GST Composition Scheme: Rules, Rates, and Turnover Limit

Under the prevailing GST regulations, businesses and individuals registered under the composition scheme must complete several forms for diverse purposes. These forms facilitate various actions such as opting in or out of the scheme, providing stock details, and responding to show cause notices. Understanding the purpose of each form is essential for compliance and efficient management of GST obligations. Below is a table summarizing the crucial forms associated with the GST composition scheme:

These forms are designed to ensure that all procedural and compliance requirements are met efficiently, enabling smooth operation within the GST framework.

As per the GST Act, a range of manufacturing and service businesses and traders can register under the GST composition scheme, excluding the following:

• Individuals or businesses who supply goods through an e-commerce portal operator that collects tax at the source
• Non-resident taxable persons or casual taxable persons
• Ice cream manufacturers or manufacturers of other edible ice without cocoa as additives
• Manufacturers of pan masala and tobacco products and substitutes
• Individuals or businesses who have purchased goods from unregistered suppliers
• Suppliers involved in the supply of goods that are exempt under the GST act
• Suppliers involved in the supply of goods and services

The GST composition scheme turnover limit depends on the type of business. Manufacturers, traders, and eligible restaurants can opt for the scheme if their annual turnover is within Rs. 1.5 crore in most states, while eligible service providers have a turnover limit of Rs. 50 lakh. In specified special category states, the turnover limit for manufacturers, traders, and restaurants is reduced to Rs. 75 lakh.

If your annual turnover exceeds the applicable limit during a financial year, you will no longer be eligible for the composition scheme under GST and must shift to the regular GST regime, where GST payment and return filing are carried out under the standard provisions.

The features of the GST composition scheme render it a favourable choice for the following reasons:

• Entrepreneurs enrolled in the GST composition scheme are subjected to a comparatively reduced tax rate compared to those enlisted in the standard GST scheme.
• The tax rates under the GST composition scheme vary depending on the nature of the business. For instance, restaurants incur a 5% rate, whereas manufacturers face a 1% rate.
• If an individual possesses multiple businesses registered under a single PAN (Permanent Account Number), they are obligated to enrol all of them in the GST composition scheme. Failure to do so requires the business owner to opt out of the scheme for specific businesses.
• Every business owner enrolled in the GST composition scheme is required to file a solitary quarterly return by the 18th of the subsequent month following the quarter.
• When executing a transaction under the reverse charge mechanism, a dealer is obliged to remit tax in accordance with the standard GST rate.

What are the benefits of the composition scheme in GST?

The advantages of registering under the Composition Scheme are mentioned below. To see how lower tax payments, reduced compliance requirements, and better cash flow can affect your business, check out the GST Calculator.

• Less compliance required (fewer returns, simpler record-keeping, and invoice issuance)
• Lower tax liability
• Better cash flow as taxes are charged at a lower rate

The main drawback of the GST composition scheme is that businesses cannot claim Input Tax Credit (ITC), which can make their goods or services costlier for B2B buyers. This can reduce competitiveness compared with businesses registered under the regular GST regime.

Under the composition scheme under GST, a business purchasing raw materials worth Rs. 10 lakh with 18% GST pays Rs. 1.8 lakh as input tax but cannot claim this amount as ITC. In contrast, a regular GST taxpayer can offset the Rs. 1.8 lakh against its output GST liability, reducing its overall tax burden.

Other limitations include:

• No inter-state supply: Businesses registered under the scheme generally cannot make inter-state taxable supplies, limiting expansion into other states.
• Restrictions on e-commerce sales: Composition taxpayers are generally not permitted to supply goods through e-commerce operators required to collect Tax Collected at Source (TCS), restricting access to online marketplaces.

Before opting for the scheme, businesses should carefully evaluate whether these restrictions align with their growth plans and customer base.

GST Composition filling due dates (FY2025-26)

Penalties for Late Filing

• A late fee of Rs. 200 per day (Rs. 100 CGST + Rs. 100 SGST) is applicable, subject to a maximum of Rs. 5,000.
• If returns are delayed for two consecutive quarters, the facility to generate e-way bills is blocked. To restore access, taxpayers must file Form GST EWB-05 and clear all pending returns.

The tax rates under the composition scheme are lower than standard GST rates. The applicable rates are outlined below:

GST Composition Scheme Rate

• Manufacturers and traders typically have a GST Composition Scheme rate of 1% of turnover.
• Restaurants and service providers under the Composition Scheme usually face a rate of 5% of turnover.
• Participants in the scheme cannot claim Input Tax Credit (ITC) on their purchases.
• The scheme aims to simplify tax compliance for small businesses.
• Eligible businesses should carefully assess the implications before opting for the Composition Scheme.

• Header: The bill should include a clear header indicating "GST Composition Scheme Bill" or "Composition Scheme Invoice" at the top.
• Business details: Provide the details of the business, including the name, address, GSTIN (Goods and Services Tax Identification Number), and any other relevant registration numbers.
• Customer details: Include the customer's name, address, and GSTIN (if applicable) for B2B transactions.
• Invoice number and date: Each bill should have a unique invoice number and date of issuance for record-keeping and tracking purposes.
• Itemised list: Present a detailed list of goods or services supplied, along with their descriptions, quantities, rates, and total amounts.
• GST composition scheme mention: Clearly indicate on the bill that it is issued under the GST Composition Scheme to distinguish it from regular invoices.
• Total amount: Summarise the total amount payable, inclusive of any applicable taxes, along with any discounts or adjustments.
• Payment terms: Specify the payment terms and methods accepted, including any due dates or credit terms agreed upon.
• Legal compliance: Ensure that the bill complies with all relevant legal requirements and includes any mandatory disclosures or disclaimers mandated by tax authorities.
• Signature: The bill should be signed or stamped by an authorised person from the business to certify its authenticity and validity.

The GST composition scheme is generally suitable if your business has an annual turnover within the prescribed limit, operates only within one state, and primarily serves B2C customers. If your business has high input costs, supplies goods across states, or mainly serves registered businesses, regular GST registration is usually the better choice.

Regular GST registration also allows you to claim ITC on eligible purchases, which can significantly reduce your net GST payment if your business has high input costs. This benefit is not available under the composition scheme. Before choosing either option, consult a Chartered Accountant to determine which registration best suits your business model and growth plans.

How easy is it to file composite GST returns?

As mentioned, the composite GST scheme dramatically reduces the burden of tax filing. With it, you need to file only GSTR 4 every quarter and GSTR 9A annually. You must file GSTR 4 by the 18th of the month succeeding every quarter-end.