Get to know about the GST Composition Scheme for small businesses in India, its key features & registration in this guide by earlyGST.

What is GST Composition Scheme?

Last Update Date : May 14, 2018

composition scheme under gst

Every tax system prescribes several actions which need to be taken by businesses to ensure compliance with statutory provisions. Things like periodic payment of taxes, filing timely returns and maintaining prescribed records are necessary steps in a tax system for corporate taxpayers. However, small business owners find it overwhelmingly challenging to deal with such requirements of the law due to lack of knowledge and expertise.

To make compliance easier for small businesses, many state governments had provisions in their VAT system for payment of a composition levy by small businesses. This ensures greater compliance without the need for maintaining copious records.  Service tax laws do not have this system.

The One Nation One Tax Scheme (GST) which promises to club all the indirect taxes into one also boasts a composition scheme for small businesses. The GST Composition Scheme will make compliance with tax laws hassle free for eligible businesses opting for the scheme.

Eligibility Criteria for Composition Scheme

Not everyone is eligible to enrol under this scheme. It is meant for taxpayers whose aggregate turnover does not exceed Rs 1.5 crore threshold in a Financial Year. In case of Special category states, this limit is Rs 75 lakh. The turnover shall be calculated by considering all the entities registered with the same PAN. However, if a person supplying the following is not eligible to opt for this scheme:

  • Exempt Supplies
  • Supplying Services
  • Manufacturer of ice-cream, pan masala, or tobacco
  • Casual taxable person
  • Non- resident taxable person
  • Businesses that operate through e-commerce

Registration under Composition Scheme

Any existing taxpayer not under Composition Scheme may choose to opt for it (subject to being qualified), only from the beginning of the next financial year. The application will have to be filed on or before 31st March of the previous year so that returns can be filed accordingly.

Dealers under Composition Scheme may be allowed to switch over to normal scheme even during the year if they want to. However, they cannot switch over to Composition Scheme again during the same financial year.

Key Features of the Composition Scheme

  • Not eligible for Input Tax Credit – As per section 16, those goods and services on which Composition Tax has been paid (under section 8) do not qualify for Input Tax Credit.
  • Applies to Intra-state supplies – Local suppliers, i.e., those who supply within a state can only take advantage of this scheme. Inter-state suppliers will come under regular GST laws.
  • Reverse Charge Mechanism – Normal rates of taxes applicable in case the supplies attract reverse charge
  • Display at Place of Business – Every composition dealer must prominently display the words “Composition Taxable person” at their place of business
  • Bill of supply not tax invoice – Unlike regular scheme where a taxpayer needs to present tax invoice to the tax authorities, taxpayers registered under this scheme need to present bill of supply.
  • Needs voluntary application – Taxpayers need to make voluntary registration every year for getting the benefits of GST Composition Scheme. However, if the taxpayer crosses the minimum turnover limit of Rs.1.5 crore then he will be transferred to regular scheme.
  • Penalty – If a taxable person is found not eligible for this scheme then the tax authorities can impose a penalty equal to the amount of tax on such person along with his tax liability. So utmost care needs to be taken when opting for this scheme and paying taxes.

Tax Rate

The rate of tax as prescribed will be less than regular GST but not less than 1% of the turnover during the Financial Year. Tax rates under the scheme are 1% and 5%

Serial Number Category of Registered Person Rate of Tax
1 Manufacturers of goods (other than those specifically notified by govt. such as ice-cream, Pan masala, Tobacco products) 1% of the turnover
2 Restaurant Services 5% of the turnover
3 Traders 1% of the turnover
4 In case of:

-Transaction under reverse charge

-Purchase from unregistered dealer

-Import of service

Normal Rates of Taxes

Tax Amount Calculation

Total GST Payable – Sum of the following:

  • Tax on supplies (net of advance and returned goods)
  • Tax on B2B transactions where reverse charge is applicable
  • Tax on B2B purchases from the unregistered suppliers (from the month of July and August 2017)
  • Tax on import of services

Returns under Composition Scheme

Instead of filing 3-4 returns monthly, taxpayers registered under this scheme will be required to file returns once every quarter. GSTR 4 must be filed by 18th of the month succeeding the relevant quarter.

  • A registered taxable person paying tax under the provisions of Composite Scheme shall furnish a return for each quarter in the prescribed form in the prescribed manner within eighteen days after the end of the relevant quarter.
  • GSTR-4 has been prescribed by the government as a tax return form to be filed by a dealer under Composition Scheme.
  • Composition dealers need to furnish the first return for the period starting from the date on which they become a registered taxable entity till the end of the quarter in which the registration has been granted.
  • An annual return GSTR 9A also needs to be filed by the 31st December of next financial year.

Impact on Input Tax Credit during transition between Regular Scheme and Composition Scheme

Transition from Composition Dealer to Normal Dealer

Section 16(3) of Model GST Law states that when a taxpayer ceases to pay composition tax and becomes liable to pay tax as a regular taxpayer under GST then he is eligible to take Input Tax Credit in respect of inputs held in stock and inputs contained in semi-finished and finished goods held in stock as on the day immediately preceding the day from which he becomes liable to pay tax under regular scheme.

 

Transition from Normal Dealer to Composition Dealer

As per section 16(12) of Model GST Law, when a taxpayer liable to pay tax as a regular taxable person switches over as a taxable person for paying tax under section 8 (GST Composition Scheme), then he needs to pay an amount by way of debiting in the electronic credit /cash ledger equivalent to Input Tax Credit in respect of inputs held in stock and inputs contained in semi- finished and finished goods held in stock as on the day immediately preceding the day of such switch over.

List of Various Forms Available for Composition Dealers

Form Purpose
GST CMP-01 Registration under composition scheme
GST CMP-02 Intimation of willingness to Opt out of the scheme
GST CMP-03 Details of stock and inward supplies from unregistered person
GST CMP-04 Intimation of withdrawal from scheme
GST CMP-05 Show cause notice on any contravention of any rules or act
GST CMP-06 Reply to show cause notice
GST CMP-07 Issue of Order

Difference between Normal Dealer and Composition Dealer

Point Normal Dealer Composition Dealer
Calculation Output GST-Input GST Gross Sales * Rate of Tax
Returns 3 Returns Monthly

1 Annual Return

1 Return Quarterly

1 Annual Return

Sales Inter-state & Intra-state Only Intra-state allowed
Rate Of taxes Higher Rate of Taxes Lower Rate of Taxes

Withdrawal from Composition Scheme

In case a composition dealer wants to opt out of composition scheme, he can give an intimation in Form GST CMP-04. Within 30 days of intimating the option of withdrawal, he must furnish details of stock input by filing Form GST ITC -01.

Advantages and Disadvantages of being a Composition Dealer

Advantages

Let us discuss a few advantages of being a composition dealer:

  • Save time due to softened compliances
  • Minimum tax liability leading to more profits
  • Availability of more liquidity and cash flow
  • Opportunity to small businesses to establish themselves in the market by offering competitive prices by passing on the rebates.

Disadvantages

These are some of the disadvantages of being a composition dealer:

  • Limited business territory-barred from carrying inter-state transactions
  • Non-availability of input tax credit leading to less preference by dealers
  • Tax borne by the composite dealer and cannot be passed on to the customer
  • Hefty penalties for non-compliance of composition provisions

Frequently Asked Questions

If I convert myself from composition scheme to regular scheme, whether I will be eligible to get ITC? A: You are eligible for ITC on inputs held in stock and inputs contained in semi-finished or finished goods held in stock as on date on which you have converted yourself from composition scheme to regular scheme.

What would happen to the input tax credit availed by a registered person who opts for composition scheme? Reversal on inputs or even on capital goods?

If a registered person opts for composition scheme then he must reverse the input tax credit taken by him on inputs which are being used by him in the year in which he opts for composition scheme. However, in case of capital goods, the credit shall be reduced by 5% per quarter of the year or part thereof from the date of invoice.

Can a person paying tax under composition levy, withdraw voluntarily from the scheme? If so, how?

Yes, the registered person who intends to withdraw from the composition scheme can file a duly signed or verified application in FORM GST CMP-04. Every person who has filed an application for withdrawal from the composition scheme, may electronically furnish, a statement in FORM GST ITC-01 containing details of the stock of inputs and inputs contained in semi-finished or finished goods held in stock by him on the date of withdrawal, within a period of thirty days of withdrawal.

How is composition scheme applicable in case of multiple branches of the same business?

If the composition scheme is opted by the dealer, then it will be for all the businesses that are associated with the PAN.

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