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Composition Scheme Under GST

Narendra Kumar
12 Oct, 2023 12 Oct, 2023
Composition Scheme Under GST

GST Composition Scheme is an alternative scheme specifically designed for small taxpayers to lower the taxability burden and ease down the complex tax filing process of using a wide range of forms. This composition scheme under GST has surely reduced the burden on small taxpayers; however, on the other hand, it also upholds certain restrictions in terms of territorial transactions and tax collection. The scheme focuses on the tax rates on the basis of the annual turnover, which also includes taxable supplies, exempt supplies, and exports made under the same PAN, but also excludes inward supplies under reverse charge (for all State, Union Territory, and Integrated taxes).

Check if you can opt for the Composition scheme.

If a taxable person or business belonging, running, or falling in any of the following categories can opt for the Composition Scheme:

  • If the gross turnover is below Rs 1.5 crore
  • For a specific set of regions (Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh) if the gross turnover is below INR 75 lakh
  • A composition dealer supplying services to the extent of 10 % of gross turnover, or INR 5 lakhs, whichever is more
  • Annual Turnover of each business registered within the same PAN should be considered to calculate the gross turnover.

However, despite qualifying the above eligibility criteria for opting for the Composition scheme, if any individual or business falls within the following category, then the Individual or business will not be eligible to opt for the Composition Scheme. The categories are as follows:

  • Ice cream, pan masala, or tobacco Manufacturer
  • A Taxpayer making inter-state supplies
  • A casual taxable person
  • Non-resident taxable person

Quick bit for conditions

GST Composition Scheme comes with the following conditions if you intend to opt for the scheme.

  • A dealer opting for the GST Composition Scheme could not claim any Input Tax Credit.
  • Goods that are not subject to taxes under the GST are prohibited for supplying goods such as alcohol.
  • The reverse charge mechanism allows the taxpayer to pay the taxes for transactions at the normal rate.
  • For Taxable businesses of different segments, such as textile, electronic, groceries, etc., which are registered under the same PAN, it is required that all of the segments of the businesses are registered collectively under the scheme and similarly done collectively in order to opt out of the scheme.
  • All the taxpayers opting for the composition scheme are mandatorily required to put a signboard or display board labelled as “Composition Taxable Person” at the premised of business operation.
  • All the taxpayers opting for the composition scheme are obliged to label any bill of supply issued under the business name as a ‘composition taxable person’.
  • A taxable person, trader or business is now allowed to supply services up to an extent of 10 % of the gross turnover or INR 5,00,000 (whichever is higher). This came into existence through the CGST (Amendment) Act, 2018, which was applicable from 1st Feb 2019.
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What is your Transaction Limit?

Under the GST Composition Scheme, Composition taxpayers have certain turnover limits varying as per the nature of the business and the kind of services and goods offered, which are as follows:

Registration StatusGood Manufacturers and TradersRestaurants (not serving alcohol)Service Providers
Newly Registered< 1.5 Crore< 1.5 Crore<50 Lakhs
Already Registered< 1.5 Crore< 1.5 Crore<50 Lakhs

Check the tax rates.

In opting for the composition scheme, the following tax rates come into the picture of taxability. These tax rates vary as per the category of services and goods offered, which are as follows:

Types of TaxesGood Manufacturers and TradersRestaurants (not serving alcohol)Service Providers
GST1 %5 %6 %
CGST0.5 %2.5 %3 %
SGST0.5 %2.5 %3 %

Pros and Cons of Composition Scheme

ProsCons
Significant decrease in compliance such as record keeping, returns, issuance of invoices, etc.The dealer is subject to limited territorial business practices, barring him from Inter-state transactions.
Limited Tax LiabilityComposition Dealers don’t get any Input Tax Credit
Taxes at lower rates lead to high liquidityProhibition on supply of non-taxable goods (under GST) through e-commerce portal. For example- Alcohol
Elimination of the flowing effect of TaxEnhanced expenditure by software purchase for GST compliance
Higher registration thresholdComposition Taxpayers are not allowed to recover the composition tax from their respective buyers as a tax invoice cannot be raised.
Heightened treatment for e-commerce dealersSMEs to experience higher tax burden

Follow-up on Recent notifications under the Composition Scheme

6th February 2023All the taxable individuals or businesses who are Composition taxable persons and intend to opt into the scheme for FY 2023-24 may opt for the scheme by submitting a declaration using Form CMP-02 via the GST portal by 31st March 2023.
1st February 2023 Budget 2023 UpdateAfter the amendment of Section 10 of the CGST Act, the individuals or businesses that supply goods using the mode of an e-commerce operator are allowed to opt for the composition scheme.
26th May 2022Following the CGST Notification no.7/2022 dated 26th May 2022, there will be no late fee for the delay in filing GSTR-4 for FY 2021-22 as it has been waived off if filed between 1st May and 30th June 2022. 
24th February 2022Composition taxable persons and those interested in opting into the FY 2022-23 scheme must submit a declaration on the GST portal in Form CMP-02 by 31st March 2022.
28th May 2021According to the 43rd GST Council meeting and the outcome of the CBIC notification, Interest relief has been provided for the filing of CMP-08 for the January 2021 to March 2021 quarter, according to which interest will not be charged until 3rd May for any delay. However, 9% of interest will be charged if the filing is done after 17th June, extending to 18% later.The due date to file GSTR-4 for FY 2020-21 is extended up to 31st July 2021The maximum late fee to be charged is 500 rupees for GSTR-4 per return for “nil filing” and INR 2000 for other than “nil filing.”

Learn to opt for the Composition Scheme.

After evaluating all the ropes, if you are ready to opt for the GST Composition Scheme, you may proceed with your application online through the designated GST Website. In order to indicate your readiness to opt for the Composition Scheme, you should fill out the form GST CMP-02, which serves the indicated purpose.

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Conclusion

GST Composition Scheme has been designed to lower the taxability burden on an individual and does release the complexity of the taxation process, providing room for business capital management. A Composition Tax Payer enjoys relaxation in terms of taxes, but it also comes with drawbacks, such as limiting transactional territory to Intra-state. However, if evaluated well, the benefits of the Composition scheme give space to ignore the drawbacks to a certain extent.

FAQs

  1. Who is eligible for GST composition scheme?

    Any registered taxpayer whose aggregate annual domestic PAN-based turnover is up to `1.5 crore (Rs. 75 lakh for special category States) in the previous financial year is eligible for the composition scheme.

  2. Who is not eligible for composition under GST?

    The following taxpayers are not eligible for the composition scheme:
    Persons making inter-state supplies of goods or services.
    Persons making supplies of goods through an e-commerce operator who collects tax at source.
    Persons manufacturing notified goods (such as ice cream, pan masala, and tobacco products).
    Persons providing services specified by the GST Council (such as restaurants, hotels, and tour operators).
    Persons making supplies on behalf of another taxable person.
    Persons who have already opted for the composition scheme in the previous financial year but have exceeded the turnover limit.

  3. Is composition taxpayer eligible for ITC?

    No, composition taxpayers are not eligible to claim input tax credit (ITC) on their purchases.

  4. What is difference between regular and composition in GST?

    Regular taxpayers
    Have to file detailed GST returns on a monthly or quarterly basis.
    Have to pay GST on their sales at the prescribed rates.
    Are eligible to claim ITC on their purchases.
    Composition taxpayers
    Have to file a single annual GST return.
    Have to pay GST on their sales at a fixed rate.
    Are not eligible to claim ITC on their purchases.

  5. What is the rule 3 of composition scheme under GST?

    Rule 3 of the composition scheme under GST specifies the persons who are not eligible for the scheme. These include persons making inter-state supplies of goods or services, persons making supplies of goods through an e-commerce operator who collects tax at source, and persons manufacturing notified goods.

  6. What is the rule 3 of ITC under GST?

    Rule 3 of the ITC rules under GST specifies the conditions under which a taxpayer can claim ITC. These conditions include that the goods or services must be used for business purposes, and that the taxpayer must have a proper tax invoice from the supplier.

  7. What are the GST rules for composition scheme?

    The GST rules for the composition scheme are specified in Chapter V of the CGST Rules, 2017. These rules include the eligibility criteria for the scheme, the rates of tax payable, and the return filing requirements.

  8. What are the rules for composition dealer?

    The rules for composition dealers are the same as the GST rules for the composition scheme. These rules are specified in Chapter V of the CGST Rules, 2017.

  9. How do I file a CMP 03?

    To file a CMP 03 return, you need to log in to the GST portal and go to the Returns section. Then, select the CMP-03 return and enter the required details. You can also use a GST return filing software to file the CMP-03 return.

  10. What is composition scheme in GST eligibility?

    To be eligible for the composition scheme under GST, your aggregate annual domestic PAN-based turnover must be up to `1.5 crore (Rs. 75 lakh for special category States) in the previous financial year. You must also not be making any of the supplies that are excluded from the composition scheme.

  11. How do I know if my GST is regular or composite?

    To know if your GST is regular or composite, you can log in to the GST portal and go to the My Profile section. Then, select the Registration Details tab. Under the Type of Registration heading, you will see whether your registration is regular or composite.

  12. What is 6% GST composition scheme?

    The 6% GST composition scheme is a scheme under which composition taxpayers can pay GST at a fixed rate of 6% on their sales. This scheme is available to taxpayers whose aggregate annual domestic PAN-based turnover is up to `1.5 crore (Rs. 75 lakh for special category States) in the previous financial year.

  13. What is the GST composition scheme?

    The GST composition scheme is a scheme under which composition taxpayers can pay GST at a fixed rate on their sales. This scheme is simpler to comply with than the regular GST scheme, as composition taxpayers do not have to file detailed GST returns or claim ITC.

  14. What is difference between GST regular and composition?

    The main difference between GST regular and composition is that regular taxpayers have to file detailed GST returns on a monthly or quarterly basis and are eligible to claim ITC on their purchases, while composition taxpayers have to file a single annual GST return and are not eligible to claim ITC on their purchases.

  15. What is composition scheme limit for GST?

    The composition scheme limit for GST is `1.5 crore (Rs. 75 lakh for special category States)

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