Understanding GST Valuation and Composition Scheme: A Practical Guide

Introduction

The Goods and Services Tax (GST) system is built on two important pillars: valuation of supplies and tax payment mechanisms. While valuation determines the amount on which GST is charged, the Composition Scheme offers a simplified method of tax payment for small taxpayers. Understanding both concepts is crucial for businesses, professionals, and GST learners.

Part I: Valuation of Taxable Supplies under GST (Section 15)

What is the Value of Taxable Supply?

As per Section 15 of the CGST Act, the value of a taxable supply is generally the price actually paid or payable for the supply of goods or services. However, certain additions and deductions must be considered while determining the taxable value.

Inclusions in Transaction Value

The following amounts are added to the taxable value:

1. Incidental Expenses

Expenses incurred before delivery, such as:

• Packing charges
• Loading and unloading charges
• Commission
• Transportation charges

These are included in the value of supply.

2. Supplier's Liability Paid by Recipient

If the recipient pays any amount to a third party on behalf of the supplier, such amount becomes part of the taxable value.

3. Other Taxes and Duties

Taxes other than GST are includible, such as:

• Customs Duty
• Excise Duty
• VAT (where applicable)

However:

• TDS deducted by the recipient is not included.
• TCS is not treated as a tax for this purpose.

4. Interest for Delayed Payment

Interest, late fees, or penalties charged due to delayed payment of consideration are includible. GST is payable on the amount actually received as interest.

 

Exclusions from Transaction Value

1. Discounts

Pre-Supply Discounts

Discounts given before or at the time of supply are deductible if shown on the invoice.

Post-Supply Discounts

Post-supply discounts can be excluded only when:

• The discount arrangement existed before the supply.
• It is linked to relevant invoices.
• The recipient reverses the corresponding Input Tax Credit (ITC).

No Claim Bonus (NCB)

The GST authorities have clarified that No Claim Bonus (NCB) provided by insurance companies is considered a valid discount. Therefore, GST is charged only on the insurance premium after reducing NCB.

 

2. Interest on Loans, Advances and Deposits

Interest earned from loans, deposits, or advances is not included in the value of supply and remains exempt from GST.

 

3. Government Subsidies

Subsidies provided directly by the Government are excluded from valuation. However, subsidies from private entities are included in the taxable value.

Treatment of Subsidies – Example

Assume:

• Invoice Value = ₹10,000
• Subsidy = ₹1,000

When Value is Net of Subsidy

Subsidy Given By	Assessable Value
Government	₹10,000
Non-Government	₹11,000

When Value is Before Subsidy

Subsidy Given By	Assessable Value
Government	₹9,000
Non-Government	₹10,000

 

Incentive to Banks for RuPay and BHIM-UPI Transactions

The Ministry of Electronics and Information Technology (MeitY) provides incentives to acquiring banks for promoting:

• RuPay Debit Cards
• Low-value BHIM-UPI transactions

The Government has clarified that these incentives are in the nature of subsidies and are therefore not taxable under GST.

When Transaction Value Cannot Be Determined

If the transaction value is:

• Not available, or
• Not reliable,

then GST Valuation Rules must be applied for determining the assessable value.

 

Tariff Value under GST

The Government has the power to notify specific supplies for which GST shall be calculated on a predetermined value known as Tariff Value.

Currently, tariff value is applicable for:

1. Online money gaming
2. Online gaming (other than online money gaming)
3. Actionable claims in casinos

For these supplies, GST is charged on the notified entry fee or tariff value.

 Part II: Composition Scheme under GST

What is the Composition Scheme?

The Composition Scheme is a simplified GST mechanism designed for small taxpayers.

Instead of paying GST at normal rates and maintaining extensive compliance records, eligible taxpayers can pay tax at a fixed lower rate on turnover.

Key Features

• Optional scheme
• PAN-based scheme
• Applies to all registrations under the same PAN
• Simplified compliance
• Lower tax burden

Persons Not Eligible for Composition Scheme

The following categories cannot opt for the scheme:

1. Inter-State Suppliers

Any person making inter-state supply of goods or services.

2. Certain Service Providers

Except:

• Restaurant services
• Limited-value services up to:
• 10% of turnover in the State/UT, or
• ₹5 lakh,
  whichever is higher.

3. Suppliers of Non-Taxable Goods or Services

4. Suppliers Through E-Commerce Operators

5. Manufacturers of Specified Goods

Such as:

• Pan Masala
• Tobacco products
• Ice Cream
• Aerated Water
• Bricks
• Earthen or Roofing Tiles

6. Casual Taxable Persons (CTP) and Non-Resident Taxable Persons (NRTP)

 

Turnover Limits

Goods-Focused Composition Scheme

State Category	Limit
Most States and UTs	₹150 Lakh
Certain Special Category States	₹75 Lakh

 

Service-Focused Composition Scheme

Particulars	Limit
Turnover Limit	₹50 Lakh

Tax Rates under Composition Scheme

Manufacturers

1% of turnover

(CGST 0.5% + SGST 0.5%)

Restaurant Service Providers

5% of turnover

(CGST 2.5% + SGST 2.5%)

Traders

1% of taxable turnover

(CGST 0.5% + SGST 0.5%)

Service-Focused Composition Scheme

6% of turnover

(CGST 3% + SGST 3%)

 

Important Compliance Requirements

1. No Tax Collection - Composition dealers cannot collect GST separately from customers.
2. No Input Tax Credit - Buyers purchasing from composition dealers cannot claim ITC.
3. Bill of Supply - Instead of a tax invoice, composition dealers must issue a Bill of Supply.
4. Reverse Charge Mechanism (RCM) - GST under RCM must be paid at normal rates and not at composition rates.
5. Quarterly Compliance - Tax payment and returns are generally filed quarterly.
6. Mandatory Declaration - Composition dealers must mention: "Composition taxable person, not eligible to collect tax on supplies" on every Bill of Supply.

They must also display:

"Composition Taxable Person" at their principal place of business and additional places of business.

Goods-Focused vs Service-Focused Composition Scheme

Basis	Goods-Focused Scheme	Service-Focused Scheme
Eligible Businesses	Goods, Restaurant, Limited Services	Primarily Services
Tax Rate	1%, 5%, 1%	6%
Turnover Limit	₹150 lakh / ₹75 lakh	₹50 lakh
Restaurant Services	Eligible	Not Applicable
Inter-State Supply	Not Allowed	Not Allowed
E-Commerce Supply	Not Allowed	Not Allowed

Conclusion

GST valuation and the Composition Scheme are two fundamental concepts that directly affect tax liability and compliance requirements. While Section 15 ensures that GST is levied on the correct value of supply, the Composition Scheme provides a simplified tax structure for small businesses. Understanding inclusions, exclusions, subsidy treatment, discounts, and eligibility conditions can help taxpayers remain compliant while optimizing their GST obligations.