Understanding the GST Composition Scheme: Key Aspects for Businesses
The GST Composition Scheme provides a simplified tax option for small businesses in India. This article clarifies eligibility, benefits, and drawbacks, along with details on turnover calculation and applicable tax rates. It also covers aspects like reverse charge mechanism, input tax credit, invoicing, return filing, and rules for transitioning between schemes, ensuring a comprehensive understanding for compliant operations.
The Goods and Services Tax (GST) Composition Scheme offers a simplified tax compliance option for small businesses. This article addresses common inquiries regarding this scheme, detailing who qualifies, its advantages, disadvantages, and operational aspects.
Recent Scheme Updates
- February 6, 2023: Businesses eligible for the composition scheme for FY 2023-24 could apply via Form CMP-02 on the GST portal by March 31, 2023.
- July 5, 2022: The deadline for GSTR-4 for FY 2021-22 was extended with a late fee waiver until July 28, 2022, per Notification 12/2022. Additionally, the due date for CMP-08 for the April-June 2022 quarter was extended to July 31, 2022, by the same notification.
- May 26, 2022: CGST Notification no. 7/2022 waived the late fee for GSTR-4 for FY 2021-22 if filed between May 1 and June 30, 2022.
- February 24, 2022: Taxable individuals opting for or already under the composition scheme for FY 2022-23 needed to submit Form CMP-02 by March 31, 2022.
- May 28, 2021: Following the 43rd GST Council meeting and a CBIC notification:
- Interest relief was provided for delayed CMP-08 filings for Jan-March 2021. No interest was charged until May 3; 9% reduced interest applied until June 17, and 18% thereafter.
- The GSTR-4 due date for FY 2020-21 was extended to July 31, 2021.
- Maximum late fees for GSTR-4 were capped at Rs. 500 for nil returns and Rs. 2000 for other filings.
- May 1, 2021:
- The GSTR-4 due date for FY 2020-21 was extended from April 30, 2021, to May 31, 2021.
- CMP-08 for Jan-March 2021, due by April 18, 2021, received interest charge relaxations: no interest until May 8, 9% interest from May 9-23, and 18% thereafter.
- The deadline for newly opted composition taxable persons to file ITC-03 for FY 2021-22 was extended to May 31, 2021.
Key Questions for Businesses on the Composition Scheme
1. Who is eligible for the GST composition scheme?
Businesses with an annual aggregate turnover up to Rs. 1.5 crore can choose the composition scheme. The total turnover from all businesses operating under the same PAN must be combined for this calculation. Primarily, goods manufacturers, dealers, and non-alcohol-serving restaurants can opt for this scheme under Section 10. Service providers have access to a similar scheme, where the turnover limit is Rs. 50 lakh, as per CGST (Rate) notification no. 2/2019 dated March 7, 2019.
Additionally, a distinct composition scheme was introduced on March 31, 2022, for manufacturers of specific brick types (including building bricks, bricks of fossil meals, siliceous earths, earthen or roofing tiles, and fly ash bricks and blocks). Those who choose this option pay a 6% tax rate without claiming input tax credit.
The following entities are not eligible for the composition scheme:
- Manufacturers of ice cream, pan masala, or tobacco.
- Individuals making inter-state supplies.
- Casual taxable persons.
- Non-resident taxable persons.
- Individuals supplying non-taxable goods under GST law.
- Suppliers who have surpassed the specified turnover threshold.
- Businesses supplying goods through an e-commerce operator.
2. What are the advantages of joining the composition scheme?
The benefits of this scheme include:
- Simplified and fewer compliance requirements (e.g., returns, record-keeping, invoice issuance).
- Quarterly tax payments.
- Reduced tax liability.
- Enhanced liquidity due to lower tax rates.
3. What are the drawbacks of the composition scheme?
Disadvantages include:
- Restricted business territory, as inter-state transactions are prohibited.
- Ineligibility for input tax credit (ITC).
- Inability to supply non-taxable goods under GST, such as alcohol, or goods through an e-commerce portal.
4. How is aggregate turnover calculated for the composition scheme?
Aggregate turnover is determined on an all-India basis for individuals sharing the same Permanent Account Number (PAN). It comprises the total value of all outward supplies, including:
- Taxable supplies.
- Exempt supplies.
- Exports of goods or services, or both.
- Inter-state supplies.
However, this calculation excludes the value of inward supplies subject to tax under the reverse charge mechanism, and any taxes (including cess) paid under GST law.
5. What is the applicable tax rate for a composition taxable person?
The following table outlines the GST rates on turnover within a state for different business types:
| Type of Business | CGST | SGST | Total |
|---|---|---|---|
| Manufacturers and Traders (Goods) | 0.5% | 0.5% | 1% |
| Restaurants not serving Alcohol | 2.5% | 2.5% | 5% |
| Service Providers | 3% | 3% | 6% |
| Manufacturers of bricks (including building bricks, bricks of fossil meals or similar siliceous earths, earthen or roofing tiles, and fly ash bricks and blocks) | 3% | 3% | 6% |
6. What is the effective date for the composition levy?
For taxpayers opting into the scheme by filing Form GST CMP-02, the effective date is the start of the financial year. For individuals applying for new registration via Form GST REG-01, the effective date aligns with the registration date specified under sub-rule 2 or 3 of Rule 10 of CGST Rules, 2017.
7. Is the liability to pay taxes under the Reverse Charge Mechanism included in the Composition Scheme?
A composition dealer must pay tax under the reverse charge mechanism when applicable. The tax rate applied to these supplies is the standard GST rate, not the composition scheme rate. Furthermore, composition dealers cannot claim input tax credit for taxes paid under the reverse charge mechanism.
8. Do I need to pay tax when purchasing goods from an unregistered dealer?
Tax at normal rates was required on purchases from unregistered dealers only for July and August 2017. From September 2017 onwards, such tax payments are generally not needed, except for taxpayers in real estate. Builders must pay tax on a reverse charge basis at 18% if their purchases from GST-registered vendors fall short of 80%. No input tax credit is available for tax paid under reverse charge in this scenario.
9. Should I pay IGST on inter-state purchases subject to reverse charge?
A composition dealer is not required to pay IGST. Dealers obligated to pay tax under reverse charge, import services, or purchase from an unregistered dealer only need to pay CGST and SGST.
10. How is the tax amount determined?
A composition dealer is required to pay tax at a specific rate on their total sales. Additionally, tax must be paid under reverse charge for specified purchases, purchases from unregistered dealers, and imported services.
Thus, the Total GST payable equals: Tax on supplies (after adjusting for advances and returned goods) + tax on B2B transactions where reverse charge applies + tax on B2B purchases from unregistered suppliers (if applicable) + Tax on Imported Services.
The tax rate for transactions under reverse charge, purchases from unregistered dealers, and imported services will be at normal rates, i.e., the standard rates applicable to those specific supplies. The composition scheme rates apply only to a composition dealer's sales.
11. Are composition dealers required to keep detailed records?
No, a dealer registered under the composition scheme is not mandated to maintain the extensive detailed records required of a regular taxpayer.
12. Can composition dealers claim Input Tax Credit?
No, composition dealers are explicitly prohibited from claiming input tax credit (ITC) on their purchases.
13. Can a composition dealer issue tax invoices?
Composition dealers must issue a Bill of Supply instead of a tax invoice. This is because they pay tax out of their own pocket and are not permitted to collect GST from customers.
14. What returns must a composition dealer file?
Composition dealers are required to pay tax quarterly using a challan-cum-statement, Form CMP-08.
They must also file an annual return, Form GSTR-4.
15. Can a composition dealer collect tax from customers?
No, a composition dealer is not allowed to collect composition tax from the buyer.
16. Can a dealer involved in inter-state supplies opt for the composition scheme?
The composition scheme is exclusively available for dealers conducting intra-state supplies. Dealers engaged in inter-state supplies must opt out of this scheme.
17. What were the transitional provisions for businesses moving from the previous composition scheme to regular GST taxation?
Taxpayers previously registered under the VAT composition scheme were allowed to claim credit for inputs held in stock, semi-finished goods, or finished goods on the day prior to switching out of the composition scheme.
18. What conditions apply for claiming input credit on stock during transition?
To claim input credit during the transition from the composition scheme to the normal scheme, taxpayers must meet these conditions:
- The inputs or goods must be used for making taxable supplies.
- CENVAT Credit would have been eligible under the previous tax regime but could not be claimed under the composition scheme.
- Input Tax Credit (ITC) is eligible under the current GST regime.
- The taxpayer possesses invoices for input tax paid on such goods.
- Invoices should not be older than one year from July 1, 2017 (i.e., not dated before July 1, 2016).
19. How is input credit handled when transitioning from the normal scheme to the composition scheme?
When a taxpayer shifts from the normal scheme to the composition scheme, they are liable to pay an amount equivalent to the input tax credit on inputs held in stock immediately before the switch. Any remaining input tax credit balance in the credit ledger will lapse after this payment.
20. Can I switch between the composition scheme and the normal scheme annually?
Yes, it is possible to switch between the composition scheme and the normal scheme based on your turnover each year. However, be aware that this will impact your invoicing and return filing processes. The declaration for this change must be submitted on the GST Portal.
21. If I have multiple branches, does the composition scheme apply to each separately?
The composition scheme is considered applicable to all businesses associated with a single PAN.
22. Is it true that composition dealers can offer products at lower prices than regular dealers?
Yes, this can be true. Composition dealers are prohibited from charging GST on their Bills of Supply. Consequently, the final consumer typically pays a lower amount.
23. Can I opt into the composition scheme at any time during the year?
No. A registered taxpayer must submit a declaration on the GST Portal before the start of each financial year to opt into the scheme. This cannot be done mid-year. Form CMP-02 is used for this purpose by both goods and service providers.
24. What happens if I opt out of the composition scheme mid-year?
If a dealer opts out of the composition scheme mid-year, all standard GST rules apply from the date of opting out. For instance, if a dealer exits on October 15, 2020, they would need to file two CMP-08 forms (for July–September and for the 15 days of October). They would also need to file GSTR-1 and GSTR-3B for the period from October 15, 2020, until the end of that month.