The composition scheme is an easy and simple scheme functioning under the Goods and Service Tax for all taxpayers. With the help of this scheme, small taxpayers can avoid undergoing the complicated GST formalities. Instead, they can pay their GST at their turnover’s fixed rate. Taxpayers can opt for their scheme if their business has a turnover of less than five crore rupees.
The GST search tool can help you learn if a taxpayer has chosen the composition scheme to pay their taxes or not. Using the tool is simple as you have to enter the GSTIN and tick the ‘Taxpayer type’ column in the result area to learn whether the taxpayer has opted for the GST composition scheme or is a regular taxpayer.
Read along to learn more about the GST composition scheme and its benefits.
GST Composition Scheme: What Does It Mean?
The composition in GST refers to the tax-paying mechanism that several small businesses offer. This type of scheme is primarily beneficial compared to the usual GST filling.The GST composition scheme ensures compliance, less paperwork, and low tax liability. For example, normal taxpayers must submit three monthly GST returns, GST 1, 2, and 3, and one annual return.
Nevertheless, when taxpayers apply for the GST composition scheme, they are liable to pay their taxes at 6% and 1% of their turnover. Similarly, if a manufacturer deals in goods excluding ice cream, pan masala, or tobacco, they should pay a tax of 1% based on their turnover.
Rules of the GST Composition Scheme
Under the provisions of the GST Act, various manufacturing, service, and trading enterprises are eligible for registration under the GST composition scheme, with the exception of the following categories:
- Manufacturers involved in producing ice cream, pan masala, or tobacco
- Individuals engaged in interstate transactions
- Casual taxable individuals
- Non-resident taxable individuals
- Entities involved in the distribution of goods that are not subject to taxation under GST regulations
- Suppliers whose turnover surpasses the specified threshold for selecting the composition scheme
- Businesses that distribute goods via an e-commerce platform.
Who Can Choose the Composition Scheme?
Businesses incurring an annual combined turnover of approximately Rs 1.5 crore have the option to enroll in the composition scheme under GST. To determine the turnover for composition scheme eligibility, it considers the combined turnover of the businesses linked to the same PAN.
Under Section 10, only dealers, manufacturers of various goods, and restaurants not serving alcohol are eligible to participate in the GST composition scheme. Nevertheless, service providers may choose an analogous composition scheme for dealers as per the notification issued by the CGST, where Rs 50 lakh is the total turnover limit.
Additionally, the government introduced a distinct composition scheme on March 31, 2022, specifically for manufacturers of bricks made from fossil meals or similar siliceous earth, building bricks, earthen or roofing tiles, and fly ash bricks and blocks. Those who opt for this scheme can pay a special tax rate of 6% without the benefit of an input tax credit.
What is the GST Composition Scheme Limit?
The composition scheme under GST limit varies based on the nature of your business.
- For traders and manufacturers: If your business has recently obtained registration, it should not surpass a turnover of Rs 1.5 crore in the current fiscal year. If your business is already registered, your turnover in the prior fiscal year must not have exceeded Rs 1.5 crore.
- For restaurants that do not serve alcohol, The same conditions also pertain to restaurants that do not serve alcohol.
- For the service providers: If your business is newly registered, your turnover should not exceed Rs 50 lakh in the current fiscal year. If your business is already registered, your turnover in the prior fiscal year must not have exceeded Rs 50 crore.
How Can Taxpayers Choose a GST Composition Scheme?
To enroll in the GST composition scheme, the taxpayer has to submit GST CMP-02. One can complete the process online via the GST website. Dealers interested in opting for the Composition Scheme must provide this notification at the commencement of every financial year.
How Should a Composition Dealer Raise the Bill?
The composition dealer is not authorized to issue the tax invoice due to their inability to levy tax on their customers. So, they must cover the tax expenses themselves, necessitating the issuance of a Bill of Supply. Moreover, the dealer must indicate “composition taxable person, not allowed to collect taxes on supplies” at the top of the Bill of Supply.
What are the GST Rates for a Composition Dealer?
The following chart explains the rate of tax on turnover applicable for composition dealers:
| Type of Business | SGST | CGST | Total |
| Restaurants not serving alcohol | 2.5% | 2.5% | 5% |
| Manufacturers and traders (goods) | 0.5% | 0.5% | 1% |
| Other service providers | 3.0% | 3.0% | 6.0% |
What are the Advantages of the GST Composition Scheme?
The key advantages of the composition scheme on GST include:
- The revised tax rate structure alleviates the burden on taxpayers.
- Taxpayers are now required to submit fewer returns and can avoid the necessity of furnishing tax invoices.
- The reduced tax liability under the fixed rate increases businesses’ liquidity, enabling them to manage cash flow more effectively and ensuring smoother operational continuity.
Conclusion
To sum up, the composition scheme on GST can be a highly beneficial component as it helps to simplify the entire taxation process. Furthermore, it reduces tax liability greatly, which leaves much room for conducting working capital management better.
FAQs
Q1. What is the Composition Scheme under GST?
The Composition Scheme is a simplified GST compliance mechanism for small businesses with annual turnover up to Rs. 1.5 crores.
Q2. What are the eligibility criteria for the Composition Scheme?
Businesses with turnover up to Rs. 1.5 crores dealing in goods or restaurant services are eligible. Manufacturers of certain goods are excluded.
Q3. What are the benefits of GST Composition Scheme?
The benefits are – lower GST rate, no input tax credit, easy compliance by filing quarterly returns and no separate e-way bills.
Q4. What is the GST rate under the Composition Scheme?
The GST rate under the composition scheme is 1% for manufacturers, 5% for restaurant services, and 0.5% for other suppliers.
Q5. Can I make inter-state supplies under the Composition Scheme?
No, you can make only intra-state supplies if you opt for the Composition Scheme. Inter-state supply of goods is not allowed.
Q6. Is e-way bill required if I opt for the Composition Scheme?
E-way bill is not required for taxpayers under the Composition Scheme, irrespective of value.
Q7. When do I need to file GST returns under the Composition Scheme?
Quarterly returns in GSTR-4 by 18th of the month after the end of the quarter is required.
Q8. Can I switch to the regular GST scheme anytime?
Yes, you can switch out of the Composition Scheme at any time in a financial year. The transition takes effect from the subsequent financial year.