The GST composition scheme provides valuable advantages for smaller businesses, allowing them to streamline their tax processes. Despite the widespread adoption of GST registration, the composition scheme presents a viable alternative, especially for businesses with an annual turnover of Rs. 1.5 crores or less. In this article, we delve into the key aspects of the GST composition scheme, exploring its limits, eligibility criteria, categories, rates, and compliance requirements.
GST Composition Scheme Limit
The composition scheme had an initial cap of Rs. 1 crore, meaning that only companies with yearly sales under Rs. 1 crore could choose to register for the composition levy. Because they have a smaller tax base than other Indian states, the GST composition scheme turnover limit for hill and northeastern states, including Sikkim and Himachal Pradesh, was kept lower at Rs. 75 lakhs annually.
The GST composition scheme limit for states was raised to Rs. 1.5 crore at the 32nd GST Council Meeting, which took place on January 10, 2019. This means that individuals or businesses with an annual turnover of up to Rs. 1.5 crore may choose to register under the GST composition scheme, which will be effective as of April 1, 2019. It has not yet been confirmed that the North Eastern States and hill states like Sikkim or Himachal Pradesh will be subject to a lower GST composition scheme turnover limit. This modification to the current composition scheme will take effect on April 1, 2019 which
- Supplier of goods whose aggregate turnover is below Rs. 1.5 crore in the previous financial year.
- Supplier of goods whose aggregate turnover is below Rs. 75 lakh in the previous financial year having place of business in the following states:
- Arunachal Pradesh,
- Supplier of services having aggregate turnover below Rs. 50 lakh in previous financial year.
GST Composition Scheme Rules
A variety of manufacturing and service industries, including restaurants and traders, are permitted to register under the composition scheme in accordance with the provisions of the GST Act. Nevertheless, the following individuals or organizations are not covered by the GST composition scheme:
- Non-resident taxable person or a casual taxable person
- Businesses/persons supplying goods through an e-commerce portal operator that collects tax at source (u/s 52).
- Businesses/persons engaged in inter-state supply of goods
- Manufacturer of ice cream and other edible ice with/without cocoa as additive
- Manufacturer of tobacco products, tobacco substitutes and pan masal
- Businesses/persons who have purchased goods from unregistered supplier (allowed if GST is paid on such goods on reverse charge basis)
- Suppliers involved in the supply of goods that are exempt under GST Act.
*The list is indicative and subject to change.
Note that while registered entities and individuals are prohibited from participating in the composition scheme’s interstate supply of goods or services, these businesses are permitted to purchase goods or services from suppliers who are permitted to conduct interstate business under the GST Act. As a result, entities that are registered under the composition scheme may buy products and services from outside the state, but they are not permitted to sell them to customers or other entities outside the state.
Originally services providers other than restaurant services were not allowed to register under the GST composition scheme. This changed in January 2019 when the 32nd GST Council Meeting announced that services sector businesses (apart from restaurant services) would also be allowed to register under the composition scheme.
Eligible Categories and Special Provisions
- Manufacturers, dealers, and restaurants (but not those that serve alcohol) are qualified to apply for the composition scheme under Section 10.
- As long as the total turnover stays under Rs. 50 lakh, service providers may utilize the parallel scheme for composition dealers outlined in CGST (Rate) notification no. 2/2019, dated March 7, 2019.
- Notably, on March 31, 2022, a unique composition scheme was made available to brick manufacturers. This includes a variety of bricks, such as fly ash bricks and blocks, earthen or roofing tiles, building bricks, and bricks made from fossil meal. Participants in this program benefit from a fixed tax rate of 6% in the absence of an input tax credit.
Exclusions from the Composition Scheme
- 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.
Composition Scheme GST Rate
Businesses/individuals registered under the composition scheme are required to pay GST at 1% to 6% depending on the type of business activity conducted by the registered person/business entity. The applicable composition scheme GST rate are as follows:
|Type of business||CGST||SGST||Total|
|Manufacturers and traders (goods)||0.5%||0.5%||1.0%|
|Restaurants not serving alcohol||2.5%||2.5%||5.0%|
|Other service providers||3.0%||3.0%||6.0%|
GST Composition Scheme Return
According to the rules of the currently in effect GST composition scheme, registered businesses and individuals must file electronic returns on the Official GST Portal by “the 18th of the month succeeding the last month of the previous quarter” on a quarterly basis. This effectively means that the GST composition scheme return for the quarter that concluded in December needs to be submitted online by January 18 of the following year. Individuals and businesses that are registered under composition must use the GSTR-4 Form to file their returns. The GSTR-4 Offline Tool can be used to get your returns ready for online submission.
Composition Scheme Forms under GST
The following are some of the key forms that composition scheme registered businesses/individuals are required to fill out for various purposes under current GST rules*:
|Form Number/Name||Purpose of Form|
|GST CMP-01||Intimation for tax payment under composition scheme (for provisionally registered business entity/individual)|
|GST CMP-02||To opt for composition scheme (unregistered entity/persons)|
|GST CMP-03||To provide details of stock/inward supply from unregistered business/person|
|GST CMP-04||To withdraw from GST composition scheme|
|GST CMP-05||Show cause notice issued by appropriate tax official on contravention of GST Act rules|
|GST CMP-06||Reply to show cause notice issued in Form GST CMP-05|
|GST CMP-07||Order indicating acceptance/rejection of show cause notice reply provided in Form GST CMP-06|
|GST REG-01||To register under composition scheme|
|GST ITC-01||Details of inputs available with the composition registered supplier in the form of raw materials, semi-finished and finished goods|
*The list of forms is indicative and other forms may be required in order to apply for/operate under the GST composition scheme.
GST Composition Scheme Bill of Supply Format
Since they are not permitted to charge GST on outward supplies of goods or services, businesses or individuals registered under the composition scheme are not permitted to issue tax invoices or GST invoices. Thus, in the event of an outward supply of goods or services, a composition dealer is required to issue a Bill of Supply. It is mandatory for this bill of supply to state, “Composition Taxable Person, Not Eligible to Collect Tax on Supplies.” Important information that must be contained in a Bill of Supply are:
- Supplier name, GST Identification Number (GSTIN) and Address
- Unique serial number termed as bill of supply number
- Date of issue of bill of supply
- Recipient details such as name, address and GSTIN (if registered)
- HSN code of goods being supplied
- Description/quantity of Goods/services (as applicable)
- Total value of supplies (adjusted for applicable discounts)
- Signature/digital signature of the supplier
GST Payments by Composition Registered Business
Suppliers who are registered under the GST composition scheme and who are not eligible to claim input tax credit must pay GST out of pocket. The following are some significant situations in which registered dealers under the composition scheme are required to make GST payments:
- Tax payments on goods received from unregistered dealers in notified cases
- Tax payments in lieu of goods or services supplied under reverse charge mechanism
- Tax incurred for import of services
Benefits of GST Composition Scheme Registration
- Reduced compliance requirements, hence suitable for small businesses with limited resources
- Limited liability in terms of tax payable in lieu of composition levy
- Higher liquidity for small businesses as tax rates are lower
Limitations of the GST Composition Scheme Registration
- Limited area of operation as composition dealer cannot engage in inter-state sales transactions (outward supplies)
- Unavailability of input tax credit mechanism to offset GST payments
- Composition registered businesses cannot supply goods through an e-commerce portal interstate
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