GST Composition Scheme

The GST Composition Scheme is a simple tax scheme under GST designed for small businesses. It allows eligible taxpayers to pay GST at reduced rates and enjoy fewer compliance requirements. Here, we will explain the features, eligibility, tax rates, rules, forms, returns, billing, and online procedures of the GST Composition Scheme.

What is the GST Composition Scheme?

The Composition Scheme GST is a tax-paying mechanism offered to small businesses with an annual turnover of less than Rs. 1.5 crore. The scheme aims to reduce such businesses’ tax burden and compliance costs. Under the scheme, the taxpayers can pay GST at a fixed rate of their turnover instead of paying tax on the value addition at each stage of the supply chain. The scheme also exempts taxpayers from filing detailed monthly and quarterly GST returns. They only need to file a quarterly return in Form GSTR-4 and an annual return in Form GSTR-9A.

Who is eligible for the GST composition scheme?

This composition scheme under GST is optional and voluntary for taxpayers who meet the following eligibility criteria:

• The taxpayer’s annual turnover in the preceding financial year should not exceed Rs. 1.5 crore. For the taxpayers in the North-Eastern States and Himachal Pradesh, the composition turnover limit is Rs. 75 lakh.
• The taxpayer should not manufacture ice cream, pan masala, or tobacco products.
• The taxpayer should not be in the supply of non-taxable goods or services not leviable to GST.
• The taxpayer should not be in the inter-state supply of goods or services.
• The taxpayer should not be a casual or non-resident taxable person.
• The taxpayer must not provide goods or services through an e-commerce platform that needs to collect tax at source (TCS) according to section 52 of the CGST Act.
• The taxpayer should not be a manufacturer of notified goods under section 10(2)(e) of the CGST Act.
• If the composition taxpayer has multiple business verticals under the same PAN, they have to opt for the composition scheme for all the verticals. The taxpayer cannot opt for the composition scheme for one vertical and the regular scheme for another.

GST Composition Scheme Rate

Business Type	CGST	SGST	Total
Manufacturers and traders of goods	0.5%	0.5%	1.0%
Restaurants which are not serving alcohol	2.5%	2.5%	5.0%
Others (such as service providers)	3.0%	3.0%	6.0%

The tax rate applies to the taxpayer’s turnover in a state or union territory. The turnover includes the taxable and exempt supplies but excludes the inward supplies under reverse charge and the value of inward supplies of goods or services from a registered person or an unregistered person.

The composition-taxable person cannot claim any input tax credit on purchasing goods or services. They also cannot charge any GST on the sales invoices. They need to issue a bill of supply instead of a tax invoice.

GST Composition Scheme Rules

The GST Composition Scheme Rules are as follows:

• The composition taxpayer who wants to opt for the composition scheme has to file an intimation in Form GST CMP-02 on the GST portal before the beginning of the financial year.
• The taxpayer with provisional registration under GST and opts for the composition scheme must file an intimation in Form GST CMP-01 within 30 days of the appointed date (i.e., 1st July 2017).
• The taxpayer has to pay an amount equal to the input tax credit on the stock of goods held on the day immediately preceding the date of exercise of the option, calculated in the prescribed manner. The taxpayer has to file a statement in Form GST ITC-03 within 60 days of the commencement of the relevant financial year.
• The composition GST taxpayer has to mention “composition taxable person” on every signboard or notice displayed at the place of business and on every bill of supply issued by him/her.
• The taxpayer must submit a quarterly return through Form GSTR-4 by the 18th of the month following that quarter.
• The return should contain the details of the turnover, tax payable, tax payment, and other prescribed particulars.
• The has to file an annual return in Form GSTR-9A by 31st December following the end of the financial year. The return should contain the details of the turnover, tax payable, tax payment, and other prescribed particulars.
• The taxpayer has to pay the tax due along with the return. They can pay the tax by using the electronic cash ledger or the electronic credit ledger, if available.
• Taxpayers do not need to keep and maintain detailed books of accounts and records as a normal taxpayer prescribes. However, they have to maintain a correct account of the production or manufacture of goods, the inward and outward supply of goods or services, the stock of goods, the tax payable and paid, and other relevant particulars.

Different Forms for the GST Composition Scheme

Form No.	Description
GST CMP-01	Intimation to opt for the composition scheme by a person who is granted provisional registration under GST
GST CMP-02	Intimation to opt for the composition scheme by a person having  registration under GST
GST CMP-03	Intimation of the details of the stock of goods held on the day preceding the date of exercise of option
GST CMP-04	Intimation of withdrawal from the composition scheme
GST CMP-05	Notice for denial of option to pay tax under the composition scheme
GST CMP-06	Reply to the notice for denial of option to pay tax under the composition scheme
GST CMP-07	Order for acceptance or rejection of reply to the notice for denial of option to pay tax under the composition scheme
GSTR-4	Quarterly return for the composition taxable person
GSTR-9A	Annual return for the composition taxable person
GST ITC-03	Declaration for the payment of the amount of input tax credit on the stock of goods held on the date of withdrawal from the composition scheme

Online Procedure to Apply for Composition Scheme under GST Act

To apply for the composition under GST scheme online, you need to follow these steps:

• Log in to the GST portal with your username and password.
• Move your cursor to the Services tab.
• Now, select Registration> Application to opt for Composition Levy.
• Fill in the details of your business, such as the financial year, the date from which you want to opt for the scheme, and the category of registered person.
• Select the checkbox to declare that you meet all the eligibility criteria and agree to comply with the scheme’s provisions.
• Verify the details and submit the form using your digital signature certificate (DSC) or electronic verification code (EVC).
• You will receive an acknowledgment message and a reference number on your registered email and mobile number.
• The GST officer will review your application and approve or reject it within 15 days. You can verify your status on the GST portal.
• If approved, you will receive a GST CMP-02 form, which indicates that you must pay tax under the composition GST scheme. Download it from the GST portal and use it as proof of your Registration under the scheme.

You can also opt for the composition under the GST scheme when registering for GST by filling out the GST REG-01 form and selecting the option to pay tax under the scheme. However, if registered as a normal taxpayer, submit the GST CMP-02 form before the start of the financial year for which you intend to choose the scheme. You must also file the GST ITC-03 form within 60 days of opting for the scheme to declare and reverse the input tax credit on your closing stock.

Advantages of the GST Composition Scheme

Some of the benefits of the composition scheme are:

• Reduced tax liability: You can pay GST at a lower rate than the normal rate, which can help you save on your tax outgo and increase your profit margin.
• Simplified compliance: You only need to file one quarterly return (GST CMP-08) and one annual return (GSTR-4) instead of three monthly and one annual returns as a normal taxpayer. You also do not need to issue tax invoices or maintain detailed records of your transactions.
• Ease of administration: You do not have to deal with multiple tax rates, exemptions, and classifications, which can reduce the complexity and confusion of GST. You also do not have to worry about collecting and paying taxes on behalf of your suppliers or customers.
• Easy funding: GST serves as a crucial business financial document. Opting for this scheme makes it easier for you to obtain business loans from lenders like FlexiLoans.

Downsides of the GST Composition Scheme

Some drawbacks of the composition GST scheme are:

• Limited business scope: You cannot make inter-state supplies, e-commerce sales, or exempt supplies, which can restrict your market reach and customer base. You cannot claim input tax credit on your purchases or pass it on to your customers.

• Higher tax burden for customers: Your customers registered under GST cannot claim input tax credits on the purchases they make from you, which can increase their tax liability and reduce their willingness to buy from you.
• No flexibility to switch: Once you opt for the composition scheme, continue with it for the entire financial year unless you become ineligible due to crossing the turnover limit or violating any of the conditions. You cannot switch back to the normal scheme in the middle of the year. 

Conclusion

The GST Composition Scheme offers a simplified tax framework for small businesses, reducing the compliance burden and allowing them to focus on their operations. By opting for this scheme, eligible companies can benefit from lower tax rates and simplified filing procedures. 

However, businesses must understand the scheme’s eligibility criteria, rules, and limitations to ensure they make an informed decision. Staying compliant with the GST Composition Scheme can lead to a hassle-free business environment, improve the overall ease of business in India, and make it easier to obtain a small business loan.

FAQs

Q1. What is the GST Composition Scheme? 

Ans: It is a tax scheme designed to simplify tax compliance for small taxpayers. It allows eligible businesses to pay GST at a fixed turnover rate and reduces the compliance burden.

Q2. Who is qualified for the GST Composition Scheme? 

Ans: A small taxpayer with a yearly turnover of up to Rs 1.5 crore (Rs 75 lakh for special category states).

Q3. What are the tax rates under the GST Composition Scheme?

Ans: The tax rates under the Composition Scheme vary- 1% for manufacturers, 5% for restaurant services, and 6% for traders.

Q4. Are there any restrictions on businesses under the GST Composition Scheme? 

Ans: Businesses opting for the Composition Scheme cannot claim input tax credits, cannot supply goods through an e-commerce operator, and cannot engage in inter-state supplies.

Q5. How can a taxpayer apply for the GST Composition Scheme? 

Ans: A qualified taxpayer can opt for the Composition Scheme by filing the prescribed form before the beginning of the financial year for which the option to pay tax under the scheme is exercised.

Q6. Can a taxpayer switch from the regular scheme to the GST Composition Scheme? 

Ans: Yes, a taxpayer can switch from the regular scheme to the Composition Scheme at the beginning of the next financial year.

Q7. What are the conditions for withdrawal from the GST Composition Scheme? 

Ans: A composite taxpayer can withdraw from these schemes by applying the prescribed form. Withdrawal can be voluntary or by crossing the turnover threshold.

Q8. What happens if a taxpayer under the GST Composition Scheme crosses the turnover limit? 

Ans: If taxpayers under the Composition Scheme cross the turnover limit, they must switch to the regular GST scheme and inform the tax authorities by filing the prescribed form.