What is the GST Composition Scheme?

The GST Composition Scheme is a simplified tax mechanism for small businesses in India to reduce compliance burdens and tax liabilities. It allows eligible businesses with an annual turnover of up to ₹1.5 crores (₹75 lakhs for special category states) to pay a fixed percentage of their turnover as tax, ranging from 1% to 6%, depending on the business type. For example, manufacturers (excluding tobacco, ice cream, or pan masala) pay a 1% tax rate.

Unlike regular GST filers, businesses under this scheme only need to file one quarterly return (GSTR-4) and one annual return (GSTR-9A), significantly reducing paperwork. However, they cannot collect tax from customers or claim input tax credits. The scheme is ideal for small businesses to simplify their GST compliance while minimising administrative costs.

Who Can OPT for the GST Composition Scheme?

Businesses with an annual turnover of up to ₹1.5 crore can apply for the GST Composition Scheme. For businesses located in North-Eastern states and Himachal Pradesh, the turnover limit is ₹75 lakhs.

Under the CGST (Amendment) Act, 2018, composition dealers are allowed to supply services up to 10% of their total turnover or ₹5 lakhs, whichever is higher. This amendment became effective on February 1, 2019. During its 32nd meeting on January 10, 2019, the GST Council proposed more flexibility for service providers under the scheme.

Businesses must consider all entities registered under the same PAN when calculating turnover. The Composition Scheme is suitable for small businesses seeking to minimize their tax and compliance efforts while simplifying GST filing.

Who Cannot Apply for the GST Composition Scheme?

Certain businesses are not eligible for the GST Composition Scheme:

  1. Service Providers (except restaurants) other than those allowed under the scheme.
  2. Businesses dealing in tobacco, ice cream, or pan masala.
  3. Interstate sellers and those involved in the supply of goods through e-commerce platforms.
  4. Manufacturers of notified goods like aerated water.

These restrictions are designed to ensure that only small businesses meeting specific criteria can benefit from simplified GST compliance under the Composition Scheme.

Conditions for Availing of the GST Composition Scheme

To apply for the GST Composition Scheme, businesses must meet the following conditions:

  1. Turnover Limit: The business should have an annual aggregate turnover of up to ₹1.5 crore (or ₹75 lakhs for special category states) in the preceding financial year.
  2. Nature of Business: The scheme is available for suppliers of goods and specific service providers. However, it excludes businesses engaged in interstate supplies, non-taxable goods like alcohol, or those supplied through e-commerce platforms.
  3. No Input Tax Credit (ITC): Businesses opting for the Composition Scheme cannot claim input tax credit on purchases or expenses.
  4. Compliance Requirements: Composition dealers must comply with simplified requirements, such as filing quarterly returns and maintaining limited documentation. They must also display “Composition Taxable Person” on signboards and invoices.
  5. Tax Rate and Payment: Tax under the Composition Scheme is a fixed percentage of turnover, which is generally lower than regular GST rates. Taxes are payable quarterly, reducing cash flow pressures.
  6. Reverse Charge Mechanism: Taxes at regular rates must be paid on transactions that fall under the Reverse Charge Mechanism.
  7. Single Registration for Multiple Businesses: If a person has multiple business segments under one PAN, all segments must collectively register under the scheme or opt-out entirely.
  8. Service Provision Limit: As per the CGST (Amendment) Act, 2018, manufacturers or traders can provide services up to 10% of their turnover or ₹5 lakhs, whichever is higher.

By meeting these conditions, eligible businesses can benefit from simplified tax compliance and reduced tax liability under the GST Composition Scheme.

What is The GST Composition Scheme Limits

The GST Composition Scheme offers simplified tax compliance for small businesses, but it comes with specific turnover limits. Here’s a breakdown:

  • For Manufacturers and Traders: New businesses must ensure their turnover does not exceed Rs. 1.5 crore in the current financial year. For existing businesses, the turnover limit applies to the previous financial year.
  • For Restaurants (excluding those serving alcohol): The same Rs. 1.5 crore turnover limit applies to newly registered and existing restaurants.
  • For Service Providers: Newly registered service providers must have a turnover below Rs. 50 lakh in the current financial year. For those already registered, the turnover limit applies to the previous financial year.

Special Category States: In states designated as special categories, the turnover limit is reduced to Rs. 75 lakh.

Exceeding these turnover limits necessitates a transition to the regular GST payment system. Ensure you monitor your turnover to maintain compliance with the GST Composition Scheme rules.

What are the returns to be filed by a composition dealer?

Composition dealers under the GST regime must adhere to specific filing requirements to stay compliant. Here’s what you need to know about the returns and payments:

  • Quarterly Tax Payments: Composition dealers are required to pay tax quarterly using Form CMP-08. This form serves as a challan-cum-statement, ensuring that your tax payments are accurately recorded.
  • Annual Return: In addition to quarterly payments, composition dealers must file an annual return using Form GSTR-4. This comprehensive return summarizes the year’s transactions and tax obligations.

Ensure timely and accurate filing of these forms to maintain compliance with GST regulations and avoid any potential penalties.

Advantages of the GST Composition Scheme

  1. Simplified Compliance: Less paperwork and infrequent filing make tax management easier.
  2. Reduced Tax Rates: Lower tax rates lead to cost savings and higher profits.
  3. Easier Accounting: Fixed tax rates simplify accounting by avoiding complex calculations.
  4. Less Frequent Returns: File returns quarterly and annually, reducing administrative effort.
  5. Improved Cash Flow: Lower taxes and simpler compliance enhance cash flow and growth potential.

What are the disadvantages of the GST Composition Scheme?

  1. No Input Tax Credit: You can’t claim credits on purchases, increasing costs.
  2. Limited Eligibility: Not available for all businesses or high turnover enterprises.
  3. Higher Tax for Some: Fixed tax rates may be higher than regular GST for certain businesses.
  4. No Inter-State Sales: Businesses can’t sell goods outside their state.
  5. Switching Complexity: Exceeding limits requires moving to regular GST, adding complexity.

GST composition scheme rules

  1. E-commerce Sellers: Excludes those selling through platforms with tax collected at source.
  2. Non-Residents and Casual Taxpayers: Not available for non-resident or casual taxable persons.
  3. Ice Cream Makers: Excludes manufacturers of ice cream without cocoa additives.
  4. Tobacco and Pan Masala Producers: Not applicable to manufacturers of tobacco products and pan masala.
  5. Unregistered Supplier Purchases: Not for businesses buying from unregistered suppliers.
  6. Exempt Goods Suppliers: Excludes those dealing in GST-exempt goods.
  7. Mixed Suppliers: Not available for businesses providing both goods and services.

What are the tax rates applicable for the composition scheme in GST?

  • Manufacturers: 1% of turnover (0.5% CGST and 0.5% SGST/UTGST).
  • Restaurants (not serving alcohol): 5% of turnover (2.5% CGST and 2.5% SGST/UTGST).
  • Traders and Other Suppliers: 1% of turnover (0.5% CGST and 0.5% SGST/UTGST).

GST Composition Scheme bill format

  • Header Information: Label the bill as “Composition Scheme.”
  • Business Details: Include the business’s name, address, and GSTIN.
  • Customer Details: Provide the customer’s name, address, and GSTIN if applicable.
  • Invoice Number and Date: Mention a unique invoice number and date.
  • Description of Goods/Services: List goods/services with quantities and prices.
  • Tax Rate and Amount: State the GST rate (1% or 5%) and total tax amount.
  • Total Amount: Show the overall payable amount, including tax.
  • No Input Tax Credit: Indicate that ITC cannot be claimed on this bill.
  • Signature: Include the authorized person’s signature.

How to file composite GST returns?

  • Log in to GST Portal: Access the GST portal using your credentials.
  • Navigate to Returns Section: Go to the ‘Returns’ tab and select ‘Composition Scheme.’
  • Select Form GSTR-4: Choose Form GSTR-4 for annual returns and Form CMP-08 for quarterly payments.
  • Enter Details: Fill in details of turnover, tax rates, and other required information.
  • Upload Documents: Attach any necessary supporting documents.
  • Review and Validate: Check all entries for accuracy and validate the form.
  • Submit Return: Submit the return online through the portal.
  • Pay Tax: Make any required tax payments through the provided payment options.
  • Receive Acknowledgment: Download the acknowledgement receipt for your records.

How to apply for the GST composition scheme

  • Log in to GST Portal: Sign in to the GST portal with your credentials.
  • Select ‘Services’: Navigate to the ‘Services’ menu and choose ‘Registration.’
  • Choose ‘Composition Scheme’: Opt for the ‘Apply for Composition Scheme’ option.
  • Fill Application Form: Complete the application form with business details and turnover information.
  • Upload Required Documents: Attach necessary documents like business registration and PAN.
  • Submit Application: Review and submit your application online.
  • Receive Confirmation: Wait for the confirmation and GSTIN for the Composition Scheme.

Expert Assistance for Seamless GST Registration

MSMEStory can help you obtain GST registration quickly and hassle-free in India. Connect with our experts today to share your details and start the process. We’re here to support you at every stage, whether you choose regular GST registration or the composition scheme.