All About GST Composition Scheme: Rules, Rates & Eligibility
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All About GST Composition Scheme: Rules, Rates & Eligibility

Introduction

The Goods and Services Tax (GST) has revolutionized the taxation system in India, simplifying tax compliance and ensuring a uniform tax structure. However, for small businesses, compliance with regular GST rules can be cumbersome. To ease this burden, the government introduced the GST Composition Scheme. This scheme is designed for small taxpayers, allowing them to pay tax at a fixed rate without the complexity of maintaining extensive records.

In this article, we will dive deep into the rules, rates, and eligibility criteria of the GST Composition Scheme, ensuring a comprehensive understanding for business owners considering this tax regime.

Understanding the GST Composition Scheme

What is the GST Composition Scheme?

The GST Composition Scheme is a simplified tax payment scheme available to small businesses with a lower turnover. Instead of paying tax under the normal GST regime, businesses under this scheme pay a fixed percentage of their turnover as tax and enjoy reduced compliance requirements.

Purpose of the Composition Scheme

The scheme was introduced to:

  • Reduce the tax burden on small businesses.
  • Simplify tax filing and compliance.
  • Help small traders and manufacturers focus on their core business activities instead of dealing with complex tax calculations.

Difference Between Regular GST and Composition Scheme

Feature Regular GST GST Composition Scheme
Tax Rates Varies (5%, 12%, 18%, 28%) Fixed lower percentage (1%, 5%, etc.)
Return Filing Monthly Quarterly
Input Tax Credit (ITC) Available Not available
Interstate Sales Allowed Not allowed
Compliance Requirements High Low

Eligibility Criteria for the Composition Scheme

Not all businesses can opt for the composition scheme. There are specific eligibility conditions that must be met.

Who Can Opt for the Composition Scheme?

The following categories of businesses can avail of this scheme:

  1. Manufacturers (excluding specific industries like tobacco and ice cream).
  2. Traders and retailers selling goods within the same state.
  3. Restaurants (not serving alcohol).

Turnover Limits for Eligibility

The GST Composition Scheme is available only to businesses that meet certain turnover limits:

  • ₹1.5 Crore for most states (₹75 Lakhs for North-Eastern and hill states).
  • ₹50 Lakhs for service providers opting under a special composition scheme.

Businesses Not Eligible for the Scheme

Some businesses are restricted from using the composition scheme, including:

  • Businesses engaged in interstate sales.
  • E-commerce sellers (like those selling on Amazon or Flipkart).
  • Service providers (except those under the special scheme).
  • Businesses dealing in exempt goods.
  • Ice cream manufacturers, tobacco product sellers, and pan masala manufacturers.

GST Rates Under the Composition Scheme

The composition scheme offers a simplified fixed tax rate depending on the type of business:

Business Type GST Rate
Manufacturers and traders 1% (0.5% CGST + 0.5% SGST)
Restaurants (not serving alcohol) 5% (2.5% CGST + 2.5% SGST)
Service providers (special scheme) 6% (3% CGST + 3% SGST)

How is Tax Calculated?

For a trader with an annual turnover of ₹50 Lakhs, the tax calculation would be:

  • GST Payable = 1% of ₹50 Lakhs = ₹50,000
  • This is significantly lower than standard GST rates.

Comparison with Regular GST Rates

  • Under the normal GST regime, businesses have to charge GST at 5%, 12%, 18%, or 28%, depending on the goods/services they sell.
  • In contrast, the composition scheme keeps tax rates lower, making it beneficial for small businesses.

Rules and Conditions for the Composition Scheme

Filing Requirements and Compliance

Businesses under the composition scheme must:

  • File a quarterly return (CMP-08) instead of monthly returns.
  • Submit an annual return (GSTR-4).
  • Mention “Composition Taxable Person” on invoices.

Restrictions and Limitations

  • Cannot supply goods to other states.
  • Cannot claim input tax credit (ITC).
  • Cannot collect GST separately from customers.

Impact on Input Tax Credit (ITC)

  • Businesses under the scheme cannot claim ITC on purchases.
  • This means they end up paying GST on raw materials without getting any credit back.

Registration Process for the GST Composition Scheme

If you’re eligible and want to opt for the GST Composition Scheme, you need to complete the registration process through the GST portal. Here’s a step-by-step guide:

Step-by-Step Guide for Registration

  1. Log in to the GST Portal
    • Visit the official GST website (www.gst.gov.in).
    • Enter your GSTIN and password to log in.
  2. Go to the Composition Scheme Section
    • Click on ‘Services’ → ‘Registration’ → ‘Application to opt for Composition Levy’.
  3. Fill in the Application Form
    • Select the business category (manufacturer, trader, restaurant, service provider).
    • Confirm that you meet the eligibility criteria.
  4. Submit the Declaration
    • A declaration confirming that you will abide by the rules and limitations of the composition scheme must be submitted.
  5. Verification and Approval
    • The GST authorities will review your application.
    • Once approved, you will receive a confirmation email and message.

Documents Required for Registration

  • GSTIN (if already registered under GST)
  • PAN card of the business owner
  • Business registration documents (if applicable)
  • Aadhaar card for identity verification

Switching from Regular GST to Composition Scheme

  • Businesses already registered under GST can switch to the composition scheme by filing Form GST CMP-02.
  • This must be done at the beginning of the financial year.

Filing of GST Returns in the Composition Scheme

Unlike regular GST taxpayers, who must file monthly returns, businesses under the composition scheme enjoy a much simpler return filing process.

Forms to be Filed Under the Composition Scheme

Form Purpose Frequency
CMP-02 Application to opt for the Composition Scheme Once (when opting in)
CMP-08 Quarterly payment of GST Every quarter
GSTR-4 Annual return Once a year

Filing Frequency

  • CMP-08 (quarterly) is used to declare total turnover and pay taxes.
  • GSTR-4 (annually) is a summary return for the entire year.

Common Mistakes to Avoid

  • Missing deadlines for return filing, which can lead to penalties.
  • Incorrect turnover declaration, which can lead to disqualification.
  • Failing to mention ‘Composition Taxable Person’ on invoices, which is mandatory.

Benefits of the GST Composition Scheme

The GST Composition Scheme is designed to provide several advantages to small businesses.

  1. Simplified Tax Compliance
    • Less paperwork and fewer returns to file.
    • No need to maintain detailed tax records like in regular GST.
  2. Lower Tax Liability
    • Fixed low tax rates reduce the burden on small businesses.
    • Helps in keeping products competitively priced.
  3. Reduced Compliance Costs
    • No need for expensive accounting software.
    • Can be managed with basic bookkeeping.
  4. Better Cash Flow Management
    • Since tax is paid at a lower rate, businesses retain more working capital.
    • No need to worry about input tax credit adjustments.

Limitations of the Composition Scheme

While the composition scheme is beneficial, it also comes with some restrictions and challenges.

  1. No Input Tax Credit (ITC)
    • Businesses cannot claim ITC on purchases.
    • This increases the cost of raw materials and supplies.
  2. Restrictions on Inter-State Sales
    • Businesses cannot sell goods outside their state.
    • This limits growth opportunities for businesses with national reach.
  3. Only Certain Businesses Are Eligible
    • Service providers, except restaurants and special category businesses, are not eligible.
    • E-commerce sellers cannot opt for this scheme.
  4. Tax Must Be Paid from Pocket
    • Businesses cannot charge GST separately from customers.
    • This means they must absorb the tax cost in the selling price.

Comparison Between Regular GST and Composition Scheme

To decide whether to opt for the Composition Scheme, businesses should compare it with regular GST.

Feature Regular GST Composition Scheme
Tax Rate Varies (5% to 28%) Fixed (1% to 6%)
Input Tax Credit (ITC) Available Not Available
Return Filing Monthly (GSTR-1, GSTR-3B) Quarterly (CMP-08) + Annual (GSTR-4)
Inter-State Sales Allowed Not Allowed
Invoice Format Regular tax invoice Bill of supply (No GST mentioned)

Recent Updates and Changes in the Composition Scheme

The government frequently updates the rules and eligibility criteria for the GST Composition Scheme. Some of the recent changes include:

  1. Increase in Turnover Limit
    • The turnover limit for eligibility was raised from ₹1 crore to ₹1.5 crore to include more businesses.
  2. Introduction of Composition Scheme for Service Providers
    • Service providers can now opt for a 6% tax rate (3% CGST + 3% SGST) if turnover is below ₹50 lakhs.
  3. Simplified Annual Return (GSTR-4)
    • Filing has been made easier with an auto-generated summary based on CMP-08.

Transitioning Out of the Composition Scheme

Businesses may need to exit the scheme if:

  • Their turnover exceeds ₹1.5 crore.
  • They decide to expand interstate.
  • They wish to claim input tax credit.

Steps to Switch to Regular GST

  1. File Form GST CMP-04 to opt out of the scheme.
  2. File regular GST returns (GSTR-1, GSTR-3B) from the next tax period.
  3. Maintain proper ITC records if shifting to regular GST.

FAQs on GST Composition Scheme

  1. Can I switch from Composition Scheme to Regular GST anytime?
    Yes, you can opt out of the Composition Scheme at the beginning of a financial year by filing Form CMP-04.
  2. Can a service provider opt for the Composition Scheme?
    Yes, but only if they fall under the special service provider composition scheme with a turnover below ₹50 lakhs and pay 6% GST.
  3. What happens if my turnover exceeds ₹1.5 crore?
    You must exit the scheme immediately and start filing regular GST returns from the next month.
  4. Can I claim Input Tax Credit under the Composition Scheme?
    No, businesses under this scheme cannot claim ITC, as they pay tax at a reduced rate.
  5. Do I need to file GST returns monthly under the Composition Scheme?
    No, you only need to file CMP-08 (quarterly) and GSTR-4 (annually), reducing the compliance burden.

Conclusion

The GST Composition Scheme is an excellent option for small businesses looking to reduce tax compliance and pay taxes at a lower rate. However, it comes with restrictions like no inter-state sales, no ITC, and a turnover cap. Businesses must weigh the pros and cons before deciding whether to opt for this scheme or stick to regular GST.

For those eligible, the scheme offers a simplified, hassle-free tax system that allows them to focus on growing their business.