Composition Scheme under GST

GST subsumed a number of indirect taxes, making it easier for businesses to comply with the tax laws. But while larger businesses have the budget and resources to comply with the GST regulations, compliance was getting increasingly complicated for smaller entities. To make GST compliance easier for such small businesses, the GST Council introduced the composition scheme under GST.

Composition Scheme is a simple and easy scheme under GST for taxpayers. Small taxpayers can get rid of tedious GST formalities and pay GST at a fixed rate of turnover.  While the GST rate can be up to 28% under the regular scheme, the composition scheme has capped the tax rate at 6% for eligible entities. The tax slabs under the composition scheme are 0%, 1%, 2%, 5%, and 6%.

Originally, the composition scheme featured a limit of Rs. 1 crore i.e. only business with an annual turnover of less than Rs. 1 crore could opt for composition levy registration. The GST composition scheme turnover limit for northeastern states and hill states such as Sikkim and Himachal Pradesh was kept lower at Rs. 75 lakhs annually as they have a smaller tax base as compared to other states in India. At the 32nd GST Council Meeting held on 10th January 2019, the GST composition scheme limit for states was increased to Rs. 1.5 crore i.e. businesses/individuals with an annual turnover of up to Rs. 1.5 crore can opt for registration under the GST composition scheme.

Who can opt for the Composition Scheme in GST?

As per section 10 of the CGST Act, 2017 the following registered persons, whose aggregate turnover in the preceding financial year did not exceed Rs 1.5 crore, may opt to pay tax under the composition levy.

(a) Manufacturer,

(b) Persons engaged in making supplies referred to in clause (b) of paragraph 6 of Schedule II (restaurant services), and

(c) Any other supplier eligible for composition levy. Thus, essentially, the composition scheme can be availed in respect of goods and only one service namely, restaurant service. However, the scheme permits the supply of other marginal services for a specified value along with the supply of goods and restaurant service, as the case may be. Such marginal services can be supplied for a value up to 10% of the turnover in the preceding year or Rs 5 lakh, whichever is higher.

Furthermore, a registered person whose aggregate turnover in the preceding financial year is up to Rs 50 lakh and who is not eligible to pay tax section 10(1) and 10(2). Said person can pay tax @ 3% [Effective rate 6% (CGST+ SGST/UTGST)] on first supplies of goods and/or services up to an aggregate turnover of Rs 50 lakh made on/after 1st April in any financial year (FY), subject to specified conditions vide Section 10(2A). One such condition is that the registered person should not be engaged in making any inter-state outward taxable supplies and hence as per Section 10(2A), a taxpayer who engages in services can also opt for Composition Scheme.

A Taxpayer shall not be eligible for the Composition Scheme:

  • any supply of goods which are not liable to be taxed under this Act
  • inter-state outward supplies of goods
  • supplies through electronic commerce operators who are required to collect tax under section 52.
  • a manufacturer of Pan masala, Acrated water, Icecream, Tabacco.
  • a casual dealer
  • a Non-Resident Foreign Taxpayer
  • a person registered as Input Service Distributor (ISD)
  • a person registered as TDS Deductor/Tax Collector

How can a taxpayer opt for a composition scheme?

To opt for composition scheme a taxpayer has to file GST CMP-02 with the government. One can do it by logging into GST portal online. 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.

 When should opt for the Composition Levy?

In order to avail this scheme, you need to file an online application to Opt for Composition Levy with the tax authorities. The below is the category of taxpayers who can opt for this scheme:

  1. New Taxpayers: Any person who becomes liable to register under GST Act, after the appointed day, needs to file his option to pay the composition amount in the Application for New Registration in Form GST REG-01.
  2. Existing Taxpayers: Any taxpayer who is registered as a normal taxpayer under GST needs to file an application to opt for Composition Levy in Form GST-CMP-02 at GST Portal prior to the commencement of the financial year for which the option to pay tax under the aforesaid section is exercised.

Difference Between Composition GST & Regular GST Schemes:

In term ofComposition SchemeRegular Scheme
MeaningPayment of taxes on prescribed rate on the Turnover without adjustment of input tax credit.Payment of taxes at prescribed rate on the turnover with the adjustment of input tax credit
SaleThey cannot make interstate sales. The sales are restricted to intra state (with in a registered state)They can make Interstate sales as well as local sales.
Tax RateLower rate of tax is applicable (like 0%, 1%, 2%, 5% and 6%)Higher rate of tax is applicable (like 0%, 5%, 12%, 18% and 28%)
Filing of ReturnQuarterly payment of taxes and Returns using GSTR-4Annual Return-GSTR-9AReturn of outward supply GSTR-1Returns of GSTR-3B & Inward Supply GTR-2A (Automatic)Annual Return GSTR-9
Restrictions on SEZComposition Scheme person cannot make any such suppliesNo Restrictions for Exports or supply to SEZ, and SEZ developers.
Restrictions on Entry / ExitCan opt-out from composition any time throughout the year.Can opt into composition only at a prescribed time, generally Feb to End of Mar.

Advantages of Composition Scheme:

  1. Less Tax & High Liquidity
  2. Lower Tax Payment (Like 1%, 2%, 5%, 6%* )
  3. Less Compliance involved in the Composition Scheme.

Disadvantages of Composition Scheme:

  1. Inter-State sales are not permitted.
  2. Cannot collect the Tax Payment.
  3. Few Taxpayers are prefer the Composition Scheme

Convert from regular to composition scheme in GST:

Any taxpayer who is registered as a normal taxpayer under GST needs to file an application to opt for Composition Levy in Form GST-CMP-02 at GST Portal prior to the commencement of the financial year for which the option to pay tax under the composition scheme is exercised.

To opt for the Composition Levy, perform the following steps on the GST portal:

  1. Log in to the Taxpayers’ Interface
  2. Go to Services > Registration > Application to Opt for Composition Levy
  3. Fill the form as per the form specification rules and submit

Returns to be filed by a Composition taxpayer:

Composition taxpayer needs to pay tax and furnish a statement, every quarter or part thereof, as the case may be, in FORM GST CMP-08. And further he has to furnish a return for every financial year or part thereof, as the case may be, in FORM GSTR-4.

For any more information related to compliance, please feel free to contact us at SGR Consultancy OR you can also follow us on Facebook Page

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