1. GST Composition Scheme, Job Work & Input Tax CreditBy
Pradeep K. Mittal
B.Com, LLB, FCS
Advocate, PKMG Law Chambers
Past Central Council Member,
The Institute of Company Secretaries of India, New Delhi
id:
Contact Nos ,

2. GST- COMPOSITION SCHEME BOON FOR SMALL TAXABLE PERSONS

3. INTRODUCTION
In order to relieve small, medium small traders and businessmen of the need to keep the detailed records, the law makes provision for simpler, easy and convenient method of accounting, calculation and payment of tax to the Government.

4. The Composition Scheme is the scheme to facilitate small dealers (whose annual turnover does not exceed Rs. 50 lakhs) to pay GST at a flat rate of 1% without claiming Input Tax Credit. The objective of all such composition schemes is not to burden small dealers by the provisions of record keeping.

5. Therefore, such schemes will generally contain the following features:
(i) small amount of tax shall be payable;
(ii) there shall be no requirement to calculate taxable turnover;
(iii) a simple return form to cover longer return period shall be sufficient.
“The scheme will be administered by the states for collecting Central GST (CGST) as well as State GST (SGST). Dealers involved in inter-state purchases will not be eligible for it.”

6. Composition Scheme is an option:
Tax payment under this scheme is an option available to the registered taxable person. This scheme would be applicable only to taxable person whose supplies are restricted to a particular state. In other words, a person opting effecting Inter-State supplies cannot opt for this scheme.

7. The taxable person should make an application exercising his option to pay tax under this scheme. Once an application is granted, the eligibility would be valid unless his permission is cancelled under law or he becomes ineligible.

8. Applicable to both goods and services: Composition scheme may be opted for by taxable persons, for supply of goods and / or services. It must be noted that a taxable person cannot opt for payment of taxes under composition scheme say for supply of goods and opt for regular scheme of payment of taxes for supply of services. It is important to note that for any tax payable under reverse charge mechanism, the option of payment under this scheme will not be available.

9. Eligibility to pay tax under Composition Scheme:
Only taxable persons whose ‘aggregate turnover’ does not exceed Rs.50 lakhs in a financial year will be eligible to opt for payment of tax under the composition scheme.

10. In terms of Section 2(6) of the CGST/ SGST Act, 2016 “aggregate turnover” means Value of all (taxable and non-taxable supplies + Exempt Supplies + Exports) – Taxes + Value of Inward supplies + Value of supplies taxable under reverse charge) of a person having the same PAN. It is expected that this threshold of turnover would be for the relevant financial year.

11. The threshold of Rs. 50 lacs would be applicable to a person having the same PAN and can be understood as follows:
Taxable person covered by the same PAN shall be under composition across India;
Value of supplies in all forms- goods and/ or services;
Value of supplies of all business verticals.

12. CONDITIONS: (i) Restricted from effecting Inter-State supplies:
The taxable person should not effect any inter-State supplies of goods and / or services. A plain reading of the proviso to Section 8(1) would imply that the restriction on supplies would be applicable only to sales/ dispatches (outward supplies). Where a taxable person effects Inter- State barter transaction (supply) or Inter-State warranty contract (supply), he will not be eligible to opt for composition scheme.

13. (ii) Composition Scheme would be applicable for all transactions under the same PAN.
Composition scheme would become applicable for all business verticals/ registrations which are separately held by the person with the same PAN. To clarify further, if a taxable person has multiple business verticals, and if he has opted for separate registrations for each such vertical, composition scheme would become applicable for all the business verticals and it cannot be applied for select verticals only.

14. (iii) Shall not collect tax:
Taxable person opting to pay tax under the composition scheme is prohibited from collecting tax.

15. (iv) Not entitled to input tax credit: Taxable person opting to pay tax under the composition scheme will not be eligible for any input tax credit. However, if the taxable person becomes ineligible to remain under the composition scheme, the taxable person will become entitled to take input tax in respect of inputs held in stock (as inputs contained in semi-finished or finished goods) held on the day immediately preceding the date from which he becomes liable to pay tax under Section 7.

16. Rate of Tax
The rate of tax would be as notified by the Government after recommendation of the GST Council. However, the law provides that such rate cannot be less than 1% of the turnover in the State. The word “turnover” to be read as defined in Section 2(104) of the Act.

17. “Turnover in a State” means the aggregate value of all taxable and non-taxable supplies, including exempt supplies and export of goods and / or services made within a State by a taxable person and inter-state supplies of goods and/ or services made from the State by the said taxable person excluding taxes, if any charged under the CGST Act, SGST Act and the IGST Act, as the case may be.

18. Cancellation of permission
Where the proper officer has the reason to believe that the taxable person was not eligible to the composition scheme or if the permission granted earlier was incorrectly granted, the proper officer may cancel the permission and demand the following:
Differential tax- viz., tax payable under the other provisions of the Act
Penalty equivalent to the tax.

19. Conclusionary Points
A composition scheme would become applicable for all business verticals/ registrations which are separately held by the person with the same PAN.
A composition scheme is applicable subject to the condition that the taxable person does not effect inter-state supplies.
A taxable person under the composition scheme is not eligible to claim input tax credit.
A customer who buys goods from taxable person who is under composition scheme is not eligible to claim composition tax as input tax credit.

20. A taxable person under the shelter of composition scheme is restricted from collecting tax.
The threshold for composition scheme is Rs. 50 lacs of aggregate turnover in a financial year.
The minimum composition tax rate prescribed under the Act is 1% of the turnover in the State.

21. GST- Job Work

22. Activity done by Job Worker
Initial Process
Intermediate Process
Assembly
Packing or any other completion process or complete manufacture
Raw Material
Intermediate Goods
Component Parts
Further Processed Goods
Semi Finished Goods
Complete Goods

23. Specific Provision for JOB WORK under GST Section 16A read with Section 43A: Input Tax Credit in respect of Inputs Sent for Job Work.
While looking at the provision of Section 16A which pertains to the availment of Input Tax Credit in respect of Inputs sent for job work, a reference is quite necessary to be made to the significant Section covering the broad spectrum of provisions outlining Job Work and special procedure for removal of goods. For statutory enactment, both the Sections together has been reflected below for comprehensive analysis.

24. ANALYSIS
Before looking at the provisions, it is quite imperative to interpret the expressions “Job Work” and “Job Worker” under the GST Act.
The definition of Job Work is given under Section 2(62) of the GST Act, which defines that “any treatment or process done by a person on goods belonging to a registered taxable person and the expression “job worker” to be construed accordingly.
“Job worker” to mean a person who does any treatment or process on goods of registered taxable person.

25. Looking from the prospect of comparative review, the term Job Work has not been defined in the Central Excise Act or Customs Act but the same has been provided for in Notification No. 214/86- CE. dated and CENVAT Credit Rules, The definition given GST law is much wider than the one given in Notification No. 214/86- CE, wherein job-work has been defined in such a manner so as to ensure that the activity of job work must amount to manufacture. Thus, the definition of job work itself reflects the change in basic scheme of taxation relating to job work in the proposed GST regime.

26. Entitlement of credit on inputs:
The principal can take credit of input tax on inputs sent to job-worker, for job work
subject to such conditions and restrictions as may be prescribed
the inputs, after completion of job-work, are received back by him within 180 days of their being sent out

27. credit of inputs can be taken even if inputs are sent directly to job-worker’s place without bringing to principal’s place of business.
If input sent directly to job worker, the period of 180 days is counted from the date when job worker receives input.
If the inputs are not received back within 180 days, the principal shall pay an amount equal to input tax credit taken on the said inputs.
If the inputs are received back by the principal, he may reclaim the input tax credit and interest paid earlier.

28. Entitlement of credit on capital goods
The principal can take credit of input tax on capital goods sent to job-worker
The said capital goods, after completion of job-work, are received back by him within 2 years of their being sent out
The principal can take credit of capital goods even if such capital goods are sent directly to job-worker’s place without bringing to principal’s place of business.
If the capital goods are not received back within 2 years, the principal shall pay an amount equal to input tax credit taken on the said capital goods.
If the capital goods are received back by the principal, he may reclaim the input tax credit and interest paid earlier.

29. Present Regime v. GST
Reversal of credit along with the interest where inputs or capital goods are not received back within the time specified:
As per Rule 4(5)(a)(iii) of the Credit Rules, if the inputs or the capital goods , as the case may be are not received back within the time specified i.e. 180 days/ 2 years by the manufacturer or provider of output service, the manufacturer or the provider of output service shall pay an amount equivalent to the CENVAT Credit attributable to the inputs or capital goods, as the case may be, by debiting the Cenvat Credit or otherwise.

30. The Model GST Law provides that where the inputs or capital goods are not received back by the principal within the time specified (i.e. 180 days or 2 years), as the case may be , he shall pay an amount equivalent to the input tax credit availed of on the said inputs or capital goods , as the case may be along with interest and reclaim the said amount (input tax credit and interest) as and when goods are received back at his place of business.

31. Section 43A(1) of the GST Act further provides that goods can be sent from one job worker to another job worker as well without payment of tax on such goods being sent. 
After the processing of goods, the goods may be dealt with in any of the following manner by the principal:
(a) Brought back to any place of business without payment of tax and thereafter supplied,
i. Within India on payment of tax;
ii. For export with or without payment of tax;

32. (b) Supplied from the place of business of job worker –
(b) Supplied from the place of business of job worker –
i. Within India on payment of tax;
ii. For export with or without payment of tax;
The goods can be supplied directly from the place of business of job worker by the principal only when the principal declares the place of business of the job worker as his additional place of business.

33. However, the exceptions are -
(a) If job worker is registered under Section 19;
(b) The principal is engaged in the supply of notified goods.
If the benefit under this section is availed, the principal is responsible and accountable for all the transactions between him and the job worker.

34. SUMMARY
The principal undertakes the primary responsibility and accountability of the goods including payment of taxes if any. 
The goods sent by a registered taxable person (principal) to a job worker shall not be treated as supply and cannot be held liable to GST. The reason being, that in terms of Schedule I of the GST Act, the supply of goods by a Principal to a Job worker shall not be regarded as supply. Therefore, no GST is applicable on such goods. 

35. A registered taxable person can send the taxable goods to job worker for job work without payment of tax. He can further send the goods from one job-worker to another job-worker and so on subject to certain conditions. It may be noted that provisions of Section 43A are not applicable if non-taxable or exempted goods are proposed to be sent for job-work.
The goods can be supplied from job worker’s premises to customers but only on payment of taxes within India and without payment of taxes for export.
Concerning the job worker’s registration, since a job worker would be a supplier of services, he would be required to obtain registration if his aggregate turnover exceeds the prescribed threshold.

36. Where the goods of Principal are directly supplied from the job worker’s premises, it will not be included in the aggregate turnover of the Principal.
The Principal can supply the goods directly from the job worker premises without bringing such goods to his own premises provided the Principal should have declared the premises of such job worker as his additional place of business.
However, goods can be supplied directly from the place of business of the job worker without declaring it as additional place of business in two circumstances namely where the job worker is a registered taxable person or where the principal is engaged in the supply of such goods as may be notified in this behalf.

37. Section 43A does not provide for the specific time limit
Section 43A does not provide for the specific time limit. However, in Section 16A, 180 days/ 2 years time frame has been mentioned within which the inputs/ capital goods has to be returned to the principal respectively.
The provisions relating to job work are applicable only when the registered taxable person intends to send taxable goods. In other words, these provisions are not applicable to exempted or non-taxable goods or when the sender is a person other than the registered taxable person.

38. Considering the job worker’s increasing role and contribution in the economy and the symbiotic relationship they maintain with the principal manufacturer or large scale units, it is desirable that the law pertaining to job work should provide simplicity and ease of doing business to support Make in India Initiative.

39. GST- INPUT TAX CREDIT (ITC)

40. Background of ITC
The most fundamental attribute of the Invoice- credit method is the right of the registered persons to claim Input Tax Credit (ITC). The ITC process allows them to take credit of Input Tax which comprise of (i) tax paid on input (ii) tax paid on input services (iii) tax paid on capital goods.

41. Meaning of Input under GST
Section 2(54) of the CGST/ SGST Act, 2016 gives the definition of “Input” “ Input means any goods other than capital goods, subject to exceptions as may be provided under this Act or the rules made thereunder, used or intended to be used by a supplier for making an outward supply in the course or furtherance of business.”
Any goods other than capital goods (subject to the exceptions as may be prescribed)
Used or intended to be used for making outward supply
In the course or furtherance of business
Input under GST

42. Meaning of Input Service under GST
Section 2(55) of the GST Act, 2016 gives the definition of Input Service. “Input service” means any service, subject to exceptions as may be provided under this Act or the rules made thereunder, used or intended to be used by a supplier for making an outward supply in the course or furtherance of business.”
Any service (subject to the exceptions) as may be prescribed
Used or intended to be used for making outward supply
In the course or furtherance of business
Input Service under GST

43. Let’s have a quick look of the mechanism of Input Tax Credit under present Indirect Tax Regime vis-à-vis GST Regime. In the Present Regime, a normal dealer avails the following types of credits:
-  On Inputs: VAT Credit & CENVAT Credit
-  On Input Services: CENVAT Credit
-  On Capital Goods: VAT Credit & CENVAT Credit
Going forward, there will be only ONE type of Credit i.e. Input Tax Credit (CGST+SGST) / (IGST)

44. STATUTORY PROVISION
Chapter V of the Model GST Act covers the broad spectrum for the availment of Input Tax Credit (ITC). The Chapter is divided in to 4 Sections:
Section 16: Manner of taking Input Tax Credit
Section 16A: Taking input tax credit on inputs sent for job work.
Section 17: Manner of distribution of credit by Input Service Distributor (ISD).
Section 18: Manner of recovery of credit distributed in excess.

45. Section 16(1): Registered person to take credit:
ANALYSIS  
Section 16(1): Registered person to take credit:
Every registered taxable person subject to Section 35 shall be entitled to take credit on admissible input tax. The Input Tax Credit is credited to the electronic credit ledger. Person registered under GST can only claim ITC. Section 9 talks of taxable person who is required to hold registration, person whose aggregate turnover in a financial year exceeds Rs. 20 lakhs (except North Eastern States including Sikkim, where threshold is Rs. 10 lakhs).

46. Section 35 explain as to how ITC can be availed:-
Credit of IGST shall be first utilized for the payment towards IGST, then for CGST and last for SGST.
Credit of CGST shall be utilized for IGST and then CGST.
Credit for CGST shall not be used for SGST
Credit for SGST shall be utilized for IGST and then SGST
Credit for SGST shall not be used for CGST.

47. Eligibility to input tax credit on inputs held in stock and contained in finished or semi-finished goods held in stock:
The credit on inputs held in stock and inputs contained in semi-finished goods and finished goods held in stock is available in the following manner.

48. Restrictions/ Conditions
Sl. No.
Eligible persons
Credit Entitled
As on
Restrictions/ Conditions 1.
Section 16(2): The existing registered persons needs to get themselves registered under GST within 30 days
On inputs held in stock and contained in semi-finished or finished goods held in stock.
The day immediately preceding the date from which he becomes liable to pay tax.
Cannot avail credit of goods and / or services after 1 year from tax invoice date.
The amount of credit calculated as per GAAP. 2.
Section 16(2A): Section 19(3) sketches voluntary registration, means even if he is not required under GST to get himself registered, may apply for registration and can take ITC.
Inputs held in stock and inputs contained in semi- finished or finished goods held in stock.
The day immediately preceding the date of registration

49. 3.
Section 16(3): Person ceases to pay composition tax. Section 8 deals with the Composition levy, person registered under Composition may not get the ITC. But when he leave the composition then he can avail the ITC.
Inputs held in stock and inputs contained in semi- finished or finished goods held in stock.
The day immediately preceding the date from which he becomes liable to pay tax under regular scheme.

50. In short, the credit of input tax can be taken as and when the person applies for registration but the entitlement of credit of inputs would be from the day liability to pay tax arises.

51. Section 16(5) and 16(6): Proportionate credit:
Business purposes: The goods and / or services are used by a registered taxable person partly for business and partly for non-business; he is eligible to input tax credit of goods and / or services attributable to the purposes of business.

52. Taxable Supplies: The goods and / or services are used partly for effecting taxable supplies (plus zero rated supplies) and partly for effecting non-taxable supplies (plus exempt supplies); he is eligible for credit attributable to the taxable supplies including zero-rated supplies.

53. In case, goods and/or services are partly used in taxable supplies and partly in non-taxable supplies the amount of credit shall be restricted to the taxable supplies. Taxable supplies include zero rated supplies and non-taxable supplies shall include exempted supplies.

54. ITC and change in the constitution of taxable person:
It's very common for businesses to enter into M&A deals, dispose of a particular vertical, spin-off a segment; so what will happen to the ITC accumulated in these divisions? If the covenants of the agreement provide for transfer of liabilities, then the balance lying can be transferred to the resulting entity. The change in the constitution of the taxable person due to sale, merger, demerger, amalgamation, lease or transfer of business with provision for transfer of liabilities-

55. (i)The registered taxable person allowed to transfer the input tax credit remaining unutilized in the books of accounts.
(ii)To such sold, merged, demerged, leased or transferred business.

56.   Ineligible Credit:
(i) motor vehicles, except when they are supplied in the usual course of business or are used for providing taxable services of –
Transportation of passengers
Transportation of goods
Imparting training or motor driving skills
As like Central Credit Rules, 2004 ITC cannot be claimed on Motor Vehicles when are not supplied in the usual course of business. ITC can be claimed by Tour Operator but not by the company who uses Motor Vehicle for its own purpose.

57. (ii) Goods and / or services provided in relation to -
food and beverages, outdoor catering, cosmetic and plastic surgery
life insurance, health insurance
travel benefits to employees on vacation such as leave or home travel concession
membership of a club, beauty treatment,
health services,
health and fitness centre
such goods and / or services as are used primarily for personal use or consumption of employee.

58. Similar to existing Central Credit Rules, 2004, ITC may not be claimed for those supplies where they are used primarily for personal use or consumption of an employee.

59. (iii) Goods and/or services acquired by principal in the execution of works contract when such contract results in construction of immovable property, other than plant and machinery.
Goods and /or services purchased by the principal in the execution of the works contract of construction of immovable property then ITC will not be claimed. However, ITC in respect of plant and machinery would be allowable when P&M have been in works contract. .

60. (iv) Goods acquired by principal, the property in which is not transferred whether as goods or in some other form to any other person, which are used in construction of immovable property, other than plant and machinery. Goods and/ or services purchased by the principal for immovable property, ITC may not be claimed. When it is for plant and machinery, ITC is allowable.

61. (v) Goods and/or services on which composition tax has been paid (u/s 8).
Composition Dealers: A Dealer who has opted for paying tax under Composition Scheme shall not be eligible for availing the Input Tax Credit under GST, and the existing Credit in the ledger shall get reversed. However, once the dealer opts out of the scheme, ITC in respect of the Inputs lying in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date of registration shall be allowed.

62. (vi) Goods and/or services used for private or personal consumption to the extent they are so consumed.
ITC over personal consumption is not allowable.
Where the registered taxable person has claimed depreciation on the tax component of the cost of capital goods under the provisions of the Income Tax Act, 1961, the input tax credit shall not be allowed on the said tax component.

63. Conditions for availing Input Tax Credit:
Registered taxable person is not entitled to input tax credit on supply of goods and/or services unless he: (i) is in possession of a tax invoice, debit note, supplementary invoice or such other taxpaying document as may be prescribed. Importance of Invoices: Invoicing is a very important administrative requirement which is based on the following simple but effective premises.

64. Registered Businesses can claim ITC only when they possess a purchase invoice, receipt/ customs entry or declaration showing Input tax paid or payable.
Suppliers are required to issue Sales Invoices and cash receipts to customers and invoices and receipts to support their ITC claims; and
To reverse an Invoice value, a Registered entity must be in possession of debit/ credit notes, forms of negative purchases or sales invoices.

65. (ii) has received the goods and/or services
(ii) has received the goods and/or services. The goods are deemed to be received by the taxable person when goods are delivered by supplier to recipient or other person on direction of the taxable person whether an agent or otherwise before or during movement of goods by way of transfer of documents of title of goods or otherwise.

66. is actually paid to the credit of the appropriate Government,
(iii) Tax charged for such supply
is actually paid to the credit of the appropriate Government,
either through cash or through utilisation of input tax credit admissible in respect of such supply.
(iv) He has furnished return (GSTR-3& GSTR-6 have been filed)
(v) In case of the goods which are received in lots or installments, against an invoice the credit could be availed upon receipt of last lot or installment by registered taxable person.

67. Credit of any input tax shall be available to a registered taxable person only if invoice/challan is in his possession for the goods and/or services received and the payment of such tax has been made by the supplier along with his Return u/s 27. Receipt of goods shall include delivery to another person as directed by the taxable person by way of transfer of documents of title to goods or otherwise.

68. Switch over from regular scheme to composition scheme:
pay an amount by debiting electronic cash ledger,
equivalent to input tax credit of -
inputs held in stock or
inputs contained in semi-finished or finished goods held in stock
on the day immediately preceding the date of such switch over.
balance of input tax credit lying in the electronic credit ledger, after payment of the above said amount, shall lapse.
The amount payable is to be determined as per general accepted accounting principles (GAAP).
The above provision is also applicable where goods or services supplied by taxable person are absolutely exempt.

69. Supply of capital goods on which input tax credit is taken:
The registered taxable person shall:
pay an amount equal to input tax credit taken on such capital goods
reduced by percentage points as prescribed or
tax on the transaction value of such capital goods, whichever is higher.

70. in respect of any invoice for supply of goods and/or services,
Credit in respect of invoice for supply of goods or services for the month of September, after filing returns:
A taxable person shall not take input tax credit
in respect of any invoice for supply of goods and/or services,
after the filing of the return for the month of September
following the end of financial year to which such invoice pertains or
filing of the relevant annual return, whichever is earlier.

71. Recovery when credit is wrongly taken:
Input tax credit taken wrongly; the same shall be recovered from the registered taxable person in the manner prescribed.

72. The Positives and Negatives of ITC:
The long awaited GST is here and it will pave the way for cross-utilization of credits. Due to unavailability of VAT Credit against Cenvat Credit, such Non-Creditable taxes used to become part of Cost which eventually shoots up the MRP. We can expect certain benefits in this area. The ITC taken shall be carried to the Electronic Credit Ledger of the client on the GSTN portal. The E-Credit Ledger will now be a common pool of all types of Indirect taxes, unlike in Present regime where we have E-Credit Ledger only for Cenvat Credits.

73. Negatives:
Presently, credit on goods/services used in the Works contract services resulting into construction of immovable property is allowed only in B2B cases. Way forward, the same would not be allowed. This will be a big hit to developers who use the service of contractors to construct units for sale to their customers; and will eventually lead to surge in property rates. Also, to keep the chain flowing, many exempted transactions will now become taxable e.g. Services provided to Consulates will be taxed as normal, consulates will in-turn take refund of the GST paid basis the UIN obtained from GSTN.

74. You can access the Presentations & Articles at our website @pkmgcorporatelaws.com
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