GST Composition Scheme

The GST Composition Scheme is a simplified tax option for small businesses with a turnover of up to ₹1.5 crore (₹50 lakh for service providers). Under this scheme, taxpayers pay tax at a fixed percentage of their turnover rather than the regular GST rates. It reduces compliance requirements, such as filing detailed returns, making it easier for small businesses to manage their tax obligations. However, businesses under this scheme cannot claim input tax credits or charge GST on their sales.

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Know About GST Composition Scheme

The Composition Scheme under GST is a simplified option designed for small taxpayers to ease compliance. It allows eligible taxpayers to pay GST at a fixed percentage of their turnover, rather than following standard GST procedures. This scheme is available to taxpayers with an annual turnover of less than ₹1.5 crore and is optional.

Under the scheme, service providers must have a turnover of less than ₹50 lakh in the previous financial year to qualify. Additionally, they cannot supply non-taxable goods or engage in inter-state transactions. The Composition Scheme offers a hassle-free compliance process, enabling small taxpayers to pay taxes quarterly at a reduced rate, making it a practical and voluntary option.

Benefits of composition scheme

Simplified Compliance Requirements: Taxpayers opting for the Composition Scheme benefit from reduced compliance obligations, as they are not required to maintain detailed accounts or extensive records. This makes it easier for small businesses to manage their tax responsibilities without the need for complex accounting systems.
Simple Quarterly Returns: Under the scheme, taxpayers only need to file a straightforward quarterly GST return, which minimizes the administrative burden compared to the regular GST return filing process. This saves time and effort for small businesses.
Quarterly Tax Payments: Instead of making monthly tax payments, taxpayers under the Composition Scheme are required to pay GST on a quarterly basis at a fixed percentage of their turnover. This arrangement provides more flexibility and helps businesses manage their cash flow more effectively.

Overall, the Composition Scheme offers small taxpayers a streamlined process to fulfill their GST obligations, making compliance more manageable and less time-consuming.

Provisions related to composition levy

The provisions for the Composition Levy are outlined in Section 10 of the Central GST Act, 2017. This scheme is available to registered taxpayers whose aggregate annual turnover does not exceed ₹1.5 crores. Service providers, however, can avail of a similar scheme with a turnover limit of ₹50 lakhs.

Under the Composition Levy Scheme, taxpayers are required to pay tax at a fixed percentage of their annual turnover. This tax is payable quarterly, along with the submission of a simple quarterly return in FORM GSTR-04.

However, taxpayers opting for this scheme face certain restrictions. They cannot issue taxable invoices under GST, collect GST from their customers, or claim Input Tax Credit (ITC) on their purchases. This scheme is designed to simplify compliance for small taxpayers by reducing formalities and easing the tax payment process.

Method to calculate Aggregate Turnover

Aggregate turnover is calculated on an all-India basis for a person registered under the same Permanent Account Number (PAN). It is the total value of all outward supplies, including:

Taxable supplies,
Exempt supplies,
Exports of goods or services or both, and
Inter-state supplies.

However, the following are excluded from aggregate turnover:

The value of inward supplies on which tax is payable under the reverse charge mechanism, and
Taxes, including cess, paid under GST law.

Additionally, a person providing exempt services, such as services involving deposits, loans, or advances where the consideration is in the form of interest or discount, is not disqualified from opting for the Composition Scheme.

While calculating aggregate turnover for eligibility under the Composition Scheme, the value of these exempt services, including interest or discount from deposits, loans, or advances, is excluded.

Registration and intimation under the scheme

To opt for the Composition Scheme under GST, registration under GST law is mandatory.

For Existing Registrants: A person already registered under previous tax laws and holding a provisional GST registration must submit an electronic intimation using FORM GST CMP-01 to opt for the Composition Scheme.
For New Applicants: A person not registered under the previous laws but applying for fresh registration under Rule 8 of the CGST Rules, 2017 can choose the scheme by providing the required details in Part B of FORM GST REG-01.
For Existing GST Registered Taxpayers: A registered taxpayer wishing to switch to the Composition Scheme must:
- Submit an electronic intimation in FORM GST CMP-02 before the start of the financial year for which the scheme is chosen.
- File a declaration in FORM GST ITC-03 as per Rule 44(4) of the CGST Rules, 2017 within 90 days from the start of the relevant financial year, reporting details of ITC reversal.
PAN-based Conditions:
- A person with a single PAN who is registered in multiple states can only opt for the Composition Scheme if all registered entities under the same PAN comply with the conditions and collectively opt for the scheme.
- A taxpayer cannot choose the Composition Scheme for one state and exclude other states under the same PAN.
Withdrawal or Denial:
- If one registered entity under the same PAN withdraws from or is denied the scheme, the decision applies to all other entities registered under that PAN.

This ensures uniformity in applying the Composition Scheme across all registrations linked to a single PAN.

Effective Date for composition levy

The effective date for opting into the Composition Scheme under GST depends on the taxpayer's circumstances:

For Taxpayers with Provisional Registration (under existing laws): If the taxpayer notifies their intention to opt for the Composition Scheme either before the appointed day (July 1, 2017) or within 30 days (or the extended period) of the appointed day, the scheme becomes effective from July 1, 2017.
For Existing GST-Registered Taxpayers (FORM GST CMP-02): If a registered taxpayer opts for the Composition Scheme through FORM GST CMP-02, the scheme takes effect from the start of the financial year for which the option is exercised.
For New Applicants (FORM GST REG-01): For individuals applying for fresh GST registration via FORM GST REG-01, the Composition Scheme becomes effective from the date of registration.

Persons who are not eligible for the scheme

The following categories of taxable persons are not eligible to opt for the Composition Scheme under GST:

Casual Taxable Persons: Individuals without a fixed place of business.
Non-Resident Taxable Persons: Those who do not have residency in India.
Service Providers: Suppliers of services, except those providing restaurant services.
Inter-State Suppliers: Individuals engaged in the inter-state supply of goods.
Suppliers of Non-Taxable Goods: Those dealing in goods that are not subject to GST.
Suppliers Using E-Commerce Platforms: Persons supplying goods through an Electronic Commerce Operator (ECO) who is required to collect tax at source under Section 52 of the CGST Act.
Stock from Inter-State or Imports: Persons whose stock on the appointed date includes goods purchased through inter-state trade or commerce, imported goods, or items received from branches, agents, or principals located outside the state.
Stock from Unregistered Suppliers: Persons holding stock purchased from unregistered suppliers unless tax has been paid under the reverse charge mechanism.
Manufacturers of Notified Goods: Persons engaged in manufacturing goods specified under Section 10(2)(e) of the CGST Act, whether during the 2016-17 financial year or later.

Rate of Tax under the scheme

The Composition Scheme under GST prescribes three different tax rates for distinct categories of suppliers:

Manufacturers: Eligible manufacturers are required to pay tax at the rate of 1% of their turnover within a state or Union Territory, which is split equally as 0.5% CGST and 0.5% SGST/UTGST.
Restaurant Service Providers: Individuals supplying restaurant services must pay tax at the rate of 5% of their turnover within a state or Union Territory, divided as 2.5% CGST and 2.5% SGST/UTGST.
Other Suppliers (Mixed or Service Providers): Other eligible suppliers, such as service providers or those dealing with mixed supplies, are liable to pay 1% of their turnover within a state or Union Territory, split as 0.5% CGST and 0.5% SGST/UTGST.

Conditions & Restrictions under the scheme

A person opting for the Composition Scheme must comply with the following conditions:

Issue Bill of Supply: Bills of supply must be issued in the prescribed format.
Pay Taxes on Purchases: All taxes, including those payable under the reverse charge mechanism, must be paid on purchases.
No Input Tax Credit: The person cannot claim input tax credit on their purchases.
Display Composition Status: The words “Composition Taxable Person” must be displayed on a notice board or signboard at a prominent location in every business premises.
Restrictions on Stock Purchased from Outside: If a person, who has been granted provisional registration under existing laws, opts for the Composition Scheme, they will be ineligible if the goods in stock on the appointed day were purchased through inter-state trade, imported from outside India, or received from branches or agents outside the state.

Withdraw from the scheme

A person who opts for the Composition Levy Scheme can continue paying tax under this scheme as long as they meet the eligibility criteria and conditions. There is no need to submit a fresh application each year. However, if the individual fails to satisfy any of the conditions, they must begin paying tax under Section 9(1) of the CGST Act, 2017, from the date they no longer qualify for the scheme. They must also issue tax invoices for all taxable supplies made after that point and submit an intimation to withdraw from the scheme.

Voluntary Withdrawal: If a taxpayer wishes to voluntarily withdraw from the Composition Scheme, the following steps must be taken:

File an Application: The taxpayer must submit a signed application in Form GST CMP-04.
Provide Stock Details: An electronic statement must be submitted in Form GST ITC-01, detailing the stock of inputs such as raw materials, semi-finished, or finished goods held by the taxpayer on the date of withdrawal. This must be done within 30 days of opting out of the scheme.

Note: According to Rule 40 of the CGST Rules, 2017, if the input tax credit exceeds Rs. 2,00,000, the declaration in Form GST ITC-01 must be certified by a Chartered Accountant or Cost Accountant.

Amendment

1. The due date to file GSTR-4 for FY 2020-21 was extended from 30th April 2021 to 31st May 2021.
2. Form CMP-08 that was due by 18th April 2021 for January-March 2021 has been given a relaxation in the interest charges. No interest for filing on or before 8th May, interest reduced to 9% between 9th May and 23rd May, but charged at 18% thereafter.
3. The time limit to file ITC-03 by newly opted composition taxable persons for FY 2021-22 is extended up to 31st May 2021.