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GST Composition Scheme: Simplifying Taxation for Small Businesses

Do you have a small business with a turnover below a certain threshold? Are you looking for a simpler way to comply with GST regulations? If so, the GST Composition Scheme might be the perfect solution for you. Register Your GST under Composition. Contact our team. 

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GST Composition Scheme

Small businesses often face challenges in navigating the complex world of taxation. With the aim of easing this burden, the Indian government introduced the Goods and Services Tax (GST) Composition Scheme. This scheme is designed to simplify compliance and reduce the tax burden for small businesses. Let’s delve into the details of the GST Composition Scheme, its eligibility criteria, benefits, limitations, and the procedure for opting in.

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GST Registration Process Online, Online GST Registration in Delhi, GST Registration in Uttar Pradesh, GST Composition Scheme, GST Registration, LUT in GST

What is the GST Composition Scheme?

The GST Composition Scheme is a simplified tax scheme aimed at small businesses to lessen the compliance burden. Under this scheme, eligible businesses can opt to pay a fixed percentage of their turnover as GST, instead of the regular GST rates applicable to their products or services. This scheme is available for businesses with an annual turnover of up to Rs. 1.5 crores in the previous financial year.

Eligibility Criteria for GST Composition Scheme

To be eligible for the GST Composition Scheme, businesses must meet the following criteria:

  1. Annual turnover should not exceed Rs. 1.5 crores in the previous financial year.
  2. The business should not engage in interstate supplies.
  3. Businesses dealing in exempted goods or services are not eligible for the Composition Scheme.
  4. Casual taxable persons and non-resident taxable persons are not eligible to opt for this scheme.

Benefits of the GST Composition Scheme

  1. Lower Tax Liability: Under the composition scheme, businesses are subject to lower tax rates compared to the regular GST scheme. This provides cost savings and improves the cash flow for small businesses.
  2. Reduced Compliance: One of the primary advantages of the GST Composition Scheme is the reduction in compliance requirements. Businesses under this scheme are required to file quarterly returns instead of monthly returns, thereby saving time and effort.
  3. Ease of Doing Business: By opting for the Composition Scheme, small businesses can focus more on their core operations rather than tax-related complexities.
  4. Increased Competitiveness:By opting for the composition scheme, small businesses can enhance their competitiveness in the market. The lower tax burden allows them to offer competitive prices to consumers, thereby attracting more customers.

Limitations of GST Composition Scheme

1. Restriction on Interstate Sales

Businesses registered under the composition scheme are not allowed to make interstate sales. This restriction limits their market reach and may hinder business expansion strategies.

2. Ineligibility for Input Tax Credit

Unlike businesses registered under the regular GST scheme, those under the composition scheme are not eligible to claim input tax credit on their purchases. This can result in higher operational costs for such businesses.

Who cannot opt for Composition Scheme?

The following people cannot opt for the scheme-

  • Manufacturer of ice cream, pan masala, or tobacco
  • A person making inter-state supplies
  • A casual taxable person or a non-resident taxable person

How can a taxpayer opt for composition scheme?

To opt for composition scheme a taxpayer has to file GST CMP-02 with the government. This can be done online by logging into the GST Portal. This intimation should be given at the beginning of every Financial Year by a dealer wanting to opt for Composition Scheme. Here is a step by step Guide to File CMP-02 on GST Portal.

How Should a Taxpayer Issue a bill under GST Composition Scheme?

A composition dealer cannot issue a tax invoice. This is because a composition dealer cannot charge tax from their customers. They need to pay tax out of their own pocket. Hence, the dealer has to issue a Bill of Supply. The dealer should also mention “composition taxable person, not eligible to collect tax on supplies” at the top of the Bill of Supply.

What are the GST rates for a composition dealer?

Type of Business

CGST

SGST

Total

Manufacturer and Traders (Goods)

0.5%

0.5%

1%

Restaurants not serving alcohal

2.5%

2.5%

5%

Other Service Providers*

3%

3%

6%

How should GST payment be made by a composition dealer?

GST Payment has to be made out of pocket for the supplies made. The GST payment to be made by a composition dealer comprises of the following:

  • GST on supplies made.
  • Tax on reverse charge
  • Tax on purchase from an unregistered dealer*

*Only on the specified categories of goods and services and well as the notified class of registered persons with effect from 1st Feb 2019 but is yet to be notified. Hence, not applicable until then.

What are the returns to be filed by a composition dealer?

A dealer is required to pay tax in a quarterly statement CMP-08 by 18th of the month after the end of the quarter. Also, a return in form GSTR-4 has to be filed annually by 30th April of next financial year from  Also, note that a dealer registered under composition scheme is not required to maintain detailed records.

What are the disadvantages of Composition Scheme?

Let us now see the disadvantages of registering under GST composition scheme:

  • A limited territory of business. The dealer is barred from carrying out inter-state transactions
  • No Input Tax Credit available to composition dealers
  • The taxpayer 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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Frequently Asked Questions

Who is eligible to register under the GST Composition Scheme?

Businesses with an annual turnover of up to Rs. 1.5 crore (Rs. 75 lakhs for special category states) in the preceding financial year are eligible to register under the GST Composition Scheme.

What are the benefits of registering under the Composition Scheme?

The benefits include reduced compliance requirements, simplified tax calculations, and the ability to pay tax at a fixed rate based on turnover.

What are the limitations of registering under the Composition Scheme?

Composition dealers cannot collect tax from customers, cannot claim input tax credit, and are restricted from interstate sales.

Can service providers register under the Composition Scheme?

No, service providers, except restaurants, are not eligible to register under the Composition Scheme.

What is the tax rate applicable for composition dealers?

The tax rate varies based on the type of business:

  • 1% for traders and manufacturers
  • 5% for restaurants (both AC and non-AC)
How often do composition dealers need to file returns?

Composition dealers need to file quarterly returns instead of monthly returns.

Can composition dealers issue tax invoices?

No, composition dealers cannot issue tax invoices. They can only issue a bill of supply without any tax component.

Is it possible to opt out of the Composition Scheme once registered?

Yes, businesses can opt out of the Composition Scheme if they no longer meet the eligibility criteria or wish to avail of input tax credit.

Can composition dealers engage in interstate sales?

No, composition dealers are restricted from engaging in interstate sales. They can only make intrastate supplies.

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