Complete Guide to GST Composition Scheme

GST compliance is a must for every taxpayer who is registered under GST. But while bigger businesses have the resources to manage these compliance requirements quite easily, smaller businesses often face trouble due to the demanding nature of these requirements. To overcome such problems for smaller businesses, the government introduced the GST Composition Scheme.

The Composition Scheme is a simplified tax scheme introduced for small taxpayers. It aims to reduce the compliance burden on small businesses by allowing them to pay tax at a lower rate and file their returns on a quarterly basis instead of monthly. Businesses with annual revenue of up to Rs. 1.5 crore are eligible for the scheme, but there are some limitations on interstate sales, input tax credits, and the production of tax invoices. The GST Composition Scheme has provided relief to small businesses and has helped to increase compliance under the GST regime.

In this article, we will cover the Regular Scheme and Composition Scheme

Try BUSY GST Accounting Software to make GST Compliance simple for your business.

What is the Regular Scheme?

This is the default scheme for all registered taxpayers. If an eligible business does not explicitly opt for the composition scheme, they will be taxed as per the regular scheme.

GST Registration becomes mandatory when a business turns over more than ₹20 lakhs (in the case of services) and ₹40 lakhs (in the case of products). However, some states have exceptions put in place, whereby GST Registration is not mandatory if turnover did not exceed ₹75 lakhs in the previous financial year.

These states are as follows:

• Arunachal Pradesh
• Manipur
• Meghalaya
• Mizoram
• Nagaland
• Sikkim
• Tripura
• Uttarakhand

Under the regular scheme, businesses are required to file monthly returns and pay tax on their output supplies. They are also eligible to claim input tax credit on their input supplies. The Regular Scheme also allows for inter-state sales and purchases, and businesses can issue tax invoices for their transactions.

What is the Composition Scheme?

For small taxpayers, India’s Goods and Services Tax (GST) system established the Composition Scheme, a streamlined tax structure. Small enterprises with taxable items under Rs. 1.5 crores are eligible for the composition plan, under which the seller is required to pay GST at a rate of 1% for dealers, 2% for manufacturers, 5% for restaurants, and 6% for service providers. The scheme restricts inter-state sales, and businesses cannot claim an input tax credit on their purchases. Additionally, businesses under the Composition Scheme cannot issue tax invoices and instead issue bills of supply. This scheme aims to reduce the compliance burden on small businesses and promote ease of doing business. However, businesses must carefully evaluate their eligibility and the scheme’s benefits before opting for it.

Objectives of the Composition Scheme 

The Composition Scheme under GST has the following objectives:

1. To reduce the compliance burden on small taxpayers by providing a simplified tax regime.
2. To encourage more small businesses to register under GST and become a part of the formal economy.
3. To provide relief to small businesses from the tedious and complex process of monthly return filing.
4. To promote ease of doing business by reducing the administrative burden on small businesses.
5. To enable small businesses to compete with larger businesses on a level playing field by providing them with a lower tax rate.
6. To simplify the tax process for small businesses and provide them with a hassle-free experience.
7. To increase the overall tax compliance and revenue collection under the GST regime.

Who is eligible to opt for the Composition 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.  

Manufacturers of ice cream, pan masala or tobacco can apply for the Composition scheme. A person making inter-state supplies and a casual taxable person or a non-resident taxable person is eligible to opt for the Composition scheme. 

Conditions for availing of Composition 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 must 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 the 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.
• The terms above also apply to restaurants that don’t serve alcohol.
• 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 to Rs. 75 Lakh in the special category states. 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 Composition Scheme?

Switching from a regular scheme to a Composition scheme will allow credit of taxes 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:

1. Such services or goods are used in the making of taxable supplies. 
2. Not being a Composition scheme holder. 
3. Being eligible to claim credit for taxes
4. The inputs don’t make credit under the previous law ineligible because it was indicated in a schedule or in some other way.
5. the possession of an invoice or other evidence attesting to the payment of duties under former rules regarding inputs held in stocks as well as semi-completed and finished goods.
6. Such invoices and documents were issued 12 months before the appointed date.

What are the GST Rates Applicable for Dealers Opting for Composition Scheme?

The following table shows the GST rates as applicable to dealers who opt for the composition scheme:

What are the Advantages of the Composition Scheme?

The Composition Scheme under GST offers several advantages for small businesses, including:

• Simplified compliance process with quarterly return filing instead of monthly returns.
• Small businesses find it easier to operate and compete with larger companies thanks to lower tax rates and decreased tax obligations.
• Reduced administrative burden, allowing small businesses to focus on their core activities.
• Increased ease of doing business, making it easier for small businesses to register under GST and become part of the formal economy.
• Reduced compliance costs, enabling small businesses to save money and improve their profitability.
• Increased compliance and revenue collection for the government, as more small businesses are encouraged to register under the GST regime.

What are the Disadvantages of the Composition Scheme?

While the Composition Scheme under GST offers several advantages for small businesses, there are also a few disadvantages to consider, including:

• Ineligibility for an input tax credit on purchases, which can increase the overall cost of goods or services.
• Restrictions on inter-state sales can limit business opportunities and growth potential.
• The inability to issue tax invoices may be unacceptable to certain customers or clients.
• Higher tax rates than the Regular Scheme may not be suitable for businesses with high input tax credits.

Conclusion

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 its provisions. The GST council introduced the Composition scheme to make compliance easier for small businesses.