Understanding the GST Composition Scheme: Eligibility, Benefits, and Compliance

The Goods and Services Tax (GST) Composition Scheme provides a streamlined approach for small taxpayers. This scheme simplifies GST compliance, allowing eligible businesses to remit GST at a predetermined rate based on their turnover. Generally, taxpayers with an annual turnover below Rs. 1.5 crore can opt for this scheme. The Central Board of Indirect Taxes and Customs (CBIC) confirmed the increase of this threshold from Rs. 1.0 crore to Rs. 1.5 crore.

Eligibility for the Composition Scheme

Businesses with an annual turnover below Rs. 1.5 crore are typically eligible for the Composition Scheme. For entities in North-Eastern states and Himachal Pradesh, this limit is set at Rs. 75 lakh. As per the CGST (Amendment) Act, 2018, composition dealers may also provide services up to a value equivalent to ten percent of their turnover or Rs. 5 lakh, whichever amount is greater. This amendment became effective on February 1, 2019. It is important to note that the total turnover of all businesses operating under the same Permanent Account Number (PAN) must be considered when calculating this threshold.

Businesses Ineligible for the Composition Scheme

• Manufacturers of specific goods such as ice cream, pan masala, or tobacco products.
• Individuals engaged in inter-state supplies or providing exempt supplies.
• A casual taxable person or a non-resident taxable person.
• A person supplying services through an e-commerce operator who is required to collect Tax Collected at Source (TCS) under Section 52 of the CGST Act.
• Manufacturers of goods or suppliers of services as specifically notified by the government based on recommendations from the GST Council.

Essential Conditions for Availing the Composition Scheme

To qualify for the Composition Scheme, taxpayers must adhere to the following stipulations:

• Dealers opting for this scheme cannot claim Input Tax Credit (ITC).
• The dealer is restricted from supplying goods that are not taxable under GST, such as alcoholic beverages.
• Taxpayers must pay tax at standard rates for transactions conducted under the Reverse Charge Mechanism.
• If a taxable person operates multiple business segments (e.g., textiles, electronics, groceries) under the same PAN, all such businesses must collectively register under the Composition Scheme or collectively opt out.
• The phrase ‘composition taxable person’ must be visibly displayed on all notices and signboards at the business premises.
• Each bill of supply issued by the taxpayer must clearly state ‘composition taxable person’.
• From February 1, 2019, manufacturers and traders are permitted to supply services up to ten percent of their turnover or Rs. 5 lakh, whichever is higher, as per the CGST (Amendment) Act, 2018.

How to Opt for the Composition Scheme

To enroll in the Composition Scheme, taxpayers must submit Form GST CMP-02 to the government. This process can be completed online via the GST Portal. This intimation is required at the commencement of each financial year for dealers intending to avail the Composition Scheme.

Billing Procedures for Composition Dealers

A composition dealer is not authorized to issue a tax invoice because they cannot levy tax on their customers. Instead, they are responsible for paying the tax from their own funds. Consequently, such dealers must issue a Bill of Supply. The Bill of Supply should explicitly bear the statement “composition taxable person, not eligible to collect tax on supplies” at the top.

GST Rates for Composition Dealers

The following table outlines the applicable tax rates on turnover for composition dealers:

As per the notification dated January 1, 2018, turnover for traders is defined as ‘turnover of taxable supplies of goods’.

GST Payment Obligations for Composition Dealers

Composition dealers are required to pay GST from their own resources for the supplies they make. The GST payment includes:

• GST applicable to supplies made.
• Tax liabilities arising from the reverse charge mechanism.
• Tax on purchases made from unregistered dealers.

Note: Tax on purchases from unregistered dealers applies only to specified categories of goods and services and a notified class of registered persons, effective February 1, 2019, but requires further notification to be implemented.

Returns to be Filed by a Composition Dealer

Composition dealers must file a quarterly statement, Form CMP-08, by the 18th of the month following the end of the quarter. Additionally, an annual return in Form GSTR-4 must be filed by April 30th of the subsequent financial year, starting from FY 2019-20. Form GSTR-9A, an annual return due by December 31st of the next financial year, was waived for FY 2017-18 and FY 2019-20. Importantly, dealers registered under the Composition Scheme are not mandated to maintain extensive records.

Advantages of the Composition Scheme

Registering under the Composition Scheme offers several benefits:

• Reduced compliance burden, including fewer returns, simplified record-keeping, and easier invoice issuance.
• Lower tax liability due to reduced tax rates.
• Enhanced liquidity resulting from the decreased tax burden.

Disadvantages of the Composition Scheme

• Business operations are restricted to a limited geographical territory, as inter-state transactions are prohibited.
• Composition dealers cannot avail Input Tax Credit (ITC).
• Taxpayers are ineligible to supply non-taxable goods under GST, such as alcohol, or to conduct sales through an e-commerce portal.