Section 10 Of The Central Goods And Services Tax Act 2017
Original Text
10. Composition levy.
(1) Notwithstanding anything to the contrary contained in this Act but subject to the provisions of sub-sections (3) and (4) of section 9, a registered person, whose aggregate turnover in the preceding financial year did not exceed fifty lakh rupees, may opt to pay, in lieu of the tax payable by him under sub-section (1) of section 9, an amount of tax calculated at such rate as may be prescribed, but not exceeding,––
(a) one per cent. of the turnover in State or turnover in Union territory in case of a manufacturer,
(b) two and a half per cent. of the turnover in State or turnover in Union territory in case of persons engaged in making supplies referred to in clause (b) of paragraph 6 of Schedule II, and
(c) half per cent. of the turnover in State or turnover in Union territory in case of other suppliers,
subject to such conditions and restrictions as may be prescribed:
Provided that the Government may, by notification, increase the said limit of fifty lakh rupees to such higher amount, not exceeding one crore and fifty lakh rupees, as may be recommended by the Council.
Provided further that a person who opts to pay tax under clause (a) or clause (b) or clause (c) may supply services (other than those referred to in clause (b) of paragraph 6 of Schedule II), of value not exceeding ten per cent. of turnover in a State or Union territory in the preceding financial year or five lakh rupees, whichever is higher.
Explanation.—For the purposes of second proviso, the value of exempt supply of services provided by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount shall not be taken into account for determining the value of turnover in a State or Union territory.
(2) The registered person shall be eligible to opt under sub-section (1), if:—
(a) save as provided in sub-section (1), he is not engaged in the supply of services;
(b) he is not engaged in making any supply of goods or services which are not leviable to tax under this Act;
(c) he is not engaged in making any inter-State outward supplies of goods or services;
(d) he is not engaged in making any supply of services through an electronic commerce operator who is required to collect tax at source under section 52;
(e) he is not a manufacturer of such goods as may be notified by the Government on the recommendations of the Council; and
(f) he is neither a casual taxable person nor a non-resident taxable person:
Provided that where more than one registered persons are having the same Permanent Account Number (issued under the Income-tax Act, 1961), the registered person shall not be eligible to opt for the scheme under sub-section (1) unless all such registered persons opt to pay tax under that sub-section.
(2A) Notwithstanding anything to the contrary contained in this Act, but subject to the provisions of sub-sections (3) and (4) of section 9, 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 fifty lakh rupees, may opt to pay, in lieu of the tax payable by him under sub-section (1) of section 9, an amount of tax calculated at such rate as may be prescribed, but not exceeding three per cent. of the turnover in State or turnover in Union territory, if he is not—
(a) engaged in making any supply of goods or services which are not leviable to tax under this Act;
(b) engaged in making any inter-State outward supplies of goods or services;
(c) engaged in making any supply of services through an electronic commerce operator who is required to collect tax at source under section 52;
(d) a manufacturer of such goods or supplier of such services as may be notified by the Government on the recommendations of the Council; and
(e) a casual taxable person or a non-resident taxable person…
(3) The option availed of by a registered person under sub-section (1) or sub-section (2A), as the case may be shall lapse with effect from the day on which his aggregate turnover during a financial year exceeds the limit specified under sub-section (1) or sub-section (2A), as the case may be.
(4) A taxable person to whom the provisions of sub-section (1) or, as the case may be, sub-section (2A) apply shall not collect any tax from the recipient on supplies made by him nor shall he be entitled to any credit of input tax.
(5) If the proper officer has reasons to believe that a taxable person has paid tax under sub-section (1) or sub-section (2A), as the case may be, despite not being eligible, such person shall, in addition to any tax that may be payable by him under any other provisions of this Act, be liable to a penalty and the provisions of section 73 or section 74 or section 74A shall, mutatis mutandis, apply for determination of tax and penalty.
Visual Summary
Turnover Limits
Goods: Up to ₹1.5 Crore (₹75 Lakhs for Special States).
Services: Up to ₹50 Lakhs.
Tax Rates
Manufacturers/Traders: 1%
Restaurants: 5%
Service Providers: 6%
Restrictions
No Input Tax Credit (ITC).
No Inter-State Outward Supply.
Cannot collect tax from buyers.
Summary
Section 10 of the CGST Act introduces the Composition Levy, a simplified tax scheme designed specifically for small businesses. Instead of the rigorous compliance required under the regular GST regime (such as detailed invoice-wise filing and monthly returns), eligible businesses pay a fixed, lower rate of tax on their turnover.
This scheme is optional. If a business opts for it, they benefit from reduced compliance but face significant restrictions: they cannot claim Input Tax Credit (ITC) on their purchases, and they cannot collect tax from their customers. This effectively breaks the credit chain, making the scheme ideal for B2C (Business to Consumer) retailers but less attractive for B2B (Business to Business) suppliers.
In-Depth Analysis
Section 10 is divided into several critical sub-sections that define eligibility, rates, and penalties. Here is a detailed breakdown:
1. Two Distinct Schemes
The section actually houses two different composition schemes:
- Section 10(1) – For Goods & Restaurants: Applicable to manufacturers, traders, and restaurant service providers. The turnover limit is generally ₹1.5 Crore. The tax rates are 1% (0.5% CGST + 0.5% SGST) for traders and manufacturers, and 5% (2.5% CGST + 2.5% SGST) for restaurants.
- Section 10(2A) – For Services & Mixed Suppliers: Introduced to cover service providers (other than restaurants) and mixed suppliers who were previously excluded. The turnover limit here is ₹50 Lakhs, and the tax rate is flat 6%.
2. The “Bill of Supply” Concept
Since a composition dealer cannot collect tax, they are prohibited from issuing a “Tax Invoice.” Instead, they must issue a “Bill of Supply.” This document does not show a tax amount, ensuring the buyer cannot claim ITC on it. The dealer pays the tax out of their own pocket based on the turnover declared.
3. Marginal Service Provision
Originally, pure goods suppliers (under 10(1)) were disqualified if they provided even a small amount of service (like earning bank interest). The second proviso to Section 10(1) now allows goods suppliers to provide services up to 10% of turnover or ₹5 Lakhs (whichever is higher) without losing their composition status. Crucially, interest on loans/deposits is excluded from the turnover calculation entirely.
4. Strict Ineligibility Criteria
A taxpayer is immediately disqualified if they:
- Make any inter-state outward supply of goods (selling to another state).
- Supply goods not taxable under GST (e.g., alcohol, petrol).
- Are a Casual Taxable Person (CTP) or Non-Resident Taxable Person (NRTP).
- Manufacture notified goods like ice cream, pan masala, tobacco, aerated water, fly ash bricks, or roofing tiles.
Deep Research & Legal Precedents
The interpretation of Section 10 has been refined through judicial pronouncements and legislative amendments, particularly regarding the concept of composite supply and procedural fairness.
1. Landmark Judgments
While focusing on Ocean Freight, this judgment reinforced the sanctity of “Composite Supply.” It implies that the department cannot artificially split a bundled supply to deny composition benefits or alter tax rates, protecting dealers who provide naturally bundled services.
The Court quashed the cancellation of a composition dealer’s registration which was done solely due to non-filing of returns caused by genuine hardship (accountant’s illness). This establishes that procedural lapses should not disproportionately destroy a business’s right to the scheme if dues are subsequently paid.
Ruled that the omission of restrictive rules without a saving clause applies retrospectively. This is vital for composition dealers facing penalties under rules that have since been removed or relaxed.
2. Critical Legislative Amendments (2023-2025)
| Act / Year | Amendment Impact |
|---|---|
| Finance Act 2023 | ECO Liberalization: Amended Section 10(2)(d) to allow composition dealers to supply goods through E-Commerce Operators (like Amazon/Flipkart). However, supplying services through ECOs remains prohibited. |
| Finance Act 2024 | Unified Demand (Sec 74A): Section 10(5) was amended to include reference to the new Section 74A. For FY 2024-25 onwards, penalties for ineligible composition schemes are processed under this unified section, removing the distinction between fraud (Sec 74) and non-fraud (Sec 73) for time limits. |
| Finance Act 2025 | Penalty Relief: Introduction of Section 122B for “Track and Trace” compliance (affecting tobacco manufacturers) and reduction in appeal pre-deposits, easing the litigation burden for small composition dealers. |
Practical Examples
Scenario 1: The Small Trader (Eligible)
Rohan runs a grocery store in Pune with an annual turnover of ₹80 Lakhs. He sells goods only within Pune.
Analysis: Rohan is eligible for the Composition Scheme under Section 10(1). He pays 1% tax (0.5% CGST + 0.5% SGST) on his turnover. He cannot issue tax invoices to customers and cannot claim ITC on the stock he buys from wholesalers.
Scenario 2: The Inter-State Trap (Ineligible)
Sarah manufactures handmade soaps in Jaipur (Turnover ₹40 Lakhs). She receives an order from a client in Delhi worth ₹5,000.
Analysis: The moment Sarah fulfills this order, she engages in an inter-state outward supply. She immediately becomes ineligible for the Composition Scheme under Section 10(2)(c). She must register as a regular taxpayer and pay applicable GST rates (likely 18%) on her entire turnover, not just the Delhi order.
Scenario 3: E-Commerce Evolution
Amit sells electronics in Bangalore (Turnover ₹60 Lakhs). He wants to list his products on Flipkart.
Analysis: Prior to Oct 1, 2023, this would have disqualified him. However, post the Finance Act 2023 amendment, Amit can supply goods through an E-Commerce Operator while retaining his Composition status, provided he does not ship outside his state (Karnataka).
Key Takeaways
- ✓ Reduced Compliance: File statement CMP-08 quarterly and return GSTR-4 annually.
- ✓ Liquidity Benefit: Lower tax rates mean less working capital is tied up in tax payments, though the inability to collect tax offsets this.
- ✕ ITC Blockage: The biggest drawback is the inability to claim Input Tax Credit, breaking the value chain.
- ✕ Geographical Limit: Strictly limited to Intra-State (within the state) sales only.
Process Flowchart
Practice Questions
1. What is the tax rate for a manufacturer under the Composition Scheme?
2. Can a Composition Dealer issue a Tax Invoice?
3. Is a composition dealer allowed to sell goods through Amazon/Flipkart?
Related Provisions
Conclusion
Section 10 acts as a vital compliance shield for small businesses, shielding them from the complexities of the full GST regime. While it comes with the cost of losing Input Tax Credit and restricting market reach (no inter-state sales), the reduced tax liability and simplified filing make it an attractive option for local retailers and small manufacturers. With recent amendments allowing ECO participation for goods, the scheme is slowly modernizing to fit the digital economy.