GST Composition Scheme is a simple and hassle-free tax compliance option introduced under the Goods and Services Tax regime for small taxpayers in India. It allows eligible businesses to pay tax at a fixed rate on turnover, reducing the burden of detailed GST filings and returns.
This article by A4Accountant covers everything you need to know about the composition scheme under GST — including eligibility conditions, turnover limits, GST rates, pros and cons, and how to file returns under this scheme.
If you're a shopkeeper, trader, or small business owner looking to simplify your tax process, this guide will help you understand whether opting for the composition scheme is the right choice.
The Goods and Services Tax (GST) in India, introduced in 2017, streamlined the country's indirect tax regime. While the regular GST compliance involves detailed invoicing, input tax credit (ITC) mechanisms, and monthly filings, the government introduced a simpler alternative for small businesses: the GST Composition Scheme. This scheme aims to ease the compliance burden for small taxpayers, allowing them to pay GST at a fixed, lower rate of their turnover.
If you're a small business owner, understanding the Composition Scheme is crucial. It can significantly simplify your tax obligations and free up valuable time that would otherwise be spent on complex GST formalities. This comprehensive guide will explain everything you need to know about the GST Composition Scheme, including who is eligible, the applicable rates, the benefits it offers, its limitations, and the simplified filing process.
What is the GST Composition Scheme?
The GST Composition Scheme is a simplified tax scheme under GST designed for small taxpayers. Instead of collecting GST from customers and claiming Input Tax Credit (ITC) on purchases, businesses opting for this scheme pay a fixed percentage of their turnover as GST. This dramatically reduces the compliance burden, as they are exempted from maintaining detailed records and filing numerous monthly returns.
The core idea behind the Composition Scheme is to provide relief to small businesses, which might find the regular GST framework with its complex invoicing, input credit matching, and multiple returns too cumbersome. It's a voluntary scheme, meaning eligible businesses can choose whether to opt in or remain under the regular GST regime.
Key characteristics of the scheme include:
- Fixed Tax Rate: Tax is paid at a predetermined, lower rate based on turnover.
- Simplified Compliance: Fewer returns, no complex invoicing, and no need to maintain detailed accounting records for ITC.
- No Input Tax Credit: Businesses under this scheme cannot claim ITC on their purchases.
- Cannot Charge GST: They cannot issue a "tax invoice" and cannot collect GST from their customers. Instead, they issue a "Bill of Supply."
- Intra-State Supply Only (Generally): Most businesses under the scheme are restricted from making inter-state (outside their state) outward supplies.
Who is Eligible for the Composition Scheme?
Eligibility for the GST Composition Scheme primarily depends on two factors: the aggregate turnover of the business and the nature of the business activities.
Turnover Limits
The most crucial eligibility criterion is the aggregate turnover in the preceding financial year. Currently, the threshold limits are:
- For Goods Manufacturers and Traders: The aggregate turnover in the preceding financial year should not exceed INR 1.5 Crore (or INR 75 Lakh for special category states like Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh, Uttarakhand).
- For Service Providers (including mixed suppliers): The aggregate turnover in the preceding financial year should not exceed INR 50 Lakh.
Aggregate Turnover includes the value of all taxable supplies, exempt supplies, and exports of goods and/or services, computed on an all-India basis (under the same PAN). It excludes the value of inward supplies on which tax is payable by a person on a reverse charge basis.
Notified Businesses
Certain categories of service providers were specifically allowed to opt for the Composition Scheme under a separate notification. This includes a supplier of services (or a mixed supplier) whose aggregate annual turnover in the preceding financial year does not exceed INR 50 Lakh. They pay GST at a rate of 6% (3% CGST + 3% SGST) on their turnover.
Restrictions (e.g., no inter-state supply)
Even if a business meets the turnover criteria, certain restrictions apply that can make it ineligible for the Composition Scheme:
- No Inter-State Outward Supply: A taxpayer cannot opt for the Composition Scheme if they are engaged in the supply of goods or services across states (inter-state outward supplies). They can, however, make inter-state inward supplies (purchase from another state).
- No Supply of Non-Taxable Goods: Businesses dealing in non-taxable goods (like alcoholic liquor for human consumption, petroleum crude, high-speed diesel, motor spirit, natural gas, aviation turbine fuel) cannot opt for the scheme.
- No Supply through E-commerce Operators: A taxpayer who supplies goods or services through an Electronic Commerce Operator (ECO) who is required to collect TCS (Tax Collected at Source) cannot opt for the scheme.
- No Manufacturer of Certain Goods: Manufacturers of certain goods, as notified by the government (e.g., Ice cream, Pan Masala, Tobacco and manufactured tobacco substitutes, Aerated water), are excluded from the scheme.
- Non-Resident Taxable Persons: Non-resident taxable persons and casual taxable persons cannot opt for the Composition Scheme.
- Holding Shares in Other GST-Registered Businesses: If a taxpayer has different business verticals registered under the same PAN, all such businesses must opt for the Composition Scheme or none of them can. They cannot have some units under the regular scheme and others under the Composition Scheme.
GST Rates Under Composition Scheme
The GST rates under the Composition Scheme are significantly lower and fixed, making it attractive for small businesses. The applicable rate depends on the type of business activity:
| Type of Taxpayer | GST Rate | Effective Rate (CGST + SGST) | Turnover Limit |
|---|---|---|---|
| Manufacturers (Goods) | 0.5% of turnover in state or UT (CGST) + 0.5% of turnover in state or UT (SGST) | 1% | INR 1.5 Crore (INR 75 Lakh for special category states) |
| Restaurant Services (not serving alcohol) | 2.5% of turnover in state or UT (CGST) + 2.5% of turnover in state or UT (SGST) | 5% | INR 1.5 Crore (INR 75 Lakh for special category states) |
| Traders (Goods) | 0.5% of turnover of taxable supplies of goods (CGST) + 0.5% of turnover of taxable supplies of goods (SGST) | 1% | INR 1.5 Crore (INR 75 Lakh for special category states) |
| Other Service Providers (including mixed suppliers, i.e., both goods & services) | 3% of turnover in state or UT (CGST) + 3% of turnover in state or UT (SGST) | 6% | INR 50 Lakh |
It's important to note that these rates are applied to the aggregate turnover, not on the value of individual supplies. The GST payable by a composite dealer is typically paid out of their own pocket, as they cannot charge GST from their customers.
Benefits of Opting Composition Scheme
The GST Composition Scheme offers several attractive benefits for eligible small taxpayers:
- Reduced Compliance Burden: This is arguably the biggest advantage. Businesses under the Composition Scheme are largely exempt from maintaining detailed accounting records, issuing tax invoices, and dealing with the complexities of Input Tax Credit.
- Simplified GST Returns: Instead of filing monthly returns (GSTR-1, GSTR-3B), composite dealers only need to file a quarterly statement (GSTR-4) and an annual return (GSTR-9A, though it has been simplified or waived for recent years). This saves a lot of time and reduces the need for professional accounting services.
- Lower Tax Liability: The fixed GST rates under the Composition Scheme (1%, 5%, 6%) are generally much lower than the standard GST rates (5%, 12%, 18%, 28%) applicable under the regular scheme.
- Ease of Doing Business: The simplified procedures make it easier for small businesses to comply with GST regulations, allowing them to focus more on their core business activities rather than tax compliance.
- Higher Liquidity: Since composite dealers do not pay GST on their supplies (they pay from their own pocket), they don't have to wait for ITC refunds, which can improve their cash flow.
- Reduced Billing Hassle: They simply issue a "Bill of Supply" instead of a detailed "Tax Invoice." This bill of supply must conspicuously mention "Composition Taxable Person, not eligible to collect tax on supplies."
Limitations and Drawbacks
While the Composition Scheme offers significant benefits, it also comes with certain limitations that might make it unsuitable for some businesses:
No ITC (Input Tax Credit)
This is the most significant drawback. Businesses registered under the Composition Scheme cannot claim Input Tax Credit on the GST paid on their purchases (raw materials, services, capital goods). This means the GST paid on inputs becomes a cost for them, potentially increasing their overall expenses if their input GST is substantial. Businesses that primarily supply to other businesses (B2B) might find this disadvantageous, as their customers also cannot claim ITC on purchases from a composite dealer.
Cannot Issue Tax Invoice
A composite dealer cannot issue a "Tax Invoice." Instead, they issue a "Bill of Supply." This means they cannot collect GST from their customers. The tax is paid by the composite dealer out of their own pocket from their turnover. Furthermore, because their customers do not receive a tax invoice, the customers cannot claim Input Tax Credit on the supplies received from a composite dealer. This makes B2B transactions less attractive for customers who are registered under the regular GST scheme, as they would lose their ITC benefit.
Restrictions on Business Type and Supply
- No Inter-State Outward Supplies: Composite dealers cannot sell goods or services outside their state. This limits their market reach and growth potential if they wish to expand geographically.
- Restricted to Certain Businesses: Manufacturers of certain goods (like ice cream, pan masala, tobacco) are explicitly excluded.
- No E-commerce Sales: Businesses selling through e-commerce platforms that collect TCS are generally not eligible, which can be a significant limitation in the digital age.
Impact on Business Growth
As a business grows, its turnover might exceed the specified limit, forcing it to switch to the regular GST scheme. This transition can be complex, and the business would then need to adapt to the full compliance requirements. The turnover limits can sometimes act as a barrier to rapid expansion.
Perception Among Customers
For B2B customers, purchasing from a composite dealer means they lose the ability to claim ITC. This can make a composite dealer's offerings less attractive compared to competitors who are registered under the regular GST scheme and can issue tax invoices, thereby allowing customers to claim ITC. This might put composite dealers at a competitive disadvantage in certain markets.
GST Filing Process Under Composition Scheme
One of the primary advantages of the Composition Scheme is its simplified filing process. Businesses opting for this scheme have a much lighter compliance burden compared to regular GST taxpayers.
The main forms and processes involved are:
-
Intimation for Composition Levy (FORM GST CMP-02):
- Existing taxpayers who want to opt for the scheme need to file Form GST CMP-02. This intimation must be filed electronically on the GST Portal.
- For new registrants, they can directly opt for the Composition Scheme at the time of GST registration (Part B of FORM GST REG-01).
- This form is usually filed at the beginning of a financial year.
-
Statement for Payment of Self-Assessed Tax (FORM GST CMP-08):
- Composite dealers are required to file a quarterly statement for the payment of tax.
- This form needs to be filed by the 18th day of the month succeeding the quarter (e.g., for the quarter April-June, it's due by July 18th).
- It's a summary statement declaring the turnover and the tax payable for the quarter.
-
Return for Composition Taxpayer (FORM GSTR-4):
- Historically, GSTR-4 was a quarterly return. However, it has been simplified and converted into an annual return for most periods since FY 2019-20 onwards.
- For the relevant financial year, this annual return captures details of outward supplies, inward supplies (including those liable to reverse charge), tax payable, and tax paid.
- It must be filed by the 30th day of April following the end of the financial year. For example, for FY 2024-25, it would be due by April 30, 2026.
-
Annual Return (FORM GSTR-9A):
- This was the specific annual return for composition taxpayers. However, for financial years 2019-20 onwards, GSTR-9A has been made optional or waived for most small taxpayers, simplifying the process further. It's crucial to check the latest notifications from the GST Council regarding its applicability for specific years.
The process involves logging into the GST Portal, navigating to the "Services" -> "Returns" -> "Returns Dashboard" section, selecting the financial year and return filing period, and then choosing the relevant form (CMP-08 or GSTR-4) to prepare and file.
FAQs on Composition Scheme
Can a business registered under the regular GST scheme switch to the Composition Scheme?
Yes, an existing taxpayer registered under the regular scheme can opt for the Composition Scheme. They need to file an intimation in FORM GST CMP-02 on the GST Portal, usually before the commencement of the financial year for which they wish to opt for the scheme. They also need to furnish a statement in FORM GST ITC-03 regarding the details of input tax credit held in stock and capital goods.
What happens if my turnover exceeds the limit after opting for the Composition Scheme?
If your aggregate turnover exceeds the prescribed limit (INR 1.5 Crore or INR 50 Lakh, as applicable) during a financial year, you cease to be eligible for the Composition Scheme. You must file an intimation for withdrawal from the scheme in FORM GST CMP-004 within seven days of crossing the threshold. Subsequently, you will be required to comply with all the provisions of the regular GST scheme, including charging GST, issuing tax invoices, and filing regular returns (GSTR-1, GSTR-3B).
Can a composite dealer collect GST from customers?
No, a composite dealer cannot collect GST from their customers. They are required to pay the GST from their own pocket at the fixed composition rates based on their turnover. Instead of a tax invoice, they must issue a "Bill of Supply" and conspicuously mention "Composition Taxable Person, not eligible to collect tax on supplies" on it.
Is Input Tax Credit (ITC) allowed for purchases made from a composite dealer?
No, a recipient who purchases goods or services from a composite dealer cannot claim Input Tax Credit on those purchases. This is because the composite dealer does not issue a tax invoice, nor do they collect GST from the customer to pass on as credit. The GST paid by the composite dealer is their own tax liability, not a tax collected on behalf of the government from the customer.
What is the penalty for violating the Composition Scheme rules?
If a taxpayer opts for the Composition Scheme despite not being eligible, or if they violate the conditions of the scheme (e.g., start making inter-state supplies, issue a tax invoice), they can be penalized. The Commissioner has the power to cancel the registration of such a person and may also impose a penalty equivalent to the tax payable under the regular scheme, along with interest.
