CMA Intermediate · Direct and Indirect Taxation

Composition Levy under GST for CMA Inter

The composition levy is an optional GST scheme under section 10 where an eligible registered person pays tax at a low flat rate on turnover instead of normal GST. To solve questions, check eligibility and conditions, pick the Rule 7 rate for the category, apply it to the right turnover, then note the compliance restrictions.

What this chapter covers

This chapter covers the composition scheme under section 10 of the CGST Act and Chapter II of the CGST Rules, 2017 (rules 3 to 7 in the text you study). It is a scheme for small taxpayers. Instead of charging tax on each invoice and claiming input tax credit, the person pays a flat percentage of turnover.

The chapter has four parts. First, who can opt and what conditions they must keep (rule 5). Second, how much tax they pay (rule 7). Third, from when the option works and how it is exercised (rule 4). Fourth, what happens when they leave the scheme or lose eligibility (rule 6).

It connects to the rest of the paper through registration, levy and charge, time and value of supply, input tax credit, reverse charge and invoicing. Many questions test composition together with these. For example, a problem may ask you to compute tax payable under composition and compare it with normal GST. Know the scheme well and you can answer such comparisons quickly.

Composition levy is a compact, rule-based chapter, so it is easy to score in once you have the conditions and rates fixed in memory. It suits both MCQs (a one-line condition or a rate) and short written answers (conditions, procedure, withdrawal steps, or a tax computation). The rules are specific, such as the seven-day and thirty-day time limits, so careful students can pick up full marks where others lose them to vague answers.

Composition Levy: topics in the order to study them

1Composition Levy Eligibility and ConditionsStart here. You must know who can opt and which conditions (rule 5) must be kept before rates or procedure make sense.
2Rate of Tax under Composition Levy (Rule 7)Once you know who is eligible, learn the rate for each category and the turnover it applies to. This is the base of numerical questions.
3Effective Date and Procedure for Opting CompositionNext, learn when the option begins (rule 4) and how intimation works. This needs the earlier topics as background.
4Consequences and Compliance under Composition SchemeStudy this last. It covers validity, withdrawal, denial by the officer, and ITC-01 (rule 6), which build on everything before.

How to prepare Composition Levy

Treat this chapter as a set of rules with exact conditions and time limits. Learn it in layers: conditions, rates, dates, exit. Then practise.

Read rule 5 and list the conditions in your own words. Group them: who cannot opt, stock and purchase restrictions, tax on inward supplies, and display and invoice wording.
Make a rate table from rule 7: category, section under which the option is taken, rate, and the turnover it applies to. Note that for other suppliers the rate applies to turnover of taxable supplies, and under section 10(2A) the rate is 3% of turnover of supplies of goods and services.
Learn rule 4 with the three situations: intimation at the start of the financial year, intimation on the appointed day, and intimation after a new registration is granted.
Build a timeline for rule 6: seven days to file CMP-04 after ceasing to satisfy a condition, fifteen days to reply to a show-cause notice, thirty days for the officer's order, and thirty days for ITC-01.
Solve numerical questions in a fixed layout: identify the category, state the rate with its rule, compute turnover, compute tax, and add a one-line comment on restrictions.
For written answers, use headings such as Conditions, Rate, Procedure and Consequences, and give one point per line so each mark is easy to award.
Before the exam, attempt MCQs on conditions and rates, and check each wrong answer against the rule text.

Common mistakes in Composition Levy

Applying the wrong rate or the wrong turnover base in a tax computation.
Fix: Always write the category first, then the rate from rule 7, then the turnover it applies to. Remember the 3% rate is for section 10(2A) persons.
Saying a composition person collects tax from customers or issues a tax invoice.
Fix: State that a bill of supply is issued with the words "composition taxable person, not eligible to collect tax on supplies" at the top.
Forgetting that tax on inward supplies under reverse charge is still payable.
Fix: Quote rule 5(1)(d): the person pays tax under section 9(3) or 9(4) on inward supplies of goods or services or both.
Mixing up the time limits in rule 6.
Fix: Tag each to its form: CMP-04 seven days, CMP-05 reply fifteen days, CMP-07 order thirty days, ITC-01 thirty days.
Treating withdrawal at one place of business as limited to that place.
Fix: Remember rule 6(7): intimation, withdrawal or denial for one place is deemed to apply to all places registered on the same PAN.
Writing the effective date of the option without checking which intimation was filed.
Fix: Link the date to the sub-rule of rule 3: the start of the financial year, the appointed day, or the date fixed after registration is granted.

Last-day revision: Composition Levy

Composition is an optional scheme under section 10; the person pays tax on turnover at a flat rate.
Under rule 5, a casual taxable person or a non-resident taxable person cannot opt.
Under rule 5, the composition person pays tax under section 9(3) or 9(4) on inward supplies (reverse charge).
Goods in stock bought from an unregistered supplier are allowed only if the person pays tax under section 9(4).
A composition person issues a bill of supply, not a tax invoice, marked "composition taxable person, not eligible to collect tax on supplies".
The words "composition taxable person" must be on every notice or signboard at the principal and every additional place of business.
Rule 7 rates: manufacturers 0.5%; supplies under clause (b) of paragraph 6 of Schedule II 2.5%; other suppliers 0.5% of turnover of taxable supplies; section 10(2A) persons 3%.
Option under rule 3(3) is effective from the beginning of the financial year; under rule 3(1) from the appointed day.
No fresh intimation is needed every year; the option continues subject to the Act and Rules.
On ceasing to meet a condition, tax is payable under section 9(1) from that day, and CMP-04 is due within seven days.
Show-cause notice CMP-05 gives fifteen days; the officer's order CMP-07 comes within thirty days of the reply.
ITC-01 stock statement is due within thirty days of withdrawal or of the CMP-07 order; withdrawal or denial for one place applies to all places on the same PAN.

Composition Levy practice questions

Composition Levy in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Composition Levy: frequently asked questions

What is the composition levy under GST?

It is an optional scheme under section 10 of the CGST Act. An eligible registered person pays tax at a low flat rate on turnover and does not charge tax on invoices. The rates are set by rule 7 of the CGST Rules, 2017.

What are the composition rates under Rule 7?

Manufacturers pay half per cent of turnover in the State or Union territory. Suppliers of supplies under clause (b) of paragraph 6 of Schedule II pay two and a half per cent. Other eligible suppliers pay half per cent of turnover of taxable supplies, and section 10(2A) persons pay three per cent.

Do I need to opt for composition again every year?

No. Under rule 5(2), the registered person may continue to pay tax under section 10 without filing a fresh intimation each year. This is subject to the Act and the Rules, and the option stays valid only while all conditions are met.

What happens if a composition person stops meeting a condition?

Under rule 6(2), the person becomes liable to pay tax under section 9(1) from the day the condition stops being met. Tax invoices must be issued for later supplies. The person must also file CMP-04 within seven days of the event.

Can a composition person claim input tax credit?

The rules supplied here do not give a composition person a credit route in the scheme. When the option is withdrawn or denied, the person may file ITC-01 stating the stock of inputs and inputs contained in semi-finished or finished goods held on that date. This is due within thirty days.