Are you a small business owner in India looking to streamline your tax compliance and enhance your financial flexibility? Recent changes to the Goods and Services Tax (GST) composition scheme might just have what you need.
In this article, we will break down the intricacies of the GST composition scheme, shedding light on its advantages, eligibility criteria, and potential drawbacks. Whether you’re a manufacturer, trader, or service provider, understanding the nuances of this scheme could be the key to smoother operations and enhanced liquidity.
What is the GST Composition Scheme?
The GST composition scheme simplifies tax for small businesses. Compared to regular GST, it offers two key advantages: reduced paperwork and lower tax liability. Normal taxpayers file multiple returns, but with the composition scheme, it’s streamlined to just one quarterly return (GSTR 4) and one annual return (GSTR 9A). You’ll pay tax at a fixed rate, ranging from 1% to 6% of your turnover.
For example, goods manufacturers pay just 1%. It’s a significant relief, simplifying tax procedures for small businesses.
Ease of Filing
Simplified filing is the core of the composition scheme. For small business owners, it’s a game-changer, freeing up time and energy to focus on growth. With only one quarterly and one annual return to handle, it’s a breath of fresh air, especially for businesses without dedicated finance departments or tax experts. Reduced compliance requirements make tax compliance straightforward and accessible.
Eligibility for the GST Composition Scheme
As a taxpayer, you can opt for the GST composition scheme if your annual turnover falls within the specified limits. It’s essential to note that the GST composition limit takes into account the turnover for all businesses registered under a particular PAN. In general, this scheme caters to small manufacturers, traders, and service providers.
For Manufacturers and Traders
If you’re a newly registered business, your turnover should not exceed Rs. 1.5 crore in the current financial year. If you’ve already registered, your turnover must not have exceeded Rs. 1.5 crore in the previous financial year.
For Restaurants Not Serving Alcohol
The above terms apply here as well, with a focus on annual turnover not exceeding Rs. 1.5 crore for both newly registered and already registered businesses.
For Service Providers
If you’re a newly registered business in the service sector, your turnover should not exceed Rs. 50 lakh in the current financial year. If you’ve already registered, your turnover must not have exceeded Rs. 50 crore in the previous financial year.
Additionally, the GST composition scheme has special provisions for businesses in specific states. It limits the Rs. 1.5 crore cap to Rs. 75 lakh for businesses in these special category states. If your turnover surpasses the specified composition scheme limit in a financial year, you’ll have to transition to the regular GST payment mechanism to comply with the GST composition scheme rules.
Who Cannot Avail the Composition Scheme GST
Certain categories of businesses and individuals are excluded from benefiting from the composition scheme in GST. These include:
Individuals or businesses who supply goods through an e-commerce portal operator that collects tax at the source.
Non-resident taxable persons or casual taxable persons.
Manufacturers of ice cream or other edible ice without cocoa as additives.
Manufacturers of pan masala and tobacco products and substitutes.
Individuals or businesses who have purchased goods from unregistered suppliers.
Suppliers involved in the supply of goods that are exempt under the GST act.
Suppliers involved in the supply of goods and services.
What are the Conditions for Availing Composition Scheme?
The following conditions must be met to avail of the benefits of the composition scheme:
Taxpayers cannot claim the Input Tax Credit if they opt for the composition scheme.
The dealer cannot supply goods that are not taxed under GST, such as alcohol.
If the taxpayer has registered many business segments (such as textile, electronics, and groceries) under the same PAN, they should register all the segments collectively under the scheme.
Taxpayers are required to ensure that the phrase ‘composition taxable person’ is clearly mentioned on all notices and signboards at their business site.
The taxpayers should also specifically mention the phrase ‘composition taxable person’ on every bill of supply they issue.
According to the CGST (Amendment) Act, 2018, a manufacturer or trader can provide services up to 10 per cent of their turnover or Rs. 5 lakh, whichever is higher.
Taxpayers have to pay tax under normal rates to avail of transactions under the Reverse Charge Mechanism.
GST Composition Scheme Forms
Small businesses and individuals who register under the composition scheme must complete certain forms that are for different purposes. The table below mentions various forms related to the GST composition scheme.
Form Number/Name
Purpose of the Form
GST CMP-01
Notification of tax payment under the composition scheme (for provisional registration)
GST CMP-02
Applying for the composition scheme(for unregistered entities or person)
GST CMP-03
Submission of stock/inward supply details from unregistered sources
GST CMP-04
Exiting the composition scheme
GST CMP-05
Show cause notice for violation of GST Act rules
GST CMP-06
Replying to show cause notice that is issued through Form GST CMP-05
GST CMP-07
Issuance of an order for acceptance/rejection of response in Form GST CMP-06
GST REG-01
Registration under the composition scheme
GST ITC-01
Reporting inputs from composition registered supplier (raw materials, semi-finished and finished goods)
Benefits of the Composition Scheme in GST
Reduced Tax Payments: The composition scheme’s fixed tax rate significantly lowers the tax burden for businesses. Manufacturers, traders, and service providers pay minimal taxes, e.g., just 1% of turnover for goods manufacturers.
Lower Compliance Requirements: Unlike regular taxpayers who juggle multiple returns, businesses under the composition scheme file only one quarterly return (GSTR 4) and one annual return (GSTR 9A). This simplifies the process and reduces administrative burdens.
Increased Liquidity: Reduced tax liability results in higher liquidity. More cash on hand helps maintain a healthy cash flow, facilitating business operations and growth.
Disadvantages of Opting for a Composition Scheme under GST?
Some drawbacks associated with the composition scheme include:
Businesses based on the B2B model cannot claim input tax credits. This increases the burden of taxation on the buyer, who may get discouraged from buying from businesses registered under the composition scheme.
The taxpayers cannot recover composition tax from their buyers as they cannot raise a tax invoice.
The scheme does not cover inter-state transactions, limiting their business territory.
The taxpayers are also restricted from supplying non-taxable goods under GST.
Tax Rates in the Composition Scheme Under GST
In the GST composition scheme, tax rates are simplified for small businesses. Manufacturers and traders pay a fixed 1% tax on their turnover, with 0.5% allocated to Central GST (CGST) and 0.5% to State GST (SGST). Restaurants not serving alcohol are charged a 5% tax, with the same division between CGST and SGST. Service providers under the scheme face a 6% tax, split into 3% for CGST and 3% for SGST.
These rates are significantly lower than those for regular GST taxpayers. However, it’s crucial to remember that businesses under this scheme cannot charge GST separately to their customers, and the tax paid directly affects their finances, as they do not receive an input tax credit. Understanding these rates is essential for assessing the financial implications of the composition scheme.
GST Composition Scheme Bill Format
The composition scheme bill should include the following:
Header: Bill should include a header at the top containing the phrase ‘GST Composition Bill’ or ‘Composition Scheme Invoice ’.
Business details: Details of the business, including name, address, Goods and Services Tax Identification Number (GSTIN), and other essential registration numbers must be included.
Customer details: Includes the customer’s name, address, and GSTIN for B2B transactions.
Invoice number and date: Every bill should include the specific invoice number and the date it was issued on.
Itemised list: This includes the details of the supplied goods or services, such as their descriptions, rates, quantities, and amount.
GST Composition Scheme Mention: It should be clearly mentioned on the bill that it is issued under GST Composition Scheme to differentiate it from regular invoices.
Total amount: The total amount, inclusive of all taxes and discounts must also be included in the bill.
Payment Terms: Indicate the payment method and terms employed, including any due dates or credit terms.
Legal compliance: The bill should clearly include all the rules and guidelines set by tax authorities including mandatory disclosures and disclaimers.
Signature: The bill must be stamped or signed by an authorised person from the business.
How to Apply for the GST Composition Scheme
Applying for the Composition Scheme Under GST is a hassle-free process that can be completed online via the official GST portal. Begin by filing Form GST CMP-02, serving as an intimation of your readiness to join the scheme.
During the application, you will need to provide essential documents such as details of your annual turnover and other relevant financial information. After submitting the necessary documents and Form GST CMP-02, the tax authorities will review your application. If it aligns with the eligibility criteria and the documents are accurate, you will receive approval to join the scheme.
The application process is designed to be straightforward, aiming to encourage small businesses to embrace the composition scheme’s benefits without excessive bureaucratic hurdles. Once approved, your business can start enjoying simplified tax compliance and reduced tax liability, enhancing your financial operations.
Conclusion
Whether you’re a manufacturer, trader, or service provider, consider the Composition Scheme Under GST as a valuable tool to simplify your tax compliance and enhance your financial flexibility. As you explore this transformative taxation framework, your journey towards a streamlined financial future begins. The Composition Scheme Under GST is not just a financial strategy, it’s a lifeline for small businesses, offering a pathway to a more straightforward and prosperous financial future.
To further support your operations, you can also explore financial solutions provided by TATA Capital. These services can help you bolster your finances, manage working capital, and pave the way for smoother business operations.
The GST composition scheme bill allows small businesses to pay taxes at a fixed rate based on turnover instead of paying regular GST. It benefits businesses which have turnover below a specified threshold.
How do I know if my GST is under the composition scheme?
Your GST will qualify for the composition scheme if you have applied for it and meet the eligibility requirements specified by the GST Council, based on turnover and nature of business.
What is the GST limit for composition schemes?
Small businesses with a turnover of up to 1.5 crore per annum are eligible to be registered under the GST composition scheme.
What is GST composition scheme rate?
The GST composition rate is 1% for manufactures and traders, 5% for restaurants not serving alcohol, and 6% for service providers.
13 February 2025
9 mins read
Previous Post
