Composition Scheme of GST

Composition Scheme under the Goods and Services Tax (GST) in India is a simplified method of taxation designed for small taxpayers to reduce their compliance burden. It allows eligible businesses to pay GST at a fixed rate of their turnover, instead of paying tax on every supply made. This scheme is an option for small businesses to simplify their GST obligations.

Eligibility Criteria for the Composition Scheme

• Businesses with an annual turnover below a specified threshold can opt for the composition scheme. As of the latest updates prior to April 2023, the turnover limit for eligibility is Rs. 1.5 crore for most businesses. For businesses in the northeastern states and Himachal Pradesh, the limit is Rs. 75 lakh.
• The scheme is available to manufacturers, traders, restaurants not serving alcohol, and service providers (the latter with a turnover cap of Rs. 50 lakh, as introduced in April 2019).
• Not all taxpayers are eligible for the Composition Scheme. For instance, businesses that make interstate supplies, supply goods not taxable under GST, or supply through e-commerce operators who are required to collect tax at source cannot opt for this scheme.

Key Features of the Composition Scheme

1. Simplified Tax Rates:

The GST rates under the Composition Scheme are significantly lower than the regular GST rates and are as follows (as of the latest update before April 2023):

• 1% for manufacturers and traders (0.5% CGST + 0.5% SGST)
• 5% for restaurant services
• 6% for other eligible service providers (3% CGST + 3% SGST)

2. Simplified Compliance:

Taxpayers under this scheme are required to file quarterly returns instead of the monthly returns required under the regular GST regime. They also need to file an annual return.

3. No Input Tax Credit (ITC):

Businesses opting for the Composition Scheme cannot claim input tax credit on their purchases.

4. Limited Tax Invoicing:

They are not allowed to collect GST from their customers and cannot issue tax invoices. Instead, they issue a bill of supply.

Advantages of the Composition Scheme

1. Reduced Compliance Burden:

The scheme simplifies GST formalities, reducing the compliance burden for small taxpayers.

2. Lower Tax Liability:

The fixed, lower rate of GST helps in reducing the tax liability of small businesses.

3. Simplified Bookkeeping:

With no requirement to maintain detailed records for ITC or to issue detailed invoices, bookkeeping becomes simpler for businesses under the scheme.

Limitations of the Composition Scheme

1. No Interstate Business:

Businesses cannot undertake interstate supply of goods or services.

2. No Input Tax Credit:

Businesses cannot claim the input tax credit, which could be a disadvantage if they make a lot of taxable purchases.

3. Restrictions on Customers:

Since businesses cannot issue tax invoices, this scheme may not be attractive for B2B transactions where the buyer wishes to claim ITC.

How to Opt for the Composition Scheme?

Eligible businesses can opt for the Composition Scheme at the beginning of the financial year by filing an application online through the GST portal. Existing taxpayers can opt-in by filing FORM GST CMP-02, and new taxpayers can opt-in through the GST registration form itself.

The Composition Scheme under GST represents a trade-off between simplified compliance and the benefits of ITC. It’s primarily beneficial for small businesses that primarily deal in the domestic market and have a limited number of transactions.