In July 2017, Goods and Services Tax (GST) was introduced in India to ease the system of indirect taxes. Although GST simplified the various taxes in a single framework, the framework also presented problems to small companies that had complex issues with compliance and filing procedures. In response, the government came up with the GST Composition Scheme, which is a simplified compliance regime under which eligible taxpayers can pay a fixed tax rate and also file fewer returns.
This blog discusses the concept behind the GST Composition Scheme, its eligibility, its benefits, tax rates, compliance, advantages, and restrictions.
What is the GST Composition Scheme?
The GST Composition Scheme is intended to be a scheme of tax payment meant to be conducted by small taxpayers. Businesses in this scheme are not required to pay any taxes at regular GST rates and submit detailed monthly returns to the authorities, whereas they can pay a lower, fixed rate of GST according to their turnover.
It also lessens the compliance burden and assists small traders, manufacturers, and those providing services in handling their tax load without engaging in extensive record-keeping.
Eligibility Criteria of GST Composition Scheme
The scheme is not applicable to all taxpayers. Businesses are required to pass certain requirements by the government:
a) Turnover Limit
- The scheme applies to taxpayers with an aggregate annual turnover of Rs.1.5 crore (Rs. 75 lakh in North-Eastern and hilly states).
- Service providers (not restaurants) may choose whether their turnover does not exceed Rs.50 lakh under the special composition scheme of services.
b) Type of Business
- Manufacturers (except the ones making tobacco, ice cream, or pan masala), traders, and restaurants (not providing alcohol) can be eligible.
- There is an exception for service providers who are not usually covered, except those who have been notified under the service composition scheme.
c) Interstate Restrictions
Businesses that deal with interstate supply of goods and services are not able to choose this scheme.
d) Supply Restrictions
The scheme cannot be applied to businesses that provide non-taxable goods, e-commerce traders, or businesses whose supply is carried out via e-commerce platforms.
GST Composition Scheme Tax Rates
The structure of composition is a lower tax structure based on the nature of business. As of the current rules:
- Corporations and Dealers in Goods: 1% of turnover.
- No alcoholic restaurants: 5% of turnover.
- Other eligible service providers: 6102A (6% of turnover (special scheme under section 10(2A))
- Such rates are much lower compared with the normal GST rates and hence compliance is not as difficult or costly.
Requirements of Compliance under GST Composition Scheme
Although the compliance load is minimised, there are procedures that a business must perform:
a) Filing Returns
- Composition dealers are required to pay taxes by submitting quarterly returns (CMP-08) in which they are required to declare their turnover.
- There should also be a filing of an annual return (GSTR-4).
b) No Input Tax Credit
Companies that are under this scheme do not have access to Input Tax Credit (ITC) on purchases.
c) Invoice Restrictions
The dealers of composition are unable to give tax invoices. They instead charge a bill of supply because they are not in a position to collect GST on the customer’s side.
d) Display Requirement
The businesses should exhibit the words Composition Taxable Person at the outlet of the business and also refer to it on all the bills of supply.
Benefits of GST Composition Scheme
There are various advantages of the scheme to small businesses:
- Simplified Compliance: Tax filing is easy since fewer returns, simple records and less paperwork are involved.
- Lower Tax Liability: The payment of tax is at a lower rate than the normal GST, which is a fixed rate, and small businesses would be relieved.
- Better Liquidity: As companies will not be required to add GST on a separate basis, users will receive better prices, which will enhance sales and cash flow.
- Ease of Doing Business: The scheme gives small businesses a break in their complicated tax systems and enables them to concentrate on growth.
Limitations of GST Composition Scheme
Although the scheme has its benefits, it has some demerits:
- No Input Tax Credit: IBTC cannot be claimed by businesses and may add to the expenses if they buy goods from regular taxpayers.
- Limited Business Operations: Inter-state supplies, exports, and sellers in e-commerce are not permitted, and this restricts the opportunities for growth.
- Inappropriate to the Service Providers: Most service-based businesses do not qualify, except for restaurants and the given service providers.
- Limited Credibility: With the inability of composition dealers to provide tax invoices, big buyers might not want to deal with them since they cannot claim ITC on purchasing.
Difference Between Regular GST and Composition Scheme
| Basis | Regular GST | GST Composition Scheme |
| Tax Rates | Normal GST rates (5%–28%) | Fixed lower rates (1%–6%) |
| Returns | Monthly (GSTR-1, GSTR-3B) | Quarterly CMP-08 and annual GSTR-4 |
| Input Tax Credit | Available | Not available |
| Invoicing | Tax Invoice | Bill of Supply |
| Eligibility | All registered taxpayers | Small taxpayers under turnover limits |
How to Opt for the GST Composition Scheme?
The composition scheme can be used by taxpayers either on registration of GST or during the start of a financial year by submitting Form GST CMP-02.
Steps include:
- Log in to the GST portal.
- Select Application to Choose Composition Levy.
- Submit Form CMP-02.
- Form CMP-03 file stock information within 60 days of choice.
GST Scheme of Composition of Service Providers
Firstly, when the scheme was introduced, service providers were not included. In 2019, however, the government expanded this scheme to the small service providers that have a turnover of up to Rs.50 lakh per annum. They are now able to pay GST at the set rate of 6 percent under the special composition scheme.
This greatly relieved the consultants, small firms and freelancers who previously were required to abide by the usual GST compliance.
Is GST Composition Scheme Worth It?
The decision whether to opt is determined by the nature of business:
- Best where the business is small traders, restaurants and manufacturers with small turnover and local sales.
- Inter-state suppliers, exporters or businesses involved in e-commerce are not suitable.
- In case your buyers insist on ITC, it can be better to remain in the regular GST scheme.
Conclusion
The GST Composition Scheme is one of the feasible solutions for small business enterprises struggling with complex taxation. It is a reprieve to the small traders and manufacturers, as it provides relief through low tax rates, easy filing of taxes, and less paperwork. It has to be noted, though, that turnover, interstate supply, and denial of ITC restrictions are issues that should be thoroughly examined prior to considering the scheme.
The GST Composition Scheme is undoubtedly a good alternative for small businesses with a local customer base that wish to remain a simple entity. However, for those who have larger businesses or interstate trade, the regular GST scheme is more suitable.
Related Services
