Understanding the GST Composition Scheme: Key Information for Businesses

This article addresses fundamental questions regarding the Goods and Services Tax (GST) Composition Scheme.

Recent Updates on the Composition Scheme

February 6, 2023: For fiscal year 2023-24, eligible taxpayers could enroll in the Composition Scheme by submitting 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. Additionally, the due date for CMP-08 for the April-June 2022 quarter was extended to July 31.
May 26, 2022: A CGST notification waived late fees for GSTR-4 filings for FY 2021-22 made between May 1 and June 30, 2022.
February 24, 2022: Businesses wishing to opt into the scheme for fiscal year 2022-23 were required to file Form CMP-02 by March 31, 2022.
May 28, 2021: The 43rd GST Council meeting announced interest relief for delayed CMP-08 filings for January-March 2021. No interest was charged until May 3, followed by a reduced 9% rate until June 17, and 18% thereafter. The GSTR-4 due date for FY 2020-21 was extended to July 31, 2021. Additionally, maximum late fees for GSTR-4 were 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 pushed to May 31, 2021. Interest relief was also provided for CMP-08 filings for January-March 2021, with no interest until May 8, a 9% rate until May 23, and 18% subsequently. New composition taxpayers for FY 2021-22 had an extended deadline until May 31, 2021, to file ITC-03.

Eligibility for the GST Composition Scheme

Businesses whose aggregate annual turnover does not exceed Rs. 1.5 crore are generally eligible for the composition scheme. This turnover calculation must consolidate all businesses operating under the same Permanent Account Number (PAN). Specifically, manufacturers of goods, dealers, and restaurants (excluding those serving alcohol) can select the composition scheme under Section 10. Service providers have a separate but similar scheme, introduced via CGST (Rate) notification no. 2/2019, with a turnover limit of Rs. 50 lakh. Additionally, as of March 31, 2022, a distinct composition scheme was introduced for manufacturers of certain brick types (building bricks, bricks of fossil meals or similar siliceous earths, earthen or roofing tiles, and fly ash bricks and blocks). Businesses under this specific scheme pay a 6% tax rate without eligibility for input tax credit. However, certain entities are explicitly excluded from opting into the composition scheme:

Manufacturers of specific goods like ice cream, pan masala, or tobacco.
Individuals or entities involved in inter-state supplies.
Casual taxable persons.
Non-resident taxable persons.
Suppliers of non-taxable goods under GST law.
Businesses that have surpassed the designated turnover limit for the scheme.
Entities supplying goods via an e-commerce operator.

Advantages of Selecting the Composition Scheme

Choosing the composition scheme offers several advantages:

Streamlined and fewer compliance requirements (e.g., simplified returns, record-keeping, and invoice issuance).
Quarterly tax payments.
Reduced overall tax liability.
Enhanced liquidity due to lower tax rates.

Drawbacks of the Composition Scheme

Despite its benefits, the composition scheme also has certain disadvantages:

Restricted business territory, as inter-state transactions are prohibited for dealers under this scheme.
Ineligibility for input tax credit (ITC) for composition dealers.
Taxpayers cannot supply goods exempt from GST, such as alcohol, or process sales through e-commerce portals.

Calculating Aggregate Turnover for Composition Scheme Eligibility

Aggregate turnover is calculated on an all-India basis for all businesses operating under a single Permanent Account Number (PAN). This calculation includes the total value of all outward supplies, encompassing: taxable supplies, exempt supplies, exports of goods or services, and inter-state supplies. Excluded from this calculation are the value of inward supplies subject to reverse charge and any taxes (including cess) paid under GST law.

Applicable GST Rates for Composition Taxpayers

The following chart outlines the applicable GST rates on turnover within the state for various business types under the composition scheme:

| Business Type | Central GST (CGST) | State GST (SGST) | Total Tax | |---| | Manufacturers and Traders (Goods) | 0.5% | 0.5% | 1% | | Restaurants (excluding alcohol service) | 2.5% | 2.5% | 5% | | Service Providers | 3% | 3% | 6% | | Brick Manufacturers (including building, fossil meal, siliceous earth, earthen/roofing tiles, and fly ash bricks/blocks) | 3% | 3% | 6% |

Effective Date for Composition Levy

For taxpayers selecting the composition scheme by filing Form GST CMP-02, the levy becomes effective from the start of the financial year. However, for individuals applying for new registration using Form GST REG-01, the effective date is determined by sub-rule 2 or 3 of Rule 10 of the CGST Rules, 2017.

Reverse Charge Mechanism (RCM) and Composition Scheme

Composition dealers are obligated to pay tax under the Reverse Charge Mechanism (RCM) where it applies. The GST rate for these supplies is the standard rate applicable to them, not the special composition scheme rate. Furthermore, composition dealers cannot claim input tax credit for taxes paid under RCM.

Purchases from Unregistered Dealers

For purchases made from unregistered dealers, tax at normal rates was only applicable for July and August 2017. Since September 2017, such purchases generally do not require tax payment, with the exception of the real estate sector. Builders must pay an 18% tax under reverse charge if their purchases from GST-registered vendors fall short by more than 80%. No input tax credit can be claimed for tax paid under reverse charge in this scenario.

IGST on Interstate Purchases with Reverse Charge

Composition dealers are not required to pay Integrated Goods and Services Tax (IGST). Instead, when a dealer is liable for tax under reverse charge, or for importing services, or purchasing from an unregistered dealer, they must only pay Central GST (CGST) and State GST (SGST).

Calculating the Total Tax Amount

A composition dealer calculates the tax amount based on a specific rate applied to their total sales. Additionally, tax must be paid under reverse charge for certain specified purchases, acquisitions from unregistered dealers, and imported services. The total GST payable is computed as follows: Tax on outward supplies (after adjusting for advances and returned goods) + Tax on applicable B2B transactions under reverse charge + Tax on B2B purchases from unregistered suppliers (if applicable) + Tax on imported services. It is important to note that the tax rates for transactions under reverse charge, purchases from unregistered dealers, and imported services are the normal GST rates applicable to those specific supplies, not the reduced rates of the composition scheme, which only apply to the dealer's sales.

Record Maintenance Requirements

Unlike regular taxpayers, a dealer enrolled in the composition scheme is not obligated to maintain extensive detailed records.

Input Tax Credit (ITC) for Composition Dealers

No, composition dealers are prohibited from claiming input tax credit (ITC) on the GST paid for their purchases.

Issuing Tax Invoices

Composition dealers are required to issue a Bill of Supply instead of a tax invoice. This is because the dealer is responsible for paying the tax directly and is not permitted to collect GST from customers.

Filing Requirements for Composition Dealers

Composition dealers must pay their taxes quarterly using a challan-cum-statement, known as Form CMP-08. Additionally, they are mandated to file an annual return using Form GSTR-4.

Collecting Tax from Customers

No, composition dealers are expressly forbidden from collecting the composition tax amount from their customers.

Interstate Supplies and Composition Scheme Eligibility

The composition scheme is exclusively available to dealers making intra-state (within the same state) supplies. Any dealer engaging in inter-state supplies must exit the scheme.

Transition from Previous Composition Scheme to Regular GST

Businesses previously registered under the VAT composition scheme, upon transitioning to regular GST taxation, were permitted to claim input tax credit for inputs, semi-finished goods, or finished goods held in stock immediately before opting out of the composition scheme.

Conditions for Claiming Input Credit on Transition Stock

To claim input credit on stock held during the transition from the composition scheme to the normal scheme, taxpayers must meet the following conditions:

The inputs or goods must be intended for use in making taxable supplies.
CENVAT Credit would have been eligible under the former tax regime, even if it couldn't be claimed under the composition scheme.
The input tax credit must be eligible for claim under the current GST regime.
The taxpayer must possess invoices for the input tax paid on such goods.
Invoices should not be older than one year from July 1, 2017 (meaning they must be dated July 1, 2016, or later).

Input Credit Treatment When Transitioning to Composition Scheme

When a taxpayer transitions from the normal GST scheme to the composition scheme, they are required to pay an amount equivalent to the input tax credit on inputs held in stock on the day preceding the switch. Any remaining balance of input tax credit in the credit ledger after this payment will lapse.

Switching Between Composition and Normal Schemes

Yes, businesses can switch between the composition scheme and the normal scheme annually, depending on their turnover. This change will impact invoicing practices and return filing procedures. The necessary declaration can be filed on the GST Portal.

Composition Scheme Applicability to Multiple Branches

The composition scheme applies to all businesses linked to a single Permanent Account Number (PAN), rather than individually to each branch.

Pricing by Composition Dealers

Yes, this statement is accurate. Composition dealers do not include GST on their bills of supply, which often results in a lower price for the end consumer compared to purchases from regular dealers.

Mid-Year Enrollment in Composition Scheme

No, enrollment in the composition scheme is not possible at any point during the year. A registered taxpayer must submit a declaration on the GST Portal using Form CMP-02 (applicable for both goods and service providers) before the start of each financial year to opt into the scheme.

Implications of Mid-Year Opt-Out from Composition Scheme

If a dealer chooses to exit the composition scheme mid-year, standard GST regulations become effective immediately from the date of opting out. For instance, if a dealer exits on October 15, 2020, they would need to file two CMP-08 statements: one for the July-September quarter and another for the partial October period (15 days). Additionally, the dealer would be required to file GSTR-1 and GSTR-3B for sales made from October 15, 2020, until the end of that month.