A Comprehensive Guide To GST Composition Scheme


Date: 16 Sep 2022

Complete Guide to GST Composite Scheme


With the introduction of the GST act in 2017, all businesses must comply with all the provisions of these acts. GST subsumed several indirect taxes, making it easier for companies to comply. As this act is still relatively new, many people are still not aware of the provisions of this act. The GST council introduced regular and composite schemes to make compliance easier for small businesses. 


What is a Regular Scheme?

GST registration is mandatory when the threshold limit of Rs. 20 Lakh for service and Rs. 40 Lakh for product turnover is reached. For some states, the exemption to this regulation is Rs. 75 lakh; when the prior year's revenue did not surpass in this case, the state chose this scheme. The states under this exception are Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, and Uttarakhand. The taxpayers under regular GST will have to file returns monthly. It benefits from an input tax credit of GST on purchasing products and services. 


What is Composite Scheme?

The composition scheme is meant for small businesses whose taxable goods are not more than Rs. 1.5 Crores, where the seller must bear GST @ 1% of such turnover by traders, @ 2% by manufacturers, 5% for Restaurants, and 6% for service providers. Composition taxpayers cannot issue a tax invoice since the dealer may pay the tax directly. A composition merchant is not permitted to charge the customers for the GST. Compared to the standard GST plan, the composition scheme benefits small firms. The composition taxpayers must submit a total of 5 GST returns. They are neither needed to keep an account nor are they permitted to claim the input tax credit on purchases.


Objectives of Composite Scheme 

Small enterprises can take advantage of composition levy benefits under the GST law. The primary objective of a composite scheme is to bring transparency to small businesses in understanding the tax laws and to reduce compliance costs for small taxpayers. Additionally, it is voluntary, and the individual choosing to pay tax under this scheme may do so by paying tax at a set proportion of their quarterly revenue rather than at the regular rate.


Who is eligible to opt for Composite Scheme?

A taxpayer whose turnover is below Rs. 1.5 Crores can opt for a composition scheme. The cap has been raised to Rs. 75 Lakh for Himachal Pradesh and the northeastern states. As per the CGST (Amendment) Act, a composition dealer may also offer services up to Rs. 5 lakh or 10% of turnover, whichever is higher. This amendment is applicable from 1st Feb 2019. Further, in its 32nd meeting, the GST council proposed increasing this limit for service providers. Turnover for all businesses registered with the same PAN should be considered to calculate turnover.  


Conditions for availing of Composite Scheme 

The following conditions must be satisfied to opt for the composition scheme. 

  • A dealer cannot claim input tax credits when using a composition plan.

  • The dealer cannot supply goods not taxable under GST, such as alcohol.

  • The taxpayers have to pay tax at standard rates for the transaction under Reverse Charge Mechanism. 

  • Suppose a taxable person has business in segments like textiles, electronics, accessories, groceries, etc., under the same PAN. In that case, they must collectively register all such businesses under the scheme or opt out of it. 

  • Every notice or signboard prominently placed at the taxpayer's place of business must include the phrase "Composition Taxable Person." 

  • The words "Composition Taxable Person" must be mentioned on each bill of supply that the taxpayer issues.

  • As per the CGST (Amendment) act, a manufacturer or trader can now supply services to 10% of turnover, or Rs. 5 Lakh, or whichever is higher. 


What is the limit for GST Composition Scheme?

Depending on a person's business, different composition scheme limits apply under the GST.

  • For producers and distributors: The turnover for the current financial year for a newly registered business should not be higher than Rs. 1.5 Crores.

  • For Restaurants not Serving Alcohol: The above terms apply here as well. 

  • For Service Providers: The turnover for a newly registered business cannot be higher than Rs. 50 Lakhs within the current financial year. If the business is already registered, The turnover must not exceed Rs. 50 Crores in the previous financial year. 


Additionally, Rs. 1.5 Crore cap is further limited in the special category states to Rs 75 Lakh. Suppose the turnover exceeds the specified composition scheme limit in a financial year. In this case, you must convert to a common GST payment mechanism to comply with GST Composition Scheme rules.


How to switch from a Regular Scheme to a Composite Scheme? 

Switching from a regular scheme to a composite scheme will allow credit of duties held in stocks as input or credit of a value-added tax in respect of input and inputs contained in semi-finished or finished goods on the appointed date subjected to the following conditions:

  • Such services or goods are used in the making of taxable supplies. 

  • Not being a composite scheme holder. 

  • Being eligible to claim credit for taxes

  • The inputs are not such that credit was not admissible under the earlier law due to being mentioned in any schedule or otherwise. 

  • Having an invoice or document evidencing payment of duties under earlier laws w.r.t inputs held in the stocks and semi-finished and finished goods. 

  • Such invoices and documents were issued 12 months before the appointed date. 


What are the advantages of a Composite Scheme?

The benefits of signing up for the Composite GST Scheme are as follows: 

  • Lesser compliance (returns, maintaining books of record, issuance of invoices)

  • Limited tax liability

  • High liquidity as taxes is at lower rates.   


What are the disadvantages of a Composite Scheme?

Below are some of the disadvantages of registering under the GST Composition Scheme:

  • The limited territory of business.  

  • No input tax credit available to composition dealers

  • The taxpayers will not be eligible to supply non-taxable goods under GST, such as alcohol and goods, through an e-commerce portal.



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