Composition Scheme under GST – All You Need To Know

The Goods and Services Tax (GST) is known to be a new turning point, as with its implementation, there is a tremendous outflow of benefits. Before the implementation of  GST in India, there used to be several types of taxes, such as Service Tax, VAT (Value Added Tax), Excise and a lot more that were burdened upon consumers, thereby leading to double taxation or having a cascading effect. However, with the implementation of GST, about 17 taxes are included under one tax regime.

GST applies to almost all assessee in any type of business. This has further increased revenues for the government. While taxes are levied on purchasing goods or services both at the levels of Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST), this puts an end to all confusion. With the implementation of GST, a new regime of business compliance is established.

Large organizations in India have the required resources and ability that can facilitate compliance procedures. On the other hand, small and medium enterprises (SMEs) and start-ups will have a problem in complying with these provisions. Thus, to lower the burden of compliance for small businesses, a composition scheme has been organized under GST law where the assessees have to pay tax at least rate based on their turnover. This is mostly related to the provisions in VAT law.

In this article, we will explain the GST composition scheme, who can apply, eligibility criteria, it’ limitations and how it can benefit small businesses.

Eligibility Criteria for GST Composition Scheme

The Goods and Services Tax (GST) composition scheme is basically a revised edition of the composition regulations. GST is an indirect taxation system that brings different types of taxes under its roof. Since July 2017, this taxation system has become mandatory for individuals as well as small, medium and large-scale businesses. Although this may not seem to be much of a problem, especially for the larger business establishments, primarily because of the availability of resources, however, this could give rise to challenges that may be faced by businesses that are of small and medium-scale, including start-ups.

Registering under the GST composition scheme is basically optional and voluntary. Any business that makes a turnover of less than Rs. 1 crore or Rs. 75 lakhs for certain states can opt for this scheme. However, on any given day, if the turnover of the business makes more than the specified limit, then the business is deemed ineligible and is required to register himself/herself under the taxation scheme. Also, there are a few conditions that are required to be fulfilled before opting for the GST composition scheme. These are given as follows:

(i) Any assessee who only deals in the supply of goods/commodities can opt for the GST composition scheme. This means the provision is not applicable to service providers. However, restaurant service providers are excluded.

(ii) There should not be any inter-state supply of goods. Thus, businesses that only carry out intra-state supply of goods are eligible.

(iii) Any dealer who supplies goods/commodities through e-Commerce (electronic commerce) operator will be barred from being registered under the GST composition scheme. For example: If M/s XYZ sells its products via an e-Commerce operator, such as Flipkart or Amazon, then M/s XYZ cannot opt for a composition scheme.

(iv) The GST composition scheme is imposed on every business verticals with the same PAN (Permanent Account Number). Thus, a taxable person will not have the option to select a composition scheme for one and opt to pay taxes for the other. For instance, a taxable person having business verticals separately registered, like the sale of footwear, sale of mobiles and franchisee of McDonald’s, then the GST composition scheme will be available to all the three business verticals.

(v) Dealers are not allowed to collect composition tax from the recipient of supplies and neither are they allowed to take Input Tax Credit.

(vi) If the person is not eligible under the GST composition scheme, the tax liability shall be tax, plus the interest and penalty, which shall be equal to the amount of tax.

The following persons are not eligible for the GST composition scheme:

(i) Manufacturer of some notified commodities

(ii) Businesses that supply goods, such as ice-cream, tobacco, and other tobacco products

(iii) Businesses that supply of goods via e-Commerce (electronic commerce) operator and who is eligible to collect TCS.

(iv) Businesses that are involved in rendering services, apart from catering to restaurant services (serving foods and non-alcoholic drinks)

(v) Businesses that supply goods which are non-taxable

(vi) An inter-state supplier of goods

Issuance of Bill of Supply by Dealer

Since, the dealer, under the GST composition scheme, cannot pass on the credit of the tax, he/she is, therefore, required to issue the bill of supply.

The details that are required to be mentioned in the bill of supply are listed below:

  • Name, address and Goods and Services Tax Identification Number (GSTIN) of the supplier
  • Name, address and GSTIN of the recipient (if the recipient is registered)
  • Date of issue
  • A consecutive serial number which is a unique number for every financial year
  • Either HSN Code of goods for commodities supplied or Services Accounting Code (SAC) for services rendered
  • Description of goods or services
  • Value of the goods or services after adjusting any discount or abatement
  • The signature or digital signature (e-signature) of the supplier or his authorized signatory (representative)

Registering for GST Composition Scheme

In case the person is already registered under the previous taxation system and has been granted registration on the provisional basis under GST regulations, then he/she can opt to pay under the GST composition scheme by filing the GST CMP-01 form. Also, the person will be required to file the GST CMP-03 form within 60 days of an exercise of the option. The form needed to contain the details about stock and inward supplies of goods received from the unregistered person which are held by him/her on the date preceding the day of the exercise of an option.

If a taxpayer who is in a composition scheme under the previous taxation system and migrates to regular taxation under GST will be permitted to take the credit of Input, semi-finished products, and finished products on the day quickly preceding the date from which they opt to be taxed as a regular taxpayer.

However, the inputs can only be availed after successfully meeting the conditions as given below:

  • Input or goods are meant for making taxable outward supplies under GST requirements
  • The dealer getting the input credit was eligible under the earlier regime, but could not pretend due to being registered under Composition Scheme
  • The taxpayer claiming input credit on goods, those goods should be eligible for such credit under the GST regime
  • The taxpayer must have a valid legal document of the input tax credit, that is, he/she must provide an invoice showing evidence that taxes or duties have been paid
  • Those invoices or documents should not be older than 12 months before the appointed date

How can the Taxpayer Choose the Directly GST Composition Scheme?

The taxpayer can choose the GST composition scheme by file GST CMP-02 with the government. This can be done online by logging into the GST portal.

This instruction should be given in the initial stage of the financial year by the dealer those who want to opt for the GST composition scheme.

How Taxpayer can Switch from Normal scheme to Composition Scheme?

If the person already registered under the normal scheme and later want to pay through the GST composition scheme then he must file an intimation in form GST CMP-2 and form  ITC-03(form should be filed within 60 days from the start of the respective financial year). Input tax credit(ITC), semi-finished product and the finished product which are available in the stack are mentions in the form.

What is the GST rate for the Composition Dealer?

The GST rate of the composition dealer is different from the non-composition dealer. For more detail see the table which is given below:

Business TypeCGSTSGSTTotal
Resturants not serving alcohol2.0%2.5%1.5%
Manufacturers and traders0.5%0.5%1%
Other service providers3.0%3.0%6.0%

How Should Composition Dealer make GST Payment?

The composition dealer should make the payment, by comparison, the following:

  • GST on supplies made.
  • Tax on purchase from an unregistered dealer*
  • Tax on reverse charge

Benefits of GST Composition Scheme

Here are a few benefits of the GST composition scheme.

(a) Less Compliance

Taking into consideration the normal scenario, a taxpayer under GST is generally required to file a minimum of three returns on a monthly basis and another one return on an annual basis. In other words, the person is mandated to file about a total of 37 returns in a given year, otherwise, there will be a penalty/fine levied for non-compliance.

For small suppliers and manufacturers, it becomes quite challenging to maintain detailed books of accounts on a daily basis and record all transactions with supporting documents. Whereas, in the composition scheme, only a quarterly return will be uploaded under GSTR-4 by:

  • 18th July – 1st quarter
  • 18th October – 2nd quarter
  • 18th January – 3rd quarter
  • 18th April – 4th quarter

This will ease the compliance burden for small and medium enterprises (SMEs) and they can focus more on their business rather than getting occupied with the compliance procedure.

(b) Less Tax Liability

Another advantage of being registered under the GST composition scheme is the rate structure.

For Manufacturer = 0.50% (CGST) + 0.50% (SGST) = 1% of turnover of State/Union Territory (UT)

For supplier supplying food other than alcoholic beverages for human consumption =

2.5% (CGST) + 2.5% (SGST) = 5% of turnover of State/Union Territory (UT)

For other suppliers = 0.50% (CGST) + 0.50% (SGST) = 1% of taxable turnover of State/Union Territory (UT)

In the GST composition scheme, a supplier is unfit to collect tax separately from the buyer in an invoice.

(c) Increased Liquidity

For normal taxpayers, most of his working capital will be blocked as Input Tax credit because the individuals can avail the input only if his/her supplier has filed the return. The supplier will have to pay tax at standard rate and credit of the input will only be to attend when his/her supplier files the return. In composition levy, the dealer does not need to worry about his/her supplier filing return as he/she cannot take credit. They will pay tax at a nominal rate. 

The disadvantage of the Composition Scheme

Businesses have a limited area to run their operations under the GST composition scheme. Inter-state transactions cannot be done in businesses under this scheme. This will make your business quite small.

Another disadvantage is that if you are taking the benefits of a composition scheme then you cannot supply the products which are excluded from the GST, for example, cashew nuts.

Under this scheme, there will be no input tax credit that will be possible for your business.

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