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Published on 9 April 2025

Understanding GST Compliance for Composition Taxpayers: Key Issues Explained

Key Issues Faced by Composition Dealers

A. Can a Composition Taxpayer Supply Exempted Goods or Services?

Composition taxpayers are permitted to supply exempted goods and services under certain conditions. The provisions outlined in Section 10 and the associated rules clarify these conditions.

  • Exempt Supply of Services: According to Explanations 1 and 2 of Section 10(5), the exempt supply encompasses services related to extending deposits, loans, or advances, where the consideration is represented as interest or discount. Such services are excluded from the “aggregate turnover” and do not count towards the “turnover in State” or “turnover in Union territory.”

  • Removal of Difficulties Order: The Removal of Difficulties Order No. 01/2019 dated February 1, 2019, supersedes Order No. 01/2017 dated October 13, 2017. This clarifies that the value of exempt services described above is not considered when determining eligibility for the composition scheme.

  • Section 10(2)(b) Interpretation: This section specifies that a composition taxpayer should not engage in supplying goods that are not subject to tax under the GST Act. Hence, exempt supply includes:

    • Goods taxed at nil rate
    • Goods wholly exempt as per Section 11 of the CGST Act and Section 6 of the IGST Act
    • Non-taxable supplies

In summary, exempt goods and services do count toward aggregate turnover for determining eligibility under the composition scheme.

B. Is GST Payable on Exempted Supplies by Composition Taxpayers?

Section 10(1) and Rule 7 outline the tax rates applicable to manufacturers, restaurant service providers, and other suppliers:

  • Manufacturers (excluding certain categories like ice cream and pan masala):

    • 1/2% of the total turnover (total turnover includes both taxable and exempted supplies).

  • Restaurant/Outdoor Caterers:

    • 2.5% of the total turnover (including taxable and exempted supplies).

  • Other Suppliers:

    • 1/2% of the total turnover, where taxable supplies exclude exempted supplies.

Additionally, under the second proviso of Section 10(1), a composition taxpayer may supply services (other than those enumerated in clause (b) of paragraph 6 of Schedule II) if their value does not exceed either 10% of the turnover in the preceding financial year or ₹5 lakhs, whichever is higher. Consequently, composition taxpayers are liable to pay tax on exempted supplies as outlined in the mentioned provisions.

C. Can Composition Taxpayers Claim Input Tax Credit on Supplies Tax Paid Under RCM?

Composition taxpayers are not entitled to claim input tax credit for any taxes paid on inward supplies, including those taxed under the Reverse Charge Mechanism (RCM). Therefore, input tax credit is disallowed for composition taxpayers.

D. Tax Liabilities for Individuals Registered Mid-Year Before Eligibility

As per Explanation 2 of Section 10(5), when determining tax liabilities for a person who registers mid-year, the "turnover in State or turnover in Union territory" will not include supplies made before the person became liable for registration. This includes:

  • Supplies made from April 1 of the financial year until registration eligibility is established.
  • Exempt services provided as described in prior sections.

Thus, turnover made prior to registration does not incur GST liabilities.

Conclusion

In conclusion, composition taxpayers have specific guidelines regarding the supply of exempt goods and services, tax obligations, eligibility for input tax credit, and turnover considerations. It is crucial to review the relevant provisions, circulars, and judicial interpretations to ensure compliance with GST laws.

Disclaimer

The information provided herein is for informational purposes only and does not constitute legal advice or professional opinion. Readers should refer to the latest statutory provisions, judicial rulings, and official circulars before making any decisions based on this article. The author, TaxGuru, is not liable for any inaccuracies or omissions that may arise from the use of this information.

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