All About GST Composition Scheme in India

The GST Composition Scheme is a simplified tax system for small businesses. This system helps taxpayer to manage their tax liabilities easily. In this scheme, a qualified taxpayer can pay GST at a fixed and lower rate. They are also required to file fewer returns rather than regular scheme and reduces their compliance burden. The scheme is suitable for small traders, manufacturers, and service providers. Thus, it allows them to focus on business growth without dealing with complex tax procedures. In this blog, you will get a guidance on GST composition Scheme, and more.

What is the GST Composition Scheme?

The GST Composition Scheme refers to a simplified tax option for small businesses. It is available to manufacturers, traders, small restaurant owners, and service providers. Their annual turnover should not be more than Rs. 1.5 crore, or Rs. 75 lakh for specific states. This scheme allows them to pay GST at a lower and fixed rate. They are not required to issue detailed tax invoices. It reduces the frequency of return filings. However, they will not be able to claim any input tax credit (ITC). This scheme helps to reduce the burden of compliance and supports the growth of small businesses.

Who Can Opt for the GST Composition Scheme?

Listed below are the eligibility criteria for the GST Composition Scheme in India:

Manufacturers, Traders, and Restaurant Operators

A registered taxpayer can opt for the GST Composition Scheme if the aggregate turnover in the previous financial year does not exceed Rs 1.5 crore. An aggregate turnover must include all the sales made under the same PAN across India. Only intra-state supply of goods is allowed under the same scheme. This means if the business sells goods outside the state, it should not qualify. The taxpayer are not required to deal in the manufacturing of items like ice cream, pan masala, or tobacco products, which are restricted items. This category includes local shopkeepers, wholesalers, and non-alcohol-serving restaurants.

Businesses in Special Category States

The turnover limit for businesses located in special category states is Rs. 75 lakh. Special category states include Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Uttarakhand, and Himachal Pradesh. The lower threshold exists due to regional and economic considerations. These businesses must also operate within the state. Inter-state supply of goods disqualifies them from this scheme. The same product restrictions and eligibility conditions can apply to it.

Restaurant Service Providers

The service sector can avail of this scheme only for businesses involved in restaurant services. These include businesses that prepare and serve food or beverages for consumption within their premises. The supply of liquor is exempt from the GST Composition Scheme.  All operations must be conducted within the same state.

Who cannot opt for the Scheme?

The GST Composition Scheme is not applicable to every taxpayer. Listed below are the categories who cannot opt for this scheme:

Manufacturers of Notified Goods

The composition scheme cannot be availed of in the case of a manufacturer of ice cream, pan masala, or tobacco. It is because such products attract higher tax rates.

Inter-State Suppliers

Any business who are supplying goods or services outside the state where it is registered becomes ineligible to claim it. The scheme allows intra-state operations only.

Suppliers of Exempt Goods or Services

Application cannot be made by any person dealing in goods or services that are exempt from GST. The scheme applies only to taxable supplies.

Casual and Non-Resident Taxable Persons

A person who is setting up a temporary business at events or fairs, or an outsider supplying in India are not eligible for this scheme.

E-commerce Sellers Liable for TCS

In case of a business supplying goods through an e-commerce operator who is required to collect tax at source under Section 52 of the CGST Act cannot opt for this scheme.

Other Notified Persons

The government, through the recommendations of the GST Council, may notify further categories as ineligible. These notifications will come through official notifications published on the Central Board of Indirect Taxes and Customs (CBIC) Website.

However, each restriction ensures that this scheme is suitable for small and local businesses with simple tax structures.

What are the Conditions for Availing the Composition Scheme?

Here are the conditions for availing the Composition Scheme:

No Input Tax Credit

A taxpayer under the composition scheme is not allowed to claim input tax credit (ITC) on purchases. The taxpayer pays at a fixed rate and does not get any credit for the GST paid on inward supplies.

No Supply of Exempt Goods or Alcohol

A person under this scheme cannot deal in goods or services that are exempt under GST. However, alcohol for human consumption, which remains outside the GST system, cannot be supplied under this scheme.

Reverse Charge Tax obligation

The recipient taxpayer has to pay GST at the applicable standard rates when the goods or services received attract tax under reverse charge. However, the taxpayer are not eligible to claim any credit for the tax paid under the reverse charge.

Single PAN, Single Option

When one person operates several businesses under the same PAN, the Composition Scheme is required to be opted for all such businesses. The person cannot choose to include some businesses and exclude others. The rule guarantees uniform treatment for all business under the same legal identity.

Display Requirement at Business Premises

The taxpayer should display the words "Composition Taxable Person" at all business premises where they operate. The display needs to be clear and visible to the customers and tax officials.

Compulsory Bill Declaration

Every bill of supply issued by the taxpayer should contain the words "Composition Taxable Person". The taxpayer under this scheme cannot issue a tax invoice. They issues a bill of supply for all the transactions.

Service Supply Limitation

A manufacturer or trader under this scheme can supply services only up to 10% of the turnover or Rs. 5 lakh, whichever is higher. This limit guarantees that the service activity remains minimal under the scheme.

GST Composition Scheme Tax Rates for a Dealer

Here is the table outlining the rate of tax on turnover, which is applicable for composition dealers:

However, as per the notification effective from January 1, 2018, the “turnover” for traders is specified as the “Turnover of taxable supplies of goods”.

Registration Process for Opting into the GST Composition Scheme

Here is the step-by-step registration process for opting into the GST Composition Scheme:

Step 1: Login to the GST Portal

Firstly, as a taxpayer, you must visit the official GST portal and log in by using your credentials.

Step 2: Filing Form GST CMP-02

A registered taxpayer must file Form GST CMP-02, which is available on the GST portal, for opting for the Composition Scheme. So, you have to log in to the portal and select the option under “Services”, “Registration”, and then “Application to Opt for Composition Levy”. Only a GST-registered person can file this form with the required details.

Step 3: Time Limit for Filing CMP-02

The government opens the window for opting into the scheme every year. The form should be filed before the financial year commences. Once filed, the scheme becomes effective from April 1 of the same financial year.

Step 4: Providing Business Details and Declaration

You must confirm the business details and agree to the declaration that they meets all the eligibility conditions. This includes the turnover limit and the nature of supplies. The taxpayer should also confirm that they will not claim Input Tax Credit (ITC).

Step 5: Verification and Submission

Once you have filling out the form, you should select the authorised signatory and enter the place of declaration. The form is to be submitted by using a Digital Signature Certificate (DSC), E-Sign, or Electronic Verification Code (EVC).

Step 6: Acknowledgement

The system will generate an Acknowledgement Reference Number (ARN). Then, you will receive a confirmation through email and SMS. This confirms that the application has been received.

Step 7: No Re-filing Needed Every Year

Once opted, the Composition Scheme continues unless the taxpayer becomes ineligible or voluntarily exits. There is no need to refile CMP-02 annually, unless the taxpayer changes their registration status.

How Does a Composition Dealer Raise Bill?

A composition dealer will not issue a tax invoice as the GST law does not permit them to collect tax from customers. They must pay the applicable tax by using their own money. However, the dealer must issue a Bill of Supply. They should also mention “composition taxable person, not eligible to collect tax on supplies” at the top of every Bill of Supply they issue to buyers.

Which GST returns must a composition dealer file?

A composition dealer should file Form CMP-08 every quarter before the 18th of the month next to the quarter. They must also file and submit an annual return in Form GSTR-4 by June 30 of the following financial year FY 2019-20 onwards. These forms contain summary particulars of the turnover, tax paid, and reverse charge liability. GSTR-9A means an annual return which must be filed by 31st December of the next financial year. Though GSTR-9A is no longer applicable. However, a dealer who is registered under the composition scheme is not required to maintain detailed records.

Conclusion

Therefore, the GST Composition Scheme gives small businesses a way to handle their taxes. This scheme lowers the burden of compliance. Taxpayers get an opportunity to concentrate on their business.  It provides lower tax rates to the eligible dealers and requires to file fewer returns by reducing their workload. However, they will not able to claim input tax credit (ITC) or issue tax invoices. Despite these limits, the scheme supports the small businesses in making GST compliance and encourages a smooth environment for their business operations. If you have any queries about it, contact Online Legal India to get assistance.

FAQ

Q1. Who can opt for the GST Composition Scheme?

It provides for granting this benefit to a taxpayer whose aggregate turnover in the previous financial year does not exceed Rs. 1.5 crore (Rs. 75 lakh in the case of special category states), provided they are not involved in inter-state supply, e-commerce supply, or supply of notified goods.

Q2. Is a Composition Dealer allowed to charge tax from customers?

No, a composition dealer are not allowed to charge tax from customers. They pays out of pocket and must issue a Bill of Supply instead of a tax invoice.

Q3. What returns must a composition dealer file?

A composition dealer has to file CMP-08 quarterly (18th of the month after each quarter) and GSTR-4 annually (30th April of the following financial year). GSTR-9A has been waived for most years.

Q4. Can a composition dealer claim Input Tax Credit (ITC)?

No, as per the GST Composition Scheme, a composition dealers are not eligible to claim Input Tax Credit on their purchases.

Q5. How can a taxpayer opt for the Composition Scheme?

The taxpayer must file Form CMP-02 on the GST portal at the beginning of each financial year to opt into the scheme.

Disclaimer

This article is for informational purposes only and does not constitute legal advice. Online Legal India is a digital platform. If you require legal assistance, we strongly recommend consulting a qualified lawyer or law firm.