Composition Levy:Analysis of section 8 of GST model Law

Section 8 of Model GST law provide for levy of composition scheme. The section read as

“Notwithstanding anything to the contrary contained in the Act but subject to subsection
(3) of section 7 on the recommendation of the Council, the proper officer of the
Central or a State Government may, subject to such conditions and restrictions as may be prescribed, permit a registered taxable person, whose aggregate turnover in financial year does not exceed [fifty lakh of rupees], to pay, in lieu of the tax payable by him, an amount calculated at such rate as may be prescribed, but not less than one percent of the turnover during the year”

“Provided that no such permission shall be granted to a taxable person who effects any inter-State supplies of goods and/or services.

Provided further that no such permission shall be granted to a taxable person unless all the registered taxable persons, having the same PAN as held by the said taxable person, also opt to pay tax under the provisions of this sub-section.”

(Text from model GST Law)

Analysis: 1) Provision of this section will overrule the other provisions of this Law except section 7(3) which provide for reverse charge as is clear from first two lines of text of Law given above. Thus the compounding dealer will also have to pay GST under reverse charge. Now question arise that if he will pay GST under reverse charge weather he will be able to take credit of it?
Section 16 (3) of model GST Law provide that a person covered under section 8 can take credit of tax paid only if he ceases to pay tax under section 8 i.e. composition levy. In this case the taxpayer doesn’t cease to pay tax under composition levy. He is not eligible to take credit of the tax he will pay under the reverse charge.

2) The composition levy will be available to only to

• A registered person
• Having aggregate turnover less then Rs. 50 lac
• in a financial year
• all registered taxable person from same PAN opt for this scheme (Proviso 2)

3) The registered person under this scheme-

• Shall not collect any  tax on any supply
• Shall not be eligible to take credit of any input tax charged from him.
• Shall pay a tax on a rate (as may be prescribed) but not less than one percent of his turnover

4) Availability of credit in case of shifting to normal provision: Section 16(3) provide that if a person ceases to pay tax under the composition levy and become liable to pay tax under section 7 he will be eligible to take the input tax credit on input in stock and in semi-finished and finished stock on the day immediately preceding the day when he became liable to pay tax under section 7.

5) Reversal of credit on Switch from normal taxability to composition i.e from section 7 to 8: Further section 16(12) provide that when a person who has availed the input tax credit switches to the composition levy u/s 8 shall pay an amount by way of debit in electronic cash or credit ledger, equivalent to the credit of input tax in respect of input held in stock including input contained in semi- finished and finished stock.

6)  If proper officer have reason to believe that a taxable person was not eligible for this scheme a penalty of amount equal to tax he was required to pay under this Act should be levied. This penalty would be levied only after giving a show cause notice and an opportunity of being heard.

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