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Understanding the Advantages of GST Composition Scheme Registration

The GST Composition Scheme offers small taxpayers in India significant advantages, including simplified compliance with quarterly return filings and a reduced tax burden through nominal tax rates. This scheme aims to enhance business liquidity by minimizing blocked working capital and promotes fair competition by allowing smaller entities to offer competitive pricing. However, it is primarily for intrastate suppliers, with specific turnover thresholds and ineligibility for interstate or import-export activities.

📖 4 min read read🏷️ GST Composition Scheme

This article explores the advantages of enrolling in the Goods and Services Tax (GST) Composition Scheme, even for businesses not mandatorily required to register based on their turnover.

Recent Scheme Updates

Key updates regarding the Composition Scheme include:

  • July 5, 2022: The deadline for GSTR-4 for FY 2021-22 was extended with a late fee waiver until July 28, 2022 (Notification 12/2022). Additionally, the CMP-08 due date for April-June 2022 was extended to July 31, 2022 (Notification 12/2022).
  • May 26, 2022: A waiver for the GSTR-4 late fee for FY 2021-22 was granted if filed between May 1 and June 30, 2022, as per CGST Notification No. 7/2022.
  • February 24, 2022: Taxpayers under the composition scheme, or those wishing to opt in for FY 2022-23, were required to submit a declaration in Form CMP-02 on the GST portal by March 31, 2022.
  • May 28, 2021: Following the 43rd GST Council meeting, interest relief was provided for CMP-08 filings for the Jan-March 2021 quarter. No interest was charged until May 3, a reduced 9% was applied until June 17, and 18% thereafter. The GSTR-4 due date for FY 2020-21 was extended to July 31, 2021. The maximum late fee for GSTR-4 was capped at Rs. 500 for nil returns and Rs. 2000 for others.
  • May 1, 2021: The GSTR-4 filing deadline for FY 2020-21 was extended from April 30 to May 31, 2021. Interest charges for CMP-08 (Jan-March 2021) were relaxed: no interest until May 8, 9% between May 9 and May 23, and 18% thereafter. The deadline for newly opted composition taxpayers to file ITC-03 for FY 2021-22 was extended to May 31, 2021.

Understanding the GST Composition Scheme

The Composition Scheme, outlined in Section 10 of GST law, aims to reduce the compliance burden for small taxpayers. This initiative was designed for millions of taxpayers transitioning to the GST regime who might lack the resources or expertise for full GST compliance due to limited turnover.

Under this scheme, taxpayers with turnover below a certain threshold can opt for composition registration instead of standard registration. They pay taxes on supplies at a nominal rate but cannot issue tax invoices or claim input tax credit.

The CGST (Amendment) Act, 2018, effective February 1, 2019, allows composition dealers to supply services up to 10% of their turnover or Rs. 5 lakhs, whichever is higher. The GST Council further proposed increasing this limit for service providers during its 32nd meeting on January 10, 2019.

Threshold Updates

  • February 1, 2019: The Central Board of Indirect Taxes and Customs (CBIC) increased the turnover threshold for goods suppliers from Rs. 1 crore to Rs. 1.5 crores.
  • January 10, 2019: Following the 32nd GST Council Meeting, service providers became eligible for the Composition Tax Scheme with a turnover threshold of Rs. 50 lakhs.

Advantages of Enrolling in the GST Composition Scheme

There are several compelling reasons to register as a supplier under the Composition Scheme:

  • Simplified Compliance: Taxpayers under this scheme only need to file quarterly returns, significantly reducing record-keeping worries and allowing them to concentrate more on business operations rather than extensive compliance procedures.
  • Reduced Tax Burden: A key advantage is the nominal tax rate applicable to taxpayers under the GST law's Composition Scheme. Tax rates are calculated as a percentage of turnover. As per Notification 01/2018 dated January 1, 2018, turnover for traders is specifically defined as 'Turnover of taxable supplies of goods'.

The table below illustrates the financial benefit for small taxpayers:

ParticularsDescriptionRegistered as a Normal TaxpayerDescriptionRegistered as a Taxpayer under Composition Scheme
Total Sale Value (MRP)118000118000
Sales Value (exclusive of taxes)100000118000
GST @ 18% on sales18000GST @ 1% on sales1180*
Input Purchases7000070000
GST @ 18% on inputs1260012600
Total Purchase Value8260082600
Net GST Liability54001180
Net Profit3000034220

*Under the Composition Scheme, a supplier cannot explicitly collect tax on an invoice. The breakdown above is solely for illustrative purposes. This example demonstrates that a composition scheme supplier selling goods at similar rates can achieve higher profit and face lower tax liability compared to a normal taxpayer.

  • Enhanced Liquidity: Registering as a composition supplier greatly improves a business's fund availability. A normal taxpayer must pay output tax at the standard rate, and input tax credit is only available after their supplier files a return and reconciliation occurs. This can tie up a significant portion of working capital. In contrast, a composition scheme supplier has a minimal output liability and is not concerned with their supplier's return filings. Referring to the example, a normal taxpayer faces a higher tax liability of Rs. 4220 (5400 - 1180) and has Rs. 12,600 blocked as input credit. A composition scheme supplier, however, only pays Rs. 1180.
  • Fair Competition: Choosing the Composition Scheme does not mean losing a competitive edge. Since composition scheme suppliers often have better profit margins than larger taxpayers, they can leverage this to offer competitive prices, thereby gaining a stronger foothold in local markets. This scheme thus protects the interests of small suppliers engaged in intrastate transactions and fosters a sustainable, competitive supply environment.

In conclusion, the Composition Scheme acts as a catalyst for growth among small taxpayers primarily involved in intrastate transactions, excluding import-export activities. Taxpayers conducting interstate transactions or engaging in import-export are ineligible for this scheme and must register as normal taxpayers.

Frequently Asked Questions

What is the primary goal of the GST Composition Scheme?
The main objective of the GST Composition Scheme is to alleviate the compliance burden for small taxpayers by offering a simplified tax mechanism and reduced procedural requirements.
Who is eligible to register under the GST Composition Scheme?
Businesses with an annual turnover below a specified threshold (currently Rs. 1.5 crores for goods suppliers and Rs. 50 lakhs for service providers in most states) are generally eligible, provided they meet other conditions like not engaging in interstate or import-export transactions.
What are the main differences between a normal GST taxpayer and a composition taxpayer?
Normal GST taxpayers charge GST on their invoices and can claim Input Tax Credit (ITC), while composition taxpayers pay a fixed percentage of their turnover as tax, cannot charge GST separately on invoices, and are not eligible to claim ITC.
Can a composition dealer claim Input Tax Credit (ITC)?
No, a composition dealer is explicitly not allowed to claim Input Tax Credit (ITC) on their purchases.
Are there any restrictions on the type of transactions a composition dealer can undertake?
Yes, composition dealers are primarily restricted to intrastate supply of goods and specified services. They cannot engage in interstate supply, import or export of goods, or supply goods through an e-commerce operator.
How often do composition dealers need to file returns?
Composition dealers are typically required to file quarterly returns, which significantly reduces their compliance frequency compared to normal taxpayers.