GST Composition Scheme

Table of Content

1. Key Features of the GST Composition Scheme

2. Eligibility for GST Composition Scheme

3. GST Composition Scheme Tax Rates

4. Advantages of the GST Composition Scheme

5. Disadvantages of the Composition Scheme

6. Rules and Conditions under the GST Composition Scheme

7. How to Apply for the GST Composition Scheme?

8. Returns and Compliance Requirements for GST Composition Scheme

9. What Happens If Turnover Exceeds the Limit?

10. Conclusion

11. Frequently Asked Questions (FAQs)

The GST Composition Scheme was introduced to make the GST system easier for small businesses. Its main objectives are explained below:

• Simplify GST Compliance: The scheme reduces the number of GST processes for small businesses to comply with. This makes it easier and faster for business people to comply with the law.

• Reduce the Cost of Tax Compliance: There is less spending on accounting, compliance and hiring services since the procedure has been made simpler. Small taxpayers do not need to hire full-time tax professionals to handle monthly invoicing and ledger reconciliations.

• Support Small Businesses: This allows small businesses to concentrate on developing themselves rather than spending much time on GST-related work.

• Minimise Paperwork: It is less burdensome as it entails less paperwork and simpler reporting with reduced documentation requirements.

• Encourage Voluntary Compliance: By making it easier to comply with GST laws, the scheme encourages businesses to comply with taxation laws.

Key Features of the GST Composition Scheme

Some of the salient features in the GST composition scheme include the following:

1. Tax on Turnover: It involves tax payable at a fixed rate on business turnover and not at GST rates.( 1% for Manufacturers and traders, 5% for catering & restaurant, and 6% for other registered person eligible for the scheme as per Section 10(2A) of CGST Act,2017

2. Quarterly Payment Using CMP-08: The taxpayers under the composition scheme make their payments quarterly using CMP-08 till the 18^th day of month succeeding such quarter.

3. Filing Annual Return Using GSTR-4: One must file the annual return in GSTR-4 after the end of the fiscal year however, on or before 30^th day of June following the end of such financial year.

4. No Input Tax Credit (ITC): ITC is not available to any taxable person under the composition scheme.

5. GST Tax Invoice Not Required: The dealers under the composition scheme are not supposed to issue a GST tax invoice. They have to issue a bill of supply instead.

6. Disclose Information Mandatory: All bills and signboards must state "Composition Taxable Person."

7. Limited Services Supply: Under this category, a manufacturer, trader, caterer, or restaurant registered under Section 10(1) of the GST Act is permitted to supply services up to 10% of the turnover in the State or Union Territory in the preceding financial year or ₹5 lakh, whichever is higher, in accordance with the provisions of the GST law.

Eligibility for GST Composition Scheme

Confused about ‘when to opt for the GST composition scheme’? A business can opt for the GST Composition Scheme if aggregate turnover in the preceding financial year below ₹1.5 crore per year. There are some special category states, where the limit is ₹75 lakhs. In case of Pure service providers or mixed suppliers may opt for the composition scheme under Section 10(2A) with a preceding FY aggregate turnover limit of ₹50 Lakhs However, Under Section 10(3), the composition option lapses instantly on the day the aggregate turnover of the taxpayer in the current financial year exceeds the respective threshold limit (₹1.5 Crore / ₹75 Lakhs / ₹50 Lakhs). From that day onwards, the taxpayer must pay tax under the regular levy (Section 9(1)) of CGST Act, 2017.

It is open to traders, manufacturers, and restaurant companies (not those providing alcohol). According to the Goods and Services Council, following the amendment in 2019, some service providers can also choose the composition scheme, subject to certain limits and conditions as prescribed in Section. Businesses providing life insurance services cannot opt for the GST Composition Scheme, as insurance services are governed under the regular GST system.

This scheme follows a PAN-wise concept. That means that if there are multiple businesses with the same PAN number, then all such businesses should either choose the composition scheme or stay away from it altogether. Partial selection is not possible across different branches or entities under a single PAN.

Who Cannot Opt for the Composition Scheme?

The following firms and taxpayers are ineligible for the GST Composition Scheme:

• Inter-State taxable supplies of goods business.

• Suppliers of goods by e-commerce operators who are liable for Tax Collected at Source (TCS).

• Ice cream, pan masala, Aerated Water, Fly ash bricket, Fly ash aggregates, Fly ash blocks and tobacco/tobacco products manufacturers.

• Non-resident taxable persons and casual taxable persons.

• Firms that supply mainly non-taxable goods or services.

• Service suppliers in general, except for the restaurant business and limited services supplied under the GST law if opted for Section 10(2).

• Annual turnover of the firm is above the threshold limit of the GST Composition Scheme.

GST Composition Scheme Tax Rates

The GST Composition Scheme offers lower tax rates than the regular GST system. The applicable rates depend on the type of business.

These rates are always calculated based on the turnover of the taxpayer according to the provisions of GST. The firms that have chosen the Composition Scheme shall always be liable to pay tax as per the fixed rate, cannot charge GST from the customers and cannot avail Input Tax Credit.

Advantages of the GST Composition Scheme

The GST Composition Scheme offers several benefits for eligible small businesses.

1. Low Tax Rate: Businesses pay GST at a fixed and lower rate based on turnover, helping reduce their tax burden.

2. Simple Compliance: The scheme has fewer GST rules and simpler procedures, making compliance easier.

3. Less Paperwork: Businesses need to maintain fewer records and complete less documentation compared to standard monthly return filers.

4. Better Cash Flow: Lower tax payments and simpler compliance help businesses manage their cash more effectively.

5. Reduced Filing Frequency: Tax is paid quarterly through CMP-08, with only one annual return in GSTR-4, reducing the time spent on GST filings.

Note: Life insurance providers are required to comply with the regular GST framework because of the nature of insurance services.

Disadvantages of the Composition Scheme

The GST Composition Scheme also has some limitations that businesses should consider.

1. No Inter-State Sales: Composition dealers cannot make taxable inter-state supplies of goods.

2. No Input Tax Credit: Businesses cannot claim Input Tax Credit (ITC) on purchases, which may increase costs.

3. Cannot Charge GST: Composition dealers cannot collect GST separately from customers.

4. Limited Service Scope: Only eligible services are allowed within the prescribed limits under GST rules.

5. Restrictions for Online Sellers: Businesses supplying goods through certain e-commerce operators required to collect TCS are generally not eligible for the scheme.

Rules and Conditions under the GST Composition Scheme

Businesses opting for the GST Composition Scheme must follow certain rules to remain eligible.

• No Input Tax Credit: Composition dealers cannot claim Input Tax Credit (ITC) on their purchases.

• Use a Bill of Supply: Instead of a GST tax invoice, they must issue a Bill of Supply for sales stating "Composition Taxable Person, not eligible to collect tax on supplies."

• Reverse Charge Mechanism (RCM): Where applicable under GST law, composition taxpayers must pay tax under the Reverse Charge Mechanism (RCM).

• Display Composition Status: Businesses must clearly display "Composition Taxable Person" at their place of business and mention it on every Bill of Supply.

• Turnover Limit: If the annual turnover exceeds the prescribed limit, the business becomes liable to shift to the regular GST scheme from the applicable date under GST rules.

How to Apply for the GST Composition Scheme?

Eligible businesses can apply for the GST Composition Scheme through the GST portal. The process depends on whether the business is already registered under GST or applying for a new registration.

• For Registered Taxpayers

File Form GST CMP-02 on the GST portal to opt for the Composition Scheme before the beginning of the financial year for which the option is exercised.

• For New Taxpayers

While applying for GST registration through Form GST REG-01, select the option to register as a composition taxpayer under the Part B section.

Simple Application Process

1. Check your eligibility.

2. Log in to the GST portal.

3. Submit CMP-02 or choose the composition option in REG-01.

4. Receive approval and follow the Composition Scheme rules and return filing requirements.

Returns and Compliance Requirements for GST Composition Scheme

Businesses registered under the GST Composition Scheme have simpler compliance requirements than regular taxpayers, but they must still meet important filing and record-keeping obligations.

• CMP-08

Composition taxpayers must pay their GST every quarter by filing Form CMP-08. This form is used to declare turnover and pay the applicable tax till the 18^th day of month succeeding such quarter.

• GSTR-4

An annual return in Form GSTR-4 must be filed after the end of each financial year with details of business turnover and tax paid. however, on or before 30^th day of June following the end of such financial year.

• Records to Maintain

Although record-keeping is simpler, businesses should maintain proper records of sales, purchases, Bills of Supply, tax payments, and other important business documents for GST compliance.

What Happens If Turnover Exceeds the Limit?

If a business registered under the GST Composition Scheme exceeds the prescribed turnover limit, it must shift to the regular GST scheme from the date it becomes ineligible. From that date, the business must issue GST tax invoices instead of Bills of Supply and follow all the compliance requirements applicable to regular taxpayers.

It must also start charging GST at the normal rates on taxable supplies. The business may become eligible to claim Input Tax Credit (ITC) on eligible inputs, subject to GST rules and conditions. GST under the regular scheme becomes payable from the date the turnover limit is crossed.

Conclusion

The GST Composition Scheme is a simple and practical option for eligible small businesses that want to reduce GST compliance and paperwork. Lower tax rates, simplified return filing, and fewer record-keeping requirements help businesses save time and manage tax obligations more easily.

However, it also has limitations, such as no Input Tax Credit (ITC), restrictions on certain transactions, and eligibility conditions. Before opting for the scheme, businesses should carefully evaluate whether its benefits outweigh its limitations and suit their business needs.

Frequently Asked Questions (FAQs)

1. Can a composition dealer collect tax?

No. A composition dealer cannot collect GST separately from customers. The tax is paid by the dealer at a fixed rate on turnover, and a Bill of Supply is issued instead of a tax invoice.

2. Can composition dealers claim Input Tax Credit (ITC)?

No. Businesses registered under the GST Composition Scheme cannot claim Input Tax Credit (ITC) on purchases made for their business.

3. Can a composition dealer make interstate sales?

No, a composition dealer cannot make interstate taxable supplies of goods and must mainly operate within the state where they are registered.

4. How often do composition dealers need to file GST returns?

Composition taxpayers pay tax quarterly by filing CMP-08 and filing GSTR-4 once every financial year as the annual return.

5. Can service providers opt for the GST Composition Scheme?

Yes, certain eligible service providers can opt for the scheme if they satisfy the prescribed turnover limits and other GST eligibility conditions.

6. What documents are required to opt for the GST Composition Scheme?

Businesses generally need a valid GST registration, business details, PAN, Aadhaar (where applicable), bank account details, and must submit Form GST CMP-02 (for existing taxpayers) or choose the composition option in GST REG-01 during new registration.