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GST Composition Scheme: A Comprehensive Guide

GST Composition Scheme A Comprehensive Guide

GST Composition Scheme: A Comprehensive Guide

The Composition Scheme is a straightforward and user-friendly arrangement within the GST framework designed to benefit taxpayers. It offers small-scale taxpayers the advantage of escaping the cumbersome GST procedures by enabling them to fulfill their GST obligations at a consistent rate based on their turnover. This beneficial scheme is open for adoption by any taxpayer with an annual turnover below Rs. 1.5 crore. This article will look into the GST Composition Scheme in detail.

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Who Qualifies for the Composition Scheme?

Small businesses with an annual combined turnover of up to Rs. 1.5 crore have the option to avail of the GST composition scheme. To ascertain eligibility, the aggregate turnover of all entities sharing the same PAN is aggregated for composition scheme calculation.

Eligible Categories and Special Provisions

  • Under Section 10, manufacturers, dealers, and restaurants (excluding those serving alcohol) are eligible for the composition scheme.
  • Meanwhile, service providers can use a parallel scheme for composition dealers as specified in CGST (Rate) notification no. 2/2019, dated March 7, 2019, applicable when the total turnover remains within Rs. 50 lakh.
  • Notably, a distinctive composition scheme was introduced on March 31, 2022, for brick manufacturers. This covers various bricks, including building bricks, fossil meal-based bricks, earthen or roofing tiles, and fly ash bricks and blocks. Enrollees in this scheme enjoy a fixed tax rate of 6% without the facility of input tax credit.

Exclusions from the Composition Scheme

The composition scheme isn’t extended to the following categories:

  • Manufacturers of ice cream, pan masala, or tobacco products
  • Businesses involved in inter-state supplies
  • Casual and non-resident taxable individuals
  • Suppliers dealing in non-taxable goods as per GST regulations
  • Entities surpassing the turnover threshold specified for composition scheme eligibility
  • Companies engaged in the supply of goods through e-commerce operators.

Benefits of Choosing the GST Composition Scheme

Opting for the composition scheme brings forth a range of benefits, including:

Streamlined Compliances

We have reduced the burden of adhering to multiple compliances such as filing returns, maintaining extensive record books, and generating invoices, making business operations smoother.

Quarterly Tax Payments

Businesses can make tax payments every quarter, alleviating the pressure of monthly fees and providing more manageable cash flow management.

Limited Tax Liability

Under the composition scheme, tax liability is confined to a fixed percentage of turnovers, providing predictability and aiding financial planning.

Enhanced Liquidity

With taxes levied at a lower rate, businesses can retain a higher portion of their earnings, leading to improved liquidity for operational and growth needs.

Choosing the composition scheme thus offers a more hassle-free compliance experience, periodic tax payments, controlled tax liability, and improved financial flexibility.

Drawbacks of the GST Composition Scheme

While the composition scheme offers its advantages, it also comes with certain limitations, including:

Geographic Limitations

Participation in the composition scheme restricts businesses from engaging in inter-state transactions, potentially limiting market reach and growth opportunities.

Absence of Input Tax Credit

Composition dealers are not entitled to claim input tax credits, which could impact cost efficiency and competitiveness in the long run.

Ineligibility for Certain Goods

Businesses under the composition scheme are prohibited from supplying non-taxable items, including alcohol and goods, via e-commerce platforms, potentially narrowing down the range of products they can offer.

While the composition scheme streamlines certain aspects, these disadvantages should be carefully considered when determining its suitability for a particular business.

Composition Scheme GST Rates

Businesses and individuals opting for registration under the composition scheme are subject to GST rates ranging from 1% to 6%, contingent upon the nature of their business activities. The composition scheme’s applicable GST rates maintain a balanced distribution between SGST/UGST and CGST, with 1% GST comprising 0.5% CGST and 0.5% SGST/UGST, and 6% GST encompassing 3% SGST/UGST along with 3% CGST.

The composition scheme’s GST rates are categorized as follows:

  • 1% of the turnover for traders and other eligible suppliers registered under the composition scheme.
  • 2% of the turnover for manufacturers, except those dealing in products ineligible for the GST composition scheme.
  • 5% of the turnover for restaurant services.
  • 6% of the turnover for businesses offering or mixed services, excluding restaurant services. This rate alteration came into effect on April 1, 2019.

The inclusion of service sector businesses, aside from restaurants, into the composition scheme was introduced during the 32nd GST Council Meeting. This extension of the composition scheme to services and mixed services took effect on April 1, 2019. Before this development, service-related businesses and individuals were ineligible for enrollment in the GST composition scheme.

Nature of Business Activity Composition Scheme GST Rate
Traders and eligible suppliers 1%
Manufacturers (except ineligible products) 2%
Restaurant Services 5%
Services/Mixed Services (excluding restaurants) 6% (from April 1, 2019 onwards)

Conditions for Opting the Composition Scheme

To become eligible for the composition scheme, businesses must adhere to the following conditions:

  • No Input Tax Credit: Dealers choosing the composition scheme cannot claim Input Tax Credit (ITC) on their purchases, leading to the inability to offset tax liabilities with credits.
  • Exclusion of Non-Taxable Goods: Businesses under the composition scheme are prohibited from supplying goods that are not taxable under GST, such as alcohol.
  • Normal Tax Rates under Reverse Charge Mechanism: Transactions subject to the Reverse Charge Mechanism require the taxpayer to pay taxes at the regular rates, not the composition scheme rates.
  • Unified Treatment of Business Segments: If a taxable entity operates various business segments (e.g., textiles, electronic accessories, groceries) under the same PAN, all such segments must either collectively register under the scheme or opt out of it.
  • Prominent Display of Designation: The term “composition taxable person” must be conspicuously displayed on all notices and signboards at the business premises.
  • Inclusion in Bill of Supply: The phrase “composition taxable person” must be featured on every bill of supply issued by the business.

Additionally, an amendment introduced by the CGST (Amendment) Act, 2018 now permits manufacturers or traders to provide services up to ten percent of their turnover or Rs. 5 lakhs, whichever is higher. This amendment took effect on February 1, 2019.

GST Composition Scheme Forms

Under the prevailing GST regulations, businesses and individuals registered under the composition scheme must complete several forms for diverse purposes. Some of the crucial forms include:

Form Number/Name

Purpose of Form

GST CMP-01 Intimation for tax payment under the composition scheme (for provisional registrations)
GST CMP-02 Opting for the composition scheme (for unregistered entities/persons)
GST CMP-03 Providing details of stock/inward supply from unregistered sources
GST CMP-04 Withdrawing from the GST composition scheme
GST CMP-05 Show cause notice issued for contravention of GST Act rules
GST CMP-06 Responding to show cause notice issued in Form GST CMP-05
GST CMP-07 Issuing an order indicating acceptance/rejection of response in Form GST CMP-06
GST REG-01 Registering under the composition scheme
GST ITC-01 Detailing inputs with the composition registered supplier (raw materials, semi-finished, and finished goods)

Please note that the provided list is indicative, and other forms may be required for applying for or operating under the GST composition scheme. 

Initiating Composition Scheme Selection under GST

As mentioned above, When a dealer intends to embrace the Composition Scheme within the GST framework, they must notify the government of their decision formally. This is accomplished by submitting either Form GST CMP-01 or Form GST CMP-02.

Form GST CMP-01: This form is to be filed by a taxpayer who has migrated to the GST system and desires to opt for the Composition Scheme. It’s a crucial step for those transitioning into the new scheme.

Form GST CMP-02: If a taxpayer wishes to adopt the Composition Scheme for an entire financial year or during its course, they must communicate this choice to the government. This is achieved by filing Form GST CMP-02.

It’s important to note that if Form GST CMP-02 is filed during an ongoing financial year, the rules of the Composition Scheme become applicable starting from the subsequent month after the filing month.

Effective Date for Composition Levy

The implementation date of the composition levy depends on the mode of opting for it:

  • For taxpayers opting in through Form GST CMP-02, the effective date will align with the start of the financial year.
  • For individuals applying for fresh registration via Form GST REG-01, the effective date is determined by the provisions of sub-rule 2 or 3 of Rule 10 of CGST Rules, 2017, about the effective date of registration.

Opting for the Composition Scheme

For a taxpayer to opt for the composition scheme, the following procedure should be followed:

Filing GST CMP-02 Form: To initiate the process, the taxpayer must file the GST CMP-02 form with the government.

Step-by-Step Guide to Filing GST CMP-02 on GST Portal

Navigating the process of filing GST CMP-02 on the GST Portal is straightforward. Here’s a breakdown of the steps:

  • Step 1: Log in to GST Portal: Access the GST Portal using your credentials.
  • Step 2: Access Composition Levy Application: Click on ‘Services’ > ‘Registration’ > ‘Application to Opt for Composition Levy.’
  • Step 3: Read and Verify Information: Carefully read through the ‘Composition Declaration’ and ‘Verification’.
    • Place a checkmark in the provided checkbox.
    • Choose the ‘Name of Authorized Signatory’ from the dropdown menu.
    • Input the ‘Place’ and click ‘SAVE.’
  • Step 4: Submission Method Selection
    • You can submit the application using a Digital Signature Certificate (DSC) if you are a Company or an LLP.
    • Other registrants have three options to submit the return.
  • Step 5: Confirmation and Proceeding
    • A warning pop-up will appear. Click ‘PROCEED’ to continue.
  • Step 6: Submission Success and Acknowledgment

After successful submission, a message confirming the submission will be displayed. An acknowledgment of the submission will be sent to your registered email ID and mobile number.

It’s important to note that following the filing of GST CMP-02, a Composition Dealer must also file GST CMP-03 within 90 days. For guidance on filing GST CMP-03, refer to our comprehensive guide.

This step-by-step guide aims to facilitate a smooth and accurate process while filing GST CMP-02 on the GST Portal.

Billing Process for a Composition Dealer

For a composition dealer, the billing procedure differs from regular taxpayers due to the nature of their scheme. Here’s how a composition dealer should approach raising a bill:

  • No Tax Invoice: A composition dealer cannot issue a tax invoice, as they are not authorized to charge tax from their customers. Instead, they must pay the tax themselves under the composition scheme.
  • Bill of Supply: A composition dealer should generate a “Bill of Supply” for their transactions instead of a tax invoice. This document is an alternative to a tax invoice and must be provided to customers.
  • Specific Mention: On the Bill of Supply, the composition dealer must prominently state: “Composition taxable person, not eligible to collect tax on supplies.” This declaration notifies the recipient that the dealer is operating under the composition scheme and is not levying tax on the transaction.

By adhering to this process, a composition dealer ensures accurate and compliant billing while adhering to the unique regulations of the composition scheme.

GST Payment Process for Composition Dealers

A composition dealer follows a distinct GST payment procedure involving the following components:

  • GST on Supplies Made: The composition dealer is responsible for making GST payments out of their pocket for the supplies they provide.
  • Reverse Charge Tax: The composition dealer must also cover any tax liabilities incurred under the reverse charge mechanism.
  • Tax on Purchases from Unregistered Dealers: This applies only to specific goods and services and the notified class of registered persons, effective February 1, 2019. However, until this is officially announced, it remains inapplicable.

Returns Obligations for Composition Dealers

Composition dealers have a streamlined return filing process involving the following returns:

  • CMP-08 (Quarterly Statement): This quarterly statement includes the tax payment due by the 18th of the month following the quarter’s end.
  • GSTR-4 (Annual Return): Composition dealers must file GSTR-4 annually by April 30 of the next financial year, starting from FY 2019-20 onwards.
  • GSTR-9A (Annual Return): An annual return, GSTR-9A, should be filed by December 31 of the subsequent financial year.

Notably, composition dealers are not mandated to maintain comprehensive records, simplifying their record-keeping obligations under the GST scheme.

Calculating Tax Amount for Composition Dealers

For a composition dealer, tax calculation involves specific considerations:

  • Tax on Total Sales: A composition dealer must pay tax at a designated rate on their total sales.
  • Reverse Charge Tax: Tax must also be paid under the reverse charge mechanism on specific purchases.
  • Tax on B2B Transactions: Where a reverse charge is applicable, the tax will be paid on relevant business-to-business (B2B) transactions.
  • Tax on Purchases from Unregistered Dealers: Tax is paid on B2B purchases from unregistered suppliers if applicable.
  • Tax on Import of Services: Tax is also levied on imported services.

In essence, the calculation formula is as follows:

Total GST Payable = Tax on Supplies (net of advance and goods returned) + Tax on B2B Transactions (reverse charge) + Tax on B2B Purchases from Unregistered Suppliers (if applicable) + Tax on Import of Services.

It’s crucial to note that the tax rates applicable to transactions under reverse charge, purchases from unregistered dealers, and import of services align with the normal rates, i.e., those relevant to the specific supplies. Rates under the composition scheme solely pertain to the sales of a composition dealer. Considering these elements, composition dealers can ensure accurate tax calculation and compliance.

Expert Assistance for Seamless GST Registration

IndiaFilings can assist you in obtaining GST registration smoothly and efficiently in India. Talk to our experts now to provide all your details and initiate the process. We’re here to assist you every step of the way. We will guide the process if you opt for regular GST registration or the composition scheme.

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