GST Composition Scheme: A Perfect GST Scheme For Small Businesses
The composition scheme under GST has been introduced to safeguard the interests of small businesses. Businesses with turnover under Rs 1.5 crore can skip the hassle of GST formalities if they are registered under the GST composition scheme. The scheme also allows businesses with a low turnover to reduce their compliance and tax liability costs.
What is the GST Composition Scheme?
The Government of India launched a composition scheme under GST for small businesses with a turnover less than Rs 1.5 crore. The primary objective of the scheme is to save small businesses from tedious GST formalities, high costs of compliance, and tax liability. Taxpayers can choose to register under the scheme by intimating the tax authorities.
Who is Eligible for the GST Composition Scheme?
The GST composition scheme is optional, and businesses with a turnover up to Rs. 1.5 crore are eligible to opt for it. However, in Himachal Pradesh and the Northeastern states, the GST composition scheme turnover limit is Rs. 75 lakh. The CGST (Amendment) Act, 2018 states that a composition dealer can also supply services up to Rs 5 lakhs or 10% of the turnover, whichever is higher. The amendment came into effect on February 1, 2019. However, the 32nd GST council meeting proposed increasing this limit for service providers. While assessing eligibility for the scheme, the combined turnover of all businesses registered under the same PAN is considered. Also, any business wishing to opt for this scheme must be registered for GST.
Who is Not Eligible for the GST Composition Scheme?
The GST composition scheme is optional. Also, all taxpayers registered under the scheme are not eligible to avail of it. The taxpayers mentioned below are not eligible for the composition scheme in GST:
- A supplier whose turnover for the previous financial year exceeds the Rs 1.5 crore mark.
- A supplier from Himachal Pradesh or North-Eastern states whose turnover exceeds Rs 75 lakhs
- Taxpayers that supply goods that do not attract tax under the GST act
- Taxpayers that offer services except for restaurant services
- Taxpayers involved with interstate outward supplying and import/export
- A non-resident or casual taxable person
- Suppliers that use e-Commerce platforms to supply goods. According to section 52, these suppliers must collect tax at the source.
- Those involved with the manufacturing of ice cream, pan masala, and tobacco
Note: Traders of ice cream, tobacco and Pan Masala are eligible to avail of the scheme
- A supplier who has bought goods and services from an unregistered supplier who has not paid GST based on reverse charge
- A supplier who purchased goods or services from an unregistered supplier and that unregistered supplier has not paid the GST on a reverse charge basis.
Also Read: What Is GST On Personal Loans and How Does It Impact Borrowers?
What are the Conditions for Availing of Composition Scheme under GST?
Taxpayers must meet the following conditions to avail the GST composition scheme:
- Dealers opting for a composition scheme under GST cannot claim any Input Tax Credit.
- Some goods like alcohol are not taxable under GST. Dealers supplying these goods cannot be registered for GST under the composition scheme.
- The reverse charge mechanism requires taxpayers to pay tax at normal rates on all transactions.
- If the taxpayer has several businesses registered under the same PAN, either they must all be registered for the composition scheme in GST collectively or can opt-out of it.
- All signboards at the place of business of the taxpayer must mention ‘composition taxable person’.
- All bills of supply issued by the taxpayer must also mention ‘composition taxable person’.
- The CGST (Amendment) Act, 2018 lays down GST composition scheme rules for services. It makes it possible for composition dealers to offer supply services up to Rs.5 lakh, or 10% of turnover, whichever is higher.
How can a Taxpayer Choose to Register for the Composition Scheme under GST?
If taxpayers meet the GST composition scheme limit criteria, they can file GST CMP-02 with the government. They can do it using the GST portal. At the beginning of each financial year, the taxpayer must notify the tax authorities about their intent to opt for the GST composition scheme.
Which Documents Should a Composition Dealer Issue while Supplying Goods and Services?
A composition dealer is not allowed to levy taxes on customers. Thus, a tax invoice cannot be issued. The dealer must pay the tax from their earnings and issue a bill of supply to the customers. The dealer must mention ‘composition taxable person, not eligible to collect tax on supplies’ right on top of the bill of supply.
What are GST Composition Scheme Tax Rates for a Composition Dealer?
The GST composition scheme for service providers includes businesses like manufacturers and traders, restaurants that do not serve alcohol, etc. Initially, composition dealers meant only suppliers of goods, with some exceptions. However, post FY19-20, the scheme has also been extended to service providers.
GST composition scheme rates for composition dealers are mentioned below:
- Manufacturers: The composition scheme tax rate for manufacturers is 1% of turnover. This comprises 0.5% towards CGST and 0.5% towards SGST.
- Restaurants that don’t serve alcohol: The tax rate for restaurant service suppliers is 5% of turnover with 2.5% each towards CGST and SGST.
- Goods and services dealers (mixed supplies): Goods and services dealers dealing with mixed supplies need to pay 3% each towards SGST and CGST amounting to 6% of turnover.
- Goods and services dealers (composite supply): Goods and services dealers dealing with composite supplies need to pay a tax rate of 1% of turnover with 0.5% each towards SGST and CGST.
To make it easier for you, refer to the table below:
| Type of Composition Dealer | Tax Rate |
| Manufacturers | 1% of turnover |
| Restaurants (without alcohol service) | 5% of turnover |
| Goods and Service (mixed supply) | 6% of turnover |
| Goods and Service (composite supply) | 1% of turnover |
How to Apply for GST under the Composition Scheme?
Taxpayers can apply for the composition scheme under GST by filing form GST CMP-02 through the GST portal. If the dealer opting for the scheme wishes to continue with the scheme in the subsequent financial year, they must inform the tax department at the beginning of the financial year.
How can Composition Dealers make GST Payments?
Composition dealers need to bear GST costs for the supplies themselves. The costs include GST applicable to the supplies, reverse charge, and purchases through unregistered dealers.
At the end of every quarter, the composition dealer must pay GST in a quarterly statement CMP-08. This must be done by the 18th of the month at the end of the quarter. GSTR-4 is the form used for quarterly returns. Apart from this, the dealer must also file annual returns through the GSTR-9A form. They must file this form by the 31st of December of the next financial year.
GST composition scheme rules do not require dealers to maintain detailed records.
Benefits of Composition Scheme in GST
Here are the benefits of registering under composite GST:
- Significantly fewer compliance rules related to return filing, maintaining record books and issuing invoices
- Lesser tax liability as compared to other taxpayers
- Lower composition GST rates ensure lower tax liability and thus higher liquidity. This makes more working capital available
Also Read: How To File GSTR-9 And What Is The Penalty For Late Filing?
Limitations of Composition Scheme under GST
Here are some disadvantages of registering for the GST composition scheme:
- Restrictions on business transactions: Dealers registered under the composition scheme have a restricted scope for business transactions. They are neither allowed to carry out interstate outward transactions nor import and export goods and services.
- Composite GST dealers cannot claim input tax credit: B2B dealers registered for the composition scheme under GST cannot claim the credit for input tax paid
- No tax collection: Registration under the GST composition scheme restricts dealers from charging taxes from customers. Though the GST composition scheme rate is lower, it still burdens the dealer and they may incur higher sales costs.
- Penalty in case of discrepancies found later: If the tax authorities find out that the composite dealer wasn’t eligible for registration under the composition scheme in GST and the permission was granted by mistake, they can penalize the dealer. The model GST law governs the penalty. Additionally, they must also pay the tax difference.
Final Word
The composition scheme under GST is very beneficial for small businesses with a turnover under the threshold. However, it is not free of drawbacks. Dealers must read all GST composition scheme rules and conditions to determine if it is the right choice for their business. It is also a good idea to check with a GST professional. They will be able to guide better about suitability and required compliance.
FAQs
Ans. Both new and existing taxpayers can apply for registration under the composition scheme in GST if they meet the eligibility criteria. The online application for composition levy can be filed on the GST portal. New taxpayers need to fill out Form GST REG-01 whereas existing taxpayers can opt for composition levy using GST-CMP-02. Those opting to switch from normal registration must do it before the financial year commences.
Ans. To change from normal GST registration to composite GST, you must pay an amount equivalent to the ITC based on inputs held in stocks on the day before switchover. Once you pay the amount, if there is any amount in the credit ledger, it would lapse.
You need to fill out form REG-CMP-02 before the financial year begins.
To switch to the composition scheme on the GST portal login to the taxpayers’ interface and go to services. Choose registration under the services menu and then select ‘application to opt for composition levy’. Read all the rules, fill out the form and submit.
Ans. If you wish to opt out of the composition scheme, you must inform the tax department. To do this, you must file form GST CMP-04 which is an intimation for withdrawal. You must do this within 7 days of any event that makes your business ineligible for the composition scheme.
Ans. The GST composition scheme turnover limit is Rs 1.5 crores for all states except Himachal Pradesh and the northeastern states. The limit for these states is Rs 75 lakhs.
Ans. Yes, starting from the financial year 2019-2020, service providers can also apply for the composition scheme under GST. Under this scheme, service providers with turnover up to Rs 50 lakhs are eligible to access lower tax rates subject to certain conditions.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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