Composition scheme is beneficial for small businesses looking for easier compliance with lower GST rates. As per the composition scheme, a registered person is required to pay GST on the turnover.
In other words, the registered person opting to pay tax under the composition scheme needs only to ascertain the aggregate turnover and compute the tax thereon at a fixed rate, regardless of the actual GST rates applicable on the said outward supply.
The composition scheme cannot be opted for during the middle of a financial year, except in the case where the person obtains registration, and opts for composition scheme at the time of applying for GST registration.
Registered person planning to jump to composition scheme is required to file intimation before the commencement of the financial year for which he opts to pay tax under the composition scheme.
Under composition scheme, a dealer will get following benefits;
- Pay a fixed percentage as GST on gross turnover without availing benefit of input tax credit,
- Relaxation in the matter of maintenance of accounts and records,
- Simplified GST return system
Who is eligible for the composition scheme under GST law?
Small dealers with aggregate turnover of 1.5 Crore rupees in a financial year are eligible for composition scheme under the GST law.
For special categories of states, the aggregate turnover threshold is 75 Lakhs rupees.
This means, a registered person having aggregate turnover across all states under the same PAN not exceeding the above prescribed limit of 1.5 Crore / 75 Lakhs rupees in the preceding financial year will be eligible to opt for payment of tax under the GST composition scheme.
Who is not eligible for the GST composition scheme?
Businesses opted for the composition scheme can not supply goods or services to other registered taxpayers.
They cannot engage in inter-state supplies (with some exceptions).
This means if a person is planning to sell goods and/or services to a registered person or engage in inter-state sales, then that person will not be eligible for the GST composition scheme.
People who are making supply of goods through electronic commerce operators who are required to collect tax at source are not eligible to opt for composition schemes.
Manufacturers of following goods shall not be entitled to opt for composition scheme;
- Ice cream and other edible ice, whether or not containing cocoa
- Pan masala
- All goods i.e., tobacco and manufactured tobacco substitutes
- Aerated water
- Fly ash blocks
- Bricks of fossil meals or similar siliceous earths
- Building bricks
- Earthen or roofing tiles
A casual taxable person and a non-resident is not eligible to opt for composition scheme under GST.
GST rates under composition scheme
The tax rates under the composition scheme are lower than regular GST rates.
Here are the prescribed rates under GST composition scheme:
| In the case of | Rate of GST |
| Manufacturers (other than manufacturers of notified goods) | 1% (0.5% CGST+ 0.5% SGST) of the turnover in the State/UT |
| Food/ restaurant services | 5% (2.5% CGST+ 2.5% SGST) of the turnover in the State/ UT |
| Other suppliers | 1% (0.5% CGST+ 0.5% SGST) of the turnover in the State/ UT |
Composition suppliers will not be entitled to collect taxes.
The tax rate will be applicable on the ‘turnover in state’ particular to a taxable person, which should be paid by him in the state in which he has obtained registration.
The composition scheme offers the option to remit GST on the turnover as against outward supply-wise payment of taxes.
In other words, the registered person opting to pay tax under the composition scheme needs only to ascertain the aggregate turnover and compute the tax thereon at a fixed rate, regardless of the actual rate of tax applicable on the said outward supply.
Tax is required to be paid quarterly on the basis of turnover.
GST paid by the supplier under composition scheme cannot be treated as input tax either for the composition supplier or for the recipient of the supplies.
The composition taxable person shall mention the words “composition taxable person, not eligible to collect tax on supplies” at the top of the bill of supply issued by him.
They are also required to mention the words “composition taxable person” on every notice or signboard displayed at a prominent place at his principal place of business and at every additional place or places of business.
Input tax credit under composition scheme
Businesses opting for composition scheme can not avail input tax credit under GST law.
This means, they can not offset the GST amount paid on input with the GST paid on sales.
Composition suppliers, being recipients of supplies on which tax is payable on reverse charge basis, will have to remit tax at the applicable rates, and not the concessional composition tax rates.
GST returns for composition scheme
Under the Composition Scheme, businesses have simplified GST return filing requirements.
Every person registered as composition taxpayer is required to furnish following statement / GST return:
- Quarterly GST return in Form GSTR-4 has to be filed quarterly for every quarter on or before 18th of the month following the quarter.
- Statement on quarterly basis containing the details of payment of self-assessed tax in Form GST CMP-08 within 18 days from the end of the relevant quarter to which such return pertains;
- GST annual return in Form GSTR-9A has to be filed annually by December 31 of the following financial year. GSTR-9A provides a summary of the quarterly returns filed during the financial year.
If the composition taxpayer switches over to become a regular taxpayer, he will be entitled to take input tax in respect of inputs held in stock qon the day immediately preceding the date from which he becomes liable to pay tax under section 9 (regular taxpayer).
Mandatory requirements for opting GST composition scheme
Every notice or signboard in every registered place of business, displayed at a prominent place, shall carry the words “Composition taxable person”.
Every bill of supply issued by the composition suppliers shall carry the declaration “Composition taxable person, not eligible to collect tax on supplies” on top of the bill.
The composition taxpayer is prohibited from collecting any GST/ Cess applicable on the outward supplies. Accordingly, the recipients of supply would also not be eligible to claim any credits where the inward supply is from a composition taxpayer.
The composition taxpayer is not entitled to claim credit in respect of taxes paid by him on any of the inward supplies, including inward supplies on which he pays tax under reverse charge mechanism (RCM).
A Composition supplier shall not be entitled to issue any tax invoice.
However, to effect supplies of goods / services, the supplier will have to issue a “Bill of Supply” without charging any tax amount on it.
The composition supplier shall be liable to make payment at the rate applicable on the supply in respect of every inward supply liable to tax under the reverse charge mechanism, regardless of the rate of tax that is applicable on him on the outward supplies affected by him.
It may be noted that the value of such inward supplies would not be included in the aggregate turnover of the composition taxpayer although the liability is discharged by him on such inward supplies.
Frequently Asked Questions (FAQs)
What is the difference between regular GST and composition GST?
The difference between regular GST and composition scheme GST primarily revolves around the compliance requirements and the way tax is calculated.
Here are the key differences;
| Regular GST | Composition Scheme GST |
| Any registered taxpayer can opt for regular GST | Designed for small taxpayers with a turnover below a specified limit (e.g., Rs 1.5 crore / Rs 75 lakhs depending on state of registration). |
| Tax is charged on the actual value of goods or services sold. Tax rates vary based on the nature of goods or services. | Tax is calculated as a fixed percentage of turnover, regardless of the actual sales value. |
| Higher compliance burden, including filing monthly or quarterly returns, and maintaining detailed records. | Simplified compliance; typically, quarterly returns and less record-keeping are required. |
| Can claim input tax credit | Cannot claim input tax credit and cannot sell inter-state (some exceptions may apply). |
Can a taxable person opt for composition scheme only for 1 unit out of three branches?
No
Composition scheme is applicable for all businesses held by a person with the same PAN.
Person with the same PAN means all the units across India having the same PAN as is issued under the Income Tax Law.
Can input tax credit be claimed under composition scheme?
No, a person under composition scheme can not claim input tax credit.
Under the composition scheme, businesses pay a fixed percentage of their turnover as tax and are not allowed to claim input tax credit (ITC) on purchases.
Can GST be collected if the person is registered under composition scheme?
No. The taxable person under the composition scheme is restricted from collecting GST from customers.
Customers who buy goods from a taxable person who is registered under composition scheme are not eligible for input tax credit for the supply of goods and/or services supplied by such composition dealers.
What is the threshold limit to opt for the composition scheme?
The threshold limit for composition scheme is up to 1.50 crores rupees of aggregate turnover in the preceding financial year.
Threshold limit is 75 lakhs rupees in case of specific category of states.
What happens when the composition dealer’s aggregate turnover crosses the threshold limit?
In such a case, from the day the taxable person crosses the threshold, the permission granted earlier is deemed to stand withdrawn, and he shall be liable to pay taxes under the regular scheme from such day.
