Filing for AY 2024-25 is coming soon
Keep calm and sign up for early access to our super filing platform

GST composition scheme

Composition Scheme Under GST Explained: Everything You Need to Know

The Goods and Services Tax (GST) is a comprehensive indirect tax that has revolutionized the Indian tax system. It has simplified tax compliance for businesses and brought transparency to the entire taxation process. One of the significant provisions under GST is the Composition Scheme, which is designed to reduce the compliance burden for small businesses. In this article, we will delve into the details of the GST Composition Scheme, its eligibility criteria, benefits, limitations, and other important aspects. So, let's get started!

Who Can Opt for the Composition Scheme?

The Composition Scheme is specifically designed for small businesses to simplify their tax compliance procedures. Here are the eligibility criteria for opting into the Composition Scheme:

  1. Annual Aggregate Turnover: Businesses with an annual aggregate turnover of up to Rs. 1.5 crore are eligible to opt for the Composition Scheme. It is important to note that the turnover of all businesses with the same PAN should be considered to calculate the turnover for the purpose of the scheme.

  2. Types of Businesses: Section 10 of the GST statute states that only dealers, manufacturers of commodities, and restaurants—apart from those that serve alcohol—may choose to participate in the Composition Scheme. The CGST (Rate) notification no. 2/2019, dated March 7, 2019, notifies service providers of an analogous composition scheme, wherein the total turnover limit is set at Rs. 50 lakh.

  3. Separate Composition Scheme for Manufacturers of Bricks: Brickmakers now have a different composition scheme for their building bricks, fly ash bricks and blocks, earthen or roofing tiles, and bricks made from fossil meals or other siliceous earths. For those who have opted in, there is no input tax credit and a special tax rate of 6%.

It is important to note that certain businesses are not eligible to opt for the Composition Scheme. These include manufacturers of ice cream, pan masala, or tobacco, businesses making inter-state supplies, casual taxable persons, non-resident taxable persons, businesses engaged in the supply of non-taxable goods under the GST law, businesses that have exceeded the turnover threshold specified for the Composition Scheme, and businesses that supply goods through an e-commerce operator.

Benefits of Opting for the Composition Scheme

The Composition Scheme offers several benefits for small businesses. Let's take a look at some of the key advantages:

  1. Simplified Compliances: Businesses opting for the Composition Scheme have to follow fewer compliance requirements compared to regular taxpayers. This includes reduced returns, simplified record-keeping, and streamlined invoicing procedures.

  2. Quarterly Payment of Taxes: Composition taxable persons are required to pay taxes on a quarterly basis, making it easier to manage their cash flow.

  3. Limited Tax Liability: The tax liability for businesses under the Composition Scheme is relatively low compared to the regular tax rates. This helps in reducing the financial burden on small businesses.

  4. High Liquidity: Since the tax rates for composition taxable persons are lower, businesses have higher liquidity, allowing them to invest in their growth and expansion.

Disadvantages of the Composition Scheme

While the Composition Scheme offers several benefits, there are certain limitations that businesses need to consider before opting in. Here are some of the disadvantages of the Composition Scheme:

  1. Limited Territory of Business: Businesses opting for the Composition Scheme are not allowed to carry out inter-state transactions. This can restrict the geographical scope of their operations.

  2. No Input Tax Credit (ITC): Composition dealers are not eligible to claim input tax credit on their purchases. This means that they cannot offset the taxes paid on inputs against their output tax liability.

  3. Restrictions on Supply of Non-Taxable Goods: Businesses under the Composition Scheme cannot supply non-taxable goods such as alcohol and goods through an e-commerce portal.

  4. Inability to Charge GST to Customers: Composition dealers are not allowed to charge GST separately on their sales. This means that they have to bear the tax liability themselves and cannot recover it from their customers.

Calculation of Aggregate Turnover for the Composition Scheme

To determine eligibility for the Composition Scheme, businesses need to calculate their aggregate turnover. The aggregate turnover should be computed on an all-India basis for businesses with the same Permanent Account Number (PAN). It includes the value of all outward supplies falling under the following categories:

  • Taxable Supplies
  • Exempt Supplies
  • Exports of Goods or Services
  • Inter-state Supplies

However, the aggregate turnover excludes the value of inward supplies on which tax is payable under the reverse charge mechanism, and taxes (including cess) paid under the GST law.

Tax Rates Applicable to Composition Taxable Persons

The tax rates for composition taxable persons vary based on the type of business. Here is a breakdown of the applicable GST rates for different categories:

Type of Business

CGST

SGST

Total

Manufacturers and Traders (Goods)

0.5%

0.5%

1%

Restaurants (excluding alcohol)

2.5%

2.5%

5%

Service Providers

3%

3%

6%

Manufacturers of Bricks

3%

3%

6%

It is important to note that these rates are applicable only to sales made by composition dealers. For transactions falling under the reverse charge mechanism, purchases from unregistered dealers, and import of services, the normal tax rates apply.

Effective Date for Composition Levy

The effective date for the composition levy depends on the method of opting into the scheme:

  • Taxpayers opting into the Composition Scheme by filing Form GST CMP-02 will have their effective date at the beginning of the financial year.
  • Taxpayers applying for a fresh registration by filing Form GST REG-01 will have their effective date as per sub-rule 2 or 3 of Rule 10 of the CGST Rules, 2017.

It is crucial for businesses to carefully consider the effective date of the composition levy to ensure compliance with the relevant regulations.

Liability to Pay Taxes Under Reverse Charge Mechanism

Composition dealers are liable to pay tax under the reverse charge mechanism whenever applicable. The rate of tax applicable to supplies subject to the reverse charge is the normal rate at which GST is payable. This means that the composition tax rate should not be used for transactions falling under the reverse charge mechanism. Additionally, composition dealers are not eligible to claim input tax credit on tax paid under the reverse charge mechanism.

Record-Keeping and Invoicing for Composition Dealers

One of the advantages of the Composition Scheme is reduced compliance requirements. Composition dealers are not required to maintain detailed records as prescribed for regular taxpayers. However, it is still important for businesses to maintain basic records of their purchases, sales, and other financial transactions for reference and audit purposes.

In terms of invoicing, composition dealers are not allowed to issue tax invoices. Instead, they are required to issue a Bill of Supply for their sales. It is important to note that composition dealers are not allowed to recover GST from their customers, as the tax liability is to be borne by the dealer.

Returns and Compliance for Composition Dealers

Composition dealers have specific return filing requirements. They are required to file a quarterly return in the form of a challan-cum-statement known as Form CMP-08. This return includes details of their outward supplies, inward supplies liable for reverse charge, and consolidated tax liability.

In addition to the quarterly return, composition dealers are also required to file an annual return in Form GSTR-4. This return provides a summary of their annual turnover, tax liability, and other relevant details. It is crucial for businesses to ensure timely and accurate filing of these returns to maintain compliance with the GST regulations.

Transition Provisions for Businesses Switching from Composition Scheme

Businesses that transition from the composition scheme under the previous tax regime to regular taxation under GST are provided with specific transition provisions. These provisions allow them to claim credit for inputs held in stock, semi-finished goods, or finished goods on the day before opting out of the composition scheme.

To avail the credit on inputs at the time of transition, the following conditions must be met:

  • Inputs or goods should be used for making taxable supplies.
  • CENVAT credit was eligible to be claimed in the previous regime but not under the composition scheme.
  • Input tax credit (ITC) is eligible to be availed under the GST regime.
  • The taxpayer possesses bills of input tax paid on such goods, and the invoices should not be older than one year from 1st July 2017.

It is important for businesses transitioning from the composition scheme to regular taxation to carefully evaluate their eligibility for input tax credit and comply with the necessary conditions.

Conclusion

The Composition Scheme under GST is a valuable option for small businesses to simplify their tax compliance procedures and reduce their tax liability. By opting into the Composition Scheme, businesses can benefit from reduced compliances, quarterly payment of taxes, and improved liquidity. However, it is important to carefully consider the eligibility criteria, limitations, and compliance requirements before making a decision. By understanding the composition scheme and its implications, businesses can make informed choices and navigate the GST landscape with ease.

author

The Tax Heaven

Mr.Vishwas Agarwal✍📊, a seasoned Chartered Accountant 📈💼 and the co-founder & CEO of THE TAX HEAVEN, brings 10 years of expertise in financial management and taxation. Specializing in ITR filing 📑🗃, GST returns 📈💼, and income tax advisory. He offers astute financial guidance and compliance solutions to individuals and businesses alike. Their passion for simplifying complex financial concepts into actionable insights empowers readers with valuable knowledge for informed decision-making. Through insightful blog content, he aims to demystify financial complexities, offering practical advice and tips to navigate the intricate world of finance and taxation.

Frequently Asked Questions

The GST composition scheme is a simplified tax scheme designed for small businesses to reduce compliance burden and tax liabilities by allowing them to pay tax at a fixed rate on their turnover instead of the regular GST rates.

Small businesses with an annual turnover below a certain threshold, as prescribed by the GST law (usually up to Rs. 1.5 crore), are eligible to opt for the GST composition scheme.

The key features of the GST composition scheme include a lower tax rate, simplified compliance requirements, quarterly filing of returns, restrictions on input tax credit, and limitations on interstate sales.

The tax rate applicable under the GST composition scheme is lower than the regular GST rates and varies depending on the type of business. For most businesses, it is a fixed percentage of turnover, typically ranging from 1% to 6%.

The benefits of opting for the GST composition scheme include reduced compliance burden, simplified tax calculation and payment, lower tax rates, ease of doing business, and increased competitiveness for small businesses.

Subscribe to the exclusive updates!