No ITC, Limited Reach: The Price Of Six Per Cent Composition

Why Service Providers Needed a Separate Composition Window

The composition scheme, originally enacted under Section 10 of the CGST Act, 2017, was largely designed for manufacturers, traders, and specified restaurant suppliers. A person substantially engaged in supplying services could not ordinarily enter the scheme. The limited relaxation introduced from 01.02.2019 allowed a conventional composition taxpayer to supply services up to 10% of the preceding financial year's turnover in the State or Union territory, or Rs.5 lakh, whichever was higher. It did not provide an effective solution for a small business whose principal activity was supplying services.

This left pure service providers and genuine mixed suppliers outside the simplified tax framework. A local consultant, repair establishment, coaching centre, beauty or fitness business, photographer, or other small service enterprise might have modest turnover but would still be required to discharge GST under the regular scheme. The GST Council therefore recommended a residual composition arrangement for service providers and mixed suppliers whose preceding-year turnover did not exceed Rs.50 lakh. The scheme was initially introduced from 01.04.2019 through Notification No. 02/2019-Central Tax (Rate), dated 07.03.2019, at a combined rate of 6%, comprising 3% CGST and 3% SGST or UTGST. The legislative history is recorded in the minutes of the 32nd GST Council Meeting.

Section 10(2A) was subsequently inserted by Section 93 of the Finance (No. 2) Act, 2019, and brought into force from 01.01.2020. The notification-based arrangement thus received a clear statutory foundation. Rule 7 of the CGST Rules, 2017 was correspondingly amended to prescribe the 3% central tax component. Section 10(2A) is therefore no longer merely an administrative concession for small service providers. It forms part of the statutory composition framework, though its benefits remain subject to narrow eligibility conditions and significant commercial limitations.

A Residual Gateway, Not a Free Choice Between Two Schemes

Section 10(2A) applies to a registered person who is not eligible to opt for the composition levy under Section 10(1) read with Section 10(2). It is therefore a residual scheme. It does not allow every small taxpayer to choose freely between the conventional composition scheme and the 6% scheme. Eligibility under the main composition scheme must be examined first. Only a person falling outside that scheme, but satisfying the independent conditions of Section 10(2A), can enter the residual window.

This distinction is particularly important for mixed suppliers. A trader who supplies only a limited amount of incidental services may remain eligible under Section 10(1), provided the value of those services does not exceed 10% of the preceding-year turnover in the State or Union territory, or Rs.5 lakh, whichever is higher. Such a taxpayer cannot simply opt for Section 10(2A) as an alternative. However, where the service component exceeds that permissible limit, the conventional scheme becomes unavailable, and Section 10(2A) may then be examined, subject to the Rs.50 lakh turnover ceiling and other statutory restrictions.

Restaurant suppliers covered by the relevant statutory category also remain within Section 10(1) and ordinarily pay composition tax at the prescribed combined rate of 5%. Section 10(2A) is principally intended for pure service providers and mixed suppliers who do not fit within the earlier scheme. Correctly identifying the applicable sub-section must therefore precede comparing tax rates. A taxpayer cannot select the preferred composition category merely because one rate or compliance pattern appears more commercially attractive.

The Rs.50 Lakh Limit Operates at the PAN Level and at Two Stages

Entry into Section 10(2A) depends upon the "aggregate turnover" of the preceding financial year not exceeding Rs.50 lakh. Under Section 2(6) of the CGST Act, 2017, aggregate turnover is calculated on an all-India basis for all GST registrations bearing the same Permanent Account Number. It includes taxable supplies, exempt supplies, exports and inter-State supplies, but excludes CGST, SGST, UTGST, IGST and compensation cess, as well as inward supplies on which tax is payable under reverse charge.

The reference to compensation cess now has mainly historical and transitional relevance. Notification No. 02/2025-Compensation Cess (Rate), dated 17.09.2025, made compensation cess Nil on all goods, except specified pan masala and tobacco products, with effect from 22.09.2025. The cess on the remaining specified products was subsequently made Nil with effect from 01.02.2026 by Notification No. 03/2025-Compensation Cess (Rate), dated 31.12.2025. Nevertheless, compensation cess charged during the period when the levy remained applicable must continue to be excluded while computing aggregate turnover for the relevant preceding financial year under Section 2(6).

Consequently, one cannot test the threshold separately for each GST registration. If a firm has establishments in Delhi, Haryana and Uttar Pradesh under the same PAN, the turnover of all three registrations must be combined. A small registration in one State cannot opt for Section 10(2A) if the PAN-level turnover exceeded Rs.50 lakh in the preceding financial year. The proviso to Section 10(2A) reinforces this by requiring all persons registered under the same PAN to opt for the scheme. A combination of regular and Section 10(2A) registrations under one PAN is not permissible.

The threshold applies again during the current financial year. Under Section 10(3), the option lapses on the day aggregate turnover exceeds Rs.50 lakh. Eligibility is therefore not secured for the entire year merely because the preceding-year test was satisfied. Turnover must be monitored continuously across all GST registrations. The statutory explanations provide limited exclusions for interest or discount earned from deposits, loans or advances, and, for tax computation, certain supplies made before the person became liable for registration. These exclusions should be applied carefully; they do not convert the Rs.50 lakh ceiling into a registration-wise or taxable-turnover test.

The Six Per Cent Rate Is Simple, but Its Economic Base Is Wide

Rule 7 of the CGST Rules, 2017 prescribes a central tax of 3% for a person opting under Section 10(2A). The corresponding State or Union territory levy ordinarily adds another 3%, bringing the combined burden to 6%. A corrigendum issued immediately after Notification No. 50/2020-Central Tax replaced the expression "turnover of taxable" with "turnover of." The current rule therefore refers to the turnover of supplies of goods and services in the State or Union territory.

This wording has an important consequence. The tax base is not necessarily confined to supplies that would independently attract GST under the regular scheme. Exempt supplies may enter the composition turnover base, subject to the statutory exclusions, including the exclusion relating to specified interest or discount income. A service provider with a substantial stream of exempt receipts must therefore calculate the effective burden carefully. The headline rate of 6% can become expensive when applied to receipts that would otherwise not attract output tax under the regular method.

The levy is calculated on turnover, not on profit or value addition. A business earning a narrow margin cannot reduce the composition liability by showing high operating expenditure. Similarly, a taxpayer receiving reimbursement or recovery of expenses must first determine whether those amounts form part of the value of supply and consequently the turnover base. The apparent simplicity of applying one percentage should not obscure the importance of valuation, classification of receipts and identification of exempt or excluded income.

Zero ITC and the Prohibition on Tax Collection Change the Commercial Equation

Section 10(4) prohibits a composition taxpayer from collecting tax separately from the recipient and from claiming input tax credit. The supplier must issue a bill of supply rather than a tax invoice and bear the composition levy on the agreed consideration. The bill of supply and prescribed business displays must include a mandatory declaration that the supplier is a composition taxable person and is not eligible to collect tax.

The denial of ITC affects both parties to the transaction. The Section 10(2A) taxpayer cannot claim credit for GST paid on rent, professional services, equipment, software, consumables, or other business inputs. That tax becomes part of the cost structure. At the same time, a registered customer purchasing services from the composition taxpayer receives no corresponding ITC. The scheme may therefore be commercially unattractive to customers who are primarily businesses and expect a tax invoice and credit flow.

A 6% composition rate should consequently not be compared directly with an 18% regular or standard GST rate. Under the regular scheme, tax is charged to the customer and credit is available for eligible inward supplies. Under Section 10(2A), the supplier ordinarily absorbs the 6% liability, and inward tax becomes a cost. The meaningful comparison is between the net cash and commercial consequences under both systems, after considering ITC, pricing power, customer profile and operating margin. A lower nominal rate does not invariably produce a lower effective burden.

Eligibility Can Be Lost Through Geography, Platforms or the Nature of Supplies

Section 10(2A) prohibits inter-State outward supplies of goods or services. Inward purchases from another State are not prohibited, but the supplier's outward supplies must remain intra-State. For a service provider, this condition requires close attention to the IGST Act's place-of-supply provisions. A consultant may perform all work from one office, yet the service may become inter-State if the legally determined place of supply is in another State. Exports and supplies to Special Economic Zone units or developers also do not fit the composition framework.

The taxpayer must not supply goods or services that are not liable to GST. This expression should not be confused with an exempt supply. Supplies such as alcoholic liquor for human consumption or specified petroleum products outside the operational GST levy can render the taxpayer ineligible, whereas exempt supplies are treated differently. The taxpayer must also not be a casual taxable person or a non-resident taxable person, and must not manufacture notified goods or supply any category of service that may be notified for exclusion.

Online Sale of Goods Is Permitted, but Online Supply of Services Remains Restricted

Until 30.09.2023, a person paying tax under Section 10(2 A) could not make any supply of goods or services through an electronic commerce operator required to collect tax at source under Section 52. The restriction was relaxed from 01.10.2023 by omitting the words "goods or." Consequently, an eligible person can now sell goods through an e-commerce platform while remaining under Section 10(2A). However, the relaxation applies only to goods. Supply of services through an electronic commerce operator required to collect tax at source under Section 52 still makes the supplier ineligible for the scheme.

The permission to sell goods online is subject to an important territorial restriction. Under Notification No. 36/2023- Central Tax, dated 04.08.2023, the electronic commerce operator must ensure that the composition taxpayer does not make any inter- State supply of goods through its platform. The operator must also collect tax at source under Section 52, deposit it with the Government, and report the transactions in Form GSTR-8. For example, a composition taxpayer registered in Delhi may sell handicrafts through an online marketplace to customers located within Delhi. The same taxpayer cannot use that platform to supply those goods to a customer in Haryana or Uttar Pradesh because that would amount to an inter- State outward supply.

The distinction between goods and services is crucial. Suppose a small trader covered under Section 10(2A) sells stationery through an online platform within the State. Such sales may continue under the scheme if all prescribed conditions are satisfied. However, if a consultant, designer, or repair professional supplies services through an e-commerce operator required to collect tax under Section 52, the benefit of Section 10(2 A) would not be available. A person supplying both goods and services must therefore examine each online transaction separately. The amendment opened the e- commerce market to small suppliers of goods; it did not grant a similar relaxation for services supplied through operators covered by Section 52.

Reverse Charge and PAN-Level Election Prevent Selective Use of the Scheme

Section 10(2A) operates subject to Sections 9(3) and 9(4). Composition tax replaces the normal forward-charge liability under Section 9(1); it does not replace tax payable under reverse charge. Where the taxpayer receives a service falling under reverse charge, the applicable GST must be paid at the regular rate prescribed for that supply. The 6% composition rate cannot be applied to reduce the reverse-charge liability.

The resulting tax is particularly significant because the composition taxpayer cannot claim ITC. Reverse-charge tax paid on legal services, specified transport services, security services, renting of motor vehicles, or other notified inward supplies may therefore become an absolute cost. A business with regular reverse-charge exposure must add that cost to the 6% composition liability before deciding whether the scheme is beneficial.

The PAN-level requirement also prevents selective placement of profitable or B2C activities under composition while retaining input-intensive or B2B activities under the regular scheme. Every registration under the same PAN must move together. Before exercising the option, the taxpayer must review each branch's business model, customer locations, inter-State supplies, electronic-commerce activity, and reverse-charge exposure. A decision suitable for one registration may be commercially harmful or legally unavailable for another.

Simplified Returns Do Not Eliminate Compliance Discipline

An existing registered person ordinarily exercises the composition option through Form GST CMP-02 before the commencement of the financial year. A new applicant may indicate the composition option in Form GST REG-01. A person transitioning from the regular scheme must reverse the relevant ITC on inputs, stock and capital goods in accordance with Section 18(4), Rule 44 and Form GST ITC-03. Circular No. 97/16/2019-GST clarified the procedural application of the composition rules to service providers under the original notification-based scheme, including the PAN-level operation of the option.

Tax is reported and paid quarterly through Form GST CMP-08, ordinarily by the 18th day of the month following the quarter. An annual return is furnished in Form GSTR-4. For financial year 2024-25 onwards, the GST Council extended the due date for annual GSTR-4 from 30 April to 30 June after the end of the financial year.

The taxpayer must also monitor continuing eligibility. If turnover crosses Rs.50 lakh or any other condition is breached, the option lapses from the date of the disqualifying event. Form GST CMP-04 must ordinarily be filed within seven days. Regular tax invoices must be issued for subsequent taxable supplies, and eligible credit on stock may be claimed through Form GST ITC-01, subject to the statutory conditions. If an ineligible person wrongly continues under Section 10(2A), differential tax and penalty may be determined under Section 10(5), read with Sections 73, 74 or 74A, as applicable to the relevant tax period.

The Commercial Test Is More Important Than the Headline Rate

Section 10(2A) is generally suitable for small, locally operating service providers whose customers do not require ITC, whose taxable purchases are limited and whose turnover remains comfortably below Rs.50 lakh. It may benefit neighbourhood repair businesses, coaching establishments, personal-care service providers and similar predominantly B2C enterprises.

The scheme may be unsuitable where the business has substantial input taxes, serves ITC-conscious corporate customers, makes inter-State supplies or supplies services through an electronic commerce operator covered by Section 52. The decision should therefore compare the composition liability with the tax payable after ITC under the regular scheme, while also considering reverse-charge exposure, expected growth and customer requirements. Section 10(2A) offers simplicity, but in return the taxpayer must surrender ITC and continuously remain within its turnover and operational restrictions.