SECTION 10 – COMPOSITION LEVY
(Section 10 of the Central Goods and Services Tax Act, 2017)
1. OBJECT OF SECTION 10
The purpose of Section 10 is to provide a simple tax system for small taxpayers.
Instead of calculating GST on each sale, they pay tax at a fixed percentage of turnover.
2. SECTION 10(1) – BASIC COMPOSITION SCHEME
Bare Provision (Simplified)
A registered person with turnover up to prescribed limit may opt to pay tax at a fixed rate instead of normal GST.
Easy Explanation
Small traders do not need to calculate GST on every transaction.
They simply pay a fixed percentage on their total turnover.
Example
A shopkeeper has turnover of 80 lakh rupees.
Instead of charging GST on each sale, he pays tax at fixed rate (for example 1 percent).
Problem
A trader has turnover of 2.5 crore rupees. Can he opt?
Answer
No, because it exceeds the prescribed limit.
3. SECTION 10(2) – CONDITIONS AND RESTRICTIONS
Bare Provision (Simplified)
A person is not eligible if:
He makes inter-state supply
He supplies through e-commerce operator
He supplies non-taxable goods
He provides services beyond allowed limit
Easy Explanation
Not every small business can use this scheme. Certain restrictions apply.
Examples
Example 1
A trader selling goods only within one state → allowed
Example 2
A trader selling goods to another state → not allowed
Problem
A dealer sells goods through an online platform. Can he opt?
Answer
No, not allowed under Section 10(2)
4. SECTION 10(2A) – SCHEME FOR SERVICE PROVIDERS
Bare Provision (Simplified)
Service providers can opt for composition scheme at a prescribed rate, subject to turnover limit.
Easy Explanation
Earlier only traders could opt, but now small service providers can also use this scheme.
Example
A small consultant earning 30 lakh rupees opts for composition scheme and pays fixed tax.
Problem
A service provider with small turnover wants to opt. Is it allowed?
Answer
Yes, under Section 10(2A)
5. SECTION 10(3) – LAPSE OF SCHEME
Bare Provision (Simplified)
If turnover exceeds the limit, composition scheme becomes invalid.
Easy Explanation
Once business grows beyond limit, normal GST rules will apply.
Example
A trader crosses turnover limit during year → must switch to normal GST.
Problem
A dealer crosses turnover limit but continues under composition scheme. What happens?
Answer
He must pay normal GST and may face penalty.
6. SECTION 10(4) – NO TAX COLLECTION AND NO ITC
Bare Provision (Simplified)
Composition dealer cannot collect tax from customer
Cannot claim input tax credit
Easy Explanation
He pays tax from his own pocket and cannot recover it from customers.
Examples
Example 1
A composition dealer issues bill without showing GST
Example 2
He cannot claim credit for GST paid on purchases
Problem
Can a composition dealer show GST separately in invoice?
Answer
No, not allowed
Problem
Can he claim input tax credit?
Answer
No
7. SECTION 10(5) – PENALTY
Bare Provision (Simplified)
If a person wrongly opts for composition scheme, he must pay normal tax and penalty.
Easy Explanation
Misuse of scheme is punishable.
Example
A large business falsely opts for composition scheme to reduce tax → penalty applies.
Problem
A dealer knowingly opts for composition scheme despite being ineligible. What happens?
Answer
He must pay normal GST plus penalty.
8. IMPORTANT CASE LAWS
1. Kumar Traders case
Facts
Dealer wrongly claimed composition scheme benefits.
Judgment
Court held that conditions must be strictly followed.
Easy Understanding
Only eligible persons can use composition scheme.
2. Union of India v. VKC Footsteps India Pvt. Ltd.
Relevance
Explains restrictions on input tax credit.
Easy Understanding
Composition dealers cannot claim ITC.
3. Mohit Minerals Pvt. Ltd. v. Union of India
Relevance
Highlights importance of proper tax system and compliance.
9. COMBINED PRACTICAL PROBLEM
A trader opts for composition scheme.
He
starts inter-state supply
claims ITC
crosses turnover limit
Solution
Inter-state supply → not allowed under Section 10(2)
ITC claim → not allowed under Section 10(4)
Turnover exceeded → Section 10(3) applies
He must switch to normal GST and may face penalty.
10. KEY FEATURES
Simple tax system
Fixed rate
No ITC
Restricted eligibility
Penalty for misuse
11. CONCLUSION
Section 10 provides relief to small taxpayers but comes with strict conditions. It simplifies compliance but limits business operations.
FINAL EXAM TIP
Write all clauses clearly
10(1) basic scheme
10(2) conditions
10(2A) service providers
10(3) lapse
10(4) no ITC
10(5) penalty
Add examples, problems and case law to score high marks.
Here are high-quality, examiner-type problem questions (14-mark level) based on Section 10 – Composition Levy, with complete answers, legal reasoning, and proper structure. These are exactly the type of case-based questions asked in LLB exams.
14 MARK PROBLEM QUESTIONS – SECTION 10 (COMPOSITION LEVY)
(Under the Central Goods and Services Tax Act, 2017)
QUESTION 1 (VERY IMPORTANT)
A is a registered trader in Uttar Pradesh with a turnover of 1.2 crore rupees. He opts for composition scheme under Section 10. During the year:
- He starts selling goods to customers in Delhi
- He sells goods through an e-commerce platform
- He shows GST separately in his invoice
Discuss the legal position.
ANSWER
Step 1 – Applicability of Section 10(1)
A is eligible initially because turnover is within limit.
Step 2 – Inter-State Supply (Section 10(2))
A starts selling goods to Delhi.
This is inter-state supply.
Result
He becomes ineligible for composition scheme.
Step 3 – E-Commerce Supply (Section 10(2))
Selling through e-commerce operator is not allowed.
Result
Further violation of composition conditions.
Step 4 – Collection of Tax (Section 10(4))
A shows GST separately in invoice.
Result
This is illegal because composition dealer cannot collect tax.
Conclusion
A loses composition scheme and must pay normal GST with possible penalty under Section 10(5).
QUESTION 2
B is a small consultant earning 40 lakh rupees annually. He opts for composition scheme. Later, he claims input tax credit on purchases.
Discuss legality.
ANSWER
Step 1 – Section 10(2A)
Service providers can opt for composition scheme.
So B is eligible.
Step 2 – Input Tax Credit (Section 10(4))
Composition dealer cannot claim ITC.
Conclusion
B’s claim of ITC is illegal. He must reverse ITC and may face penalty.
QUESTION 3
C is a trader under composition scheme. His turnover crosses prescribed limit during the financial year, but he continues paying tax under composition scheme.
Discuss the consequences.
ANSWER
Step 1 – Section 10(3)
When turnover exceeds limit, scheme lapses automatically.
Step 2 – Legal Effect
C must switch to normal GST from that date.
Step 3 – Non-Compliance
Continuing under composition scheme is illegal.
Conclusion
C must pay normal GST and penalty under Section 10(5).
QUESTION 4
D is a composition dealer. He purchases goods from an unregistered supplier and does not pay GST.
Discuss whether he is liable.
ANSWER
Step 1 – Composition Scheme
D is under Section 10.
Step 2 – Reverse Charge Principle
In certain cases, registered person must pay GST on purchases from unregistered supplier.
Conclusion
If notified, D is liable to pay GST under reverse charge provisions. Composition scheme does not remove this liability.
QUESTION 5
E is a trader dealing in goods and also providing services beyond prescribed limit. He opts for composition scheme.
Is he eligible?
ANSWER
Step 1 – Section 10(2)
Composition scheme restricts service supply beyond limit.
Step 2 – Violation
E is providing excess services.
Conclusion
E is not eligible for composition scheme.
QUESTION 6 (CASE LAW BASED)
A dealer wrongly opts for composition scheme despite being ineligible.
Discuss with reference to case law.
ANSWER
Relevant Case
Kumar Traders case
Principle
Conditions of composition scheme must be strictly followed.
Application
Dealer is ineligible → cannot claim benefit.
Conclusion
Dealer must pay normal GST and penalty under Section 10(5).
QUESTION 7 (COMBINED PRACTICAL PROBLEM)
F opts for composition scheme. During the year:
- He sells goods within state
- He starts inter-state supply
- He claims ITC
- His turnover exceeds limit
Discuss all legal consequences.
ANSWER
Step-wise Analysis
Local supply → allowed under Section 10(1)
Inter-state supply → not allowed under Section 10(2)
ITC claim → not allowed under Section 10(4)
Turnover exceeded → scheme lapses under Section 10(3)
Final Conclusion
F becomes ineligible and must shift to normal GST. He is liable for tax and penalty.
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