Earlier this year, the GST composition scheme limit for manufacturers of goods was raised to Rs. 1.5 crore from the prevailing Rs. 1 crore threshold. Similarly, the GST Council extended the benefits of the composition scheme to service providers on 10th January 2019. This scheme relaxes the tax compliance and payments for individuals having a turnover within the specified limits. As such, this scheme can be a great boon for your venture as it enhances your liquidity. While the scheme benefits B2B businesses greatly, B2C ventures can also profit from it.
To know whether the scheme will help tip the scales in your favour, read on to discover the meaning, advantages, and nuances of the GST composition scheme.
What is the GST composition scheme?
The Composition Scheme is a straightforward and easy option under GST for taxpayers, and also helps with GST returns. Small taxpayers can avoid complicated GST procedures and pay GST at a fixed rate based on their turnover. This scheme is available to any taxpayer whose turnover is less than Rs. 1.5 crore*.
Upon registering for the composition scheme under GST, you are liable to pay tax at a fixed rate of 1% to 6% of your turnover. For instance, if you are a manufacturer of goods other than tobacco, ice cream or pan masala, then you must pay 1% tax basis your turnover.
What are the conditions for availing composition scheme?
- Turnover limit: Businesses with an annual aggregate turnover of up to Rs. 15,00,000 (Rs. 18,75,000 in special category states) in the preceding financial year are eligible for the Composition Scheme.
- Nature of business: The scheme is available for suppliers of goods as well as services, excluding specific categories such as interstate supplies, non-taxable supplies, and those under the Reverse Charge Mechanism.
- No input tax credit: Businesses opting for the Composition Scheme cannot claim input tax credit (ITC) on purchases and expenses incurred for their operations.
- Limited compliance requirements: Participants in the scheme are subject to reduced compliance requirements, including simplified tax returns and fewer documentation obligations.
- Tax rate: The Composition Scheme levies a fixed percentage of turnover as tax, generally lower than the standard GST rates applicable to regular taxpayers.
- Quarterly payment: Tax liabilities under the Composition Scheme are payable on a quarterly basis, easing the cash flow burden for eligible businesses.
- Voluntary opt-in: Eligible businesses may voluntarily opt for the Composition Scheme, provided they meet the specified criteria and comply with the relevant regulations and procedures.
GST composition scheme forms
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:
Form Number/Name |
Purpose of Form |
GST CMP-01 |
Notification of tax payment under the composition scheme (for provisional registrations) |
GST CMP-02 |
Applying for the composition scheme (for unregistered entities/persons) |
GST CMP-03 |
Submission of stock/inward supply details from unregistered sources |
GST CMP-04 |
Exiting the GST composition scheme |
GST CMP-05 |
Show cause notice for violation of GST Act rules |
GST CMP-06 |
Replying to show cause notice issued via Form GST CMP-05 |
GST CMP-07 |
Issuance of an order for acceptance/rejection of response in Form GST CMP-06 |
GST REG-01 |
Registration under the composition scheme |
GST ITC-01 |
Reporting inputs from composition registered supplier (raw materials, semi-finished, and finished goods) |
These forms are designed to ensure that all procedural and compliance requirements are met efficiently, enabling smooth operation within the GST framework.
GST composition scheme rules
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
How to Opt for the GST Composition Scheme?
To benefit from this scheme, eligible taxpayers must file Form CGST CMP 01 or 02 through the official portal.
Here are the steps to follow to start the process:
Step 1 – Log in to the GST portal using your registered ID and password
Step 2 – Go to "Services" and select "Registration" from the drop-down menu. Then, click on the option “Application to opt for composition levy”
Step 3 – Carefully read the terms of the scheme and tick the box to confirm your agreement. Next, fill in the fields for "Place" and "Name of authorising signatory" by selecting the appropriate options from the drop-down menu and save the details
Step 4 – To submit the details, LLPs and companies should click “Submit with DSC”. Other taxpayers can choose between “Submit with EVC” or “Submit with e-signature”
Step 5 – A warning message will appear. Click on the “Proceed” option
By following these steps, your application will be successfully submitted. Registered taxpayers will receive a confirmation on their registered email IDs or mobile numbers.
Once registration is completed successfully, taxpayers can start enjoying the benefits of the GST Composition Scheme.
Who can opt for a GST Composition Scheme?
A taxpayer with a turnover below Rs 1.5 crore* can choose the Composition Scheme. For North-Eastern states and Himachal Pradesh, the limit is now Rs 75 lakh*. According to the CGST (Amendment) Act, 2018, a composition dealer can also provide services up to 10% of their turnover, or Rs 5 lakh, whichever is higher.
This change will come into effect from 1st February 2019. Additionally, the GST Council proposed an increase in this limit for service providers during its 32nd meeting on 10th January 2019*. The turnover of all businesses registered under the same PAN should be considered when calculating the total turnover.
Who is not eligible to opt for the composition scheme?
The following people cannot choose the scheme:
- Manufacturers of ice cream, pan masala, or tobacco
- Those making inter-state supplies or exempt supplies
- Casual taxable persons or non-resident taxable persons
- Those supplying services through an e-commerce operator who must collect TCS under CGST Section 52
- Manufacturers of goods or suppliers of services that are notified by the Government based on recommendations from the GST Council
Who can and cannot avail of the GST composition scheme?
As a taxpayer, you can opt for the GST composition scheme, provided your annual turnover falls within the specified limits. It is important to note that the GST composition limit includes turnover for all businesses registered under a particular PAN. In general, small manufacturers, traders, and service providers can avail of the composite scheme.
What is the GST composition scheme limit?
The composition scheme limit under GST varies depending on the type of business that you have.
- For manufacturers and traders: As a newly registered business, your turnover should not exceed Rs. 1.5 crore in the current financial year. If you have already registered, your turnover must not exceed Rs. 1.5 crore in the previous financial year.
- For restaurants not serving alcohol: The above terms apply here as well.
- For service providers: As a newly registered business, your turnover should not exceed Rs. 50 lakh in the current financial year. If you have already registered, your turnover must not exceed Rs. 50 lakh in the previous financial year.
Additionally, the scheme limits the Rs. 1.5 crore cap to Rs. 75 lakh in the special category states. Suppose that your turnover exceeds the specified composition scheme limit in a financial year. You will have to convert to the regular GST payment mechanism to comply with the GST composition scheme rules.
Features the composition scheme under GST
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 enroll 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
Are there any drawbacks of opting for a composition scheme under GST?
While GST composition is advantageous, you should be aware of a few pitfalls to the scheme before registering.
- No input tax credit: B2B businesses do not get the credit of input tax paid from the output liability. The buyer of such goods will not get any credit on tax paid, resulting in price distortion and cascading. A buyer registered as a regular taxpayer will not get any credit when buying from a person registered under a composition scheme, resulting in a loss of business. Eventually, such buyers might avoid purchasing from a taxpayer under the scheme.
- No collection of tax: Under the scheme, taxpayers cannot recover composition tax from their buyers, as they cannot raise a tax invoice.
- Restricted geography/ reach for businesses: GST composition restricts businesses geographically, as it does not cover inter-state transactions. They also cannot use the potential of the Internet as a supply of goods via e-commerce portals.
What are the tax rates applicable for the composition scheme in GST?
Upon registering for GST composition, a fixed tax rate applies to your business turnover. The current rates are as follows:
- For goods manufacturers and traders: 1% GST, divided as 0.5% CGST and 0.5% SGST
- For restaurants not serving alcohol: 5% GST, divided as 2.5% CGST and 2.5% SGST
- For service providers: 6% GST, divided as 3% CGST and 3% SGST
The taxes you pay come from your finances as you do not charge any to consumers and include taxes on supplies made and on reverse charges.
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.
GST Composition Scheme bill format
- 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.
- Itemized 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: Summarize 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 authorized person from the business to certify its authenticity and validity.
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.
How to apply for the GST composition scheme
If you deem the scheme profitable, you can apply for it online via the GST website. Then you need to file GST CMP-02 as this serves as an intimation, indicating your readiness to come under GST composition.
As a whole, the composition scheme greatly simplifies the taxation process and reduces tax liability to a larger extent. This leaves room for better working capital management.
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