GST Composition Scheme
The landscape of Goods and Services Tax (GST) compliance can be a daunting terrain for small individual business owners and professionals. Meeting the requirements for GST return filing and adhering to various GST law provisions can consume time and financial resources. In recognition, the government has introduced a special scheme under GST known as the “Composition Scheme.” However, not everyone with GST registration can participate in this scheme. In this article, we will explore the composition scheme under GST, who is eligible for it, and how one can opt for it.
Benefits of the Composition Scheme Under GST
The composition scheme under GST offers businesses an alternative to the regular monthly GST return filing. Instead, businesses under this scheme are required to file GST returns on a quarterly and annual basis. This simplified compliance process reduces the administrative burden.
Businesses opting for the composition scheme must complete two forms: GSTR-4 annually and GST CMP-08 quarterly. This streamlined approach saves businesses time and effort.
One of the primary benefits of the Composition Scheme under GST is the tax payment method. Instead of adhering to the standard GST rates that apply to various goods and services, businesses under this scheme pay a fixed percentage of their turnover as tax. Apoorv Phillips, a Senior Associate at Sirmacs Consultancy Services, notes that this fixed percentage can lower tax liability than regular GST rates.
The GST rates applicable under the composition scheme differ from those of the regular scheme. For instance, a business selling goods under the composition scheme might benefit from a lower tax rate. For example, if a business like Ektha opts for the composition scheme and sells Ghewar, a Rajasthani sweet, the applicable tax rate would be just 1%, as opposed to the standard 5% GST rate for sweets.
Eligibility for the Composition Scheme Under GST
Not every GST-registered person is eligible for the composition scheme. Eligibility criteria vary based on the type of business and its annual turnover. Here are the key eligibility criteria:
- Goods Traders: Individuals selling goods with an annual turnover of up to Rs 1.5 crore (Rs 75 lakh for special category states) can opt for the composition scheme under GST.
- Service Providers (except restaurants): The annual turnover threshold limit is set at Rs 50 lakh for service providers other than restaurants.
- Restaurants: Restaurants can participate in the composition scheme if their turnover does not exceed Rs 1.5 crore.
For example, consider Ramesh, who owns a handicraft store in Gwalior. If his expected turnover for the financial year is approximately Rs 55 lakh, he can opt for the composition scheme under GST since his turnover falls below the Rs 1.5 crore threshold.
It’s important to note that if a business’s annual turnover surpasses the threshold or fails to meet any of the composition scheme conditions, it must file an intimation for withdrawal from the scheme. Approval from the proper officer is required for the withdrawal, after which regular GST norms will apply to the business’s sale of goods and services.
Opting for the Composition Scheme Under GST
Individuals interested in the composition scheme under GST can make their choice at two specific times:
- Beginning of the Financial Year: At the start of the financial year, businesses can opt for the composition scheme by filing the GST CMP-02 form.
- Registration for GST: Businesses can enter the composition scheme when registering for GST. It’s important to note that businesses cannot switch to the composition scheme during the middle of the year.
Limitations of the Composition Scheme Under GST
While the composition scheme offers several advantages, there are certain limitations to consider:
- No Input Tax Credit (ITC): Businesses under the composition scheme cannot claim Input Tax Credit on their purchases.
- Billing Restrictions: Instead of issuing a tax invoice, businesses in this scheme must provide a bill of supply. This is because they are not allowed to collect GST from their customers. The bill of supply must include the description, “composition taxable person, not eligible to collect tax on supplies.”
- Single PAN Registration: If an individual has multiple businesses registered under the same PAN, all those businesses must be registered under the composition scheme if anyone is registered under it. If the combined turnover of all these businesses exceeds the composition scheme threshold, they may be forced out of the scheme.
Ineligible Entities for the Composition Scheme Under GST
Despite meeting the annual turnover criteria, certain individuals and businesses cannot opt for the composition scheme. These include:
- Interstate Suppliers: Those involved in the supply of goods and services between different states.
- Manufacturers of Specific Goods: The GST council periodically updates the exclusion list for the composition scheme based on recommendations and the nature of goods.
- Casual Taxable Persons: Individuals seeking GST registration for a limited duration, typically for selling goods at specific events.
- Non-Resident Indians (NRIs): NRIs registered under GST are not eligible for the composition scheme.
- E-commerce Sellers Collecting TCS: Individuals selling goods on e-commerce platforms who collect Tax Collected at Source (TCS). However, this restriction was lifted on October 1, 2023.
The composition scheme under GST offers small businesses and service providers a simplified and cost-effective way to meet their tax obligations. Eligibility criteria are based on annual turnover, and businesses can opt for this scheme at the beginning of the financial year or during GST registration online. While it comes with limitations, such as the inability to claim Input Tax Credit, it can provide significant benefits regarding reduced compliance burdens and lower tax rates. Understanding the eligibility criteria and the scheme’s nuances is essential for businesses considering this option under GST.