained in section 169 and section 172.
A basic study of the provisons and the principles of GST, the law related to GST is being so drafted that it can be useful for a very small segment of the taxable persons. The purpose could be to justify the seamless flow of credit in the GST vale chain. However during the transitional period the effected industries need to be vigilant and optimise the impact of indirect taxes on the business.