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The Composition Scheme under GST has been a gamechanger for MSME businesses to abate their tax burden. Designed especially for businesses with lesser than ₹1.5 crores in annual turnover, it provides several other benefits mainly reduced documentation processes and frequency of filling GST return filing forms. The GST Composition Scheme turnover limit was initially set to ₹1 crores. However, with changing times, market needs, and nature of businesses, it is currently revised to ₹1.5 crores in aggregate annual turnover.

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To leverage the benefits of the Composition Scheme under GST, businesses will have to submit their declaration form on the GST portal before the beginning of the financial year. Here we take a look at the meaning of the Composition Scheme, eligibility and turnover limit, tax rates and other details.

For more details, visit the official GST Portal: //www.gst.gov.in/

What is the GST Composition Scheme?

The Composition Scheme under GST is a simplified tax framework for small businesses. This scheme allows businesses with less than ₹1,50,00,000 (i.e., ₹1.5 crores) in annual turnover to pay GST at a fixed rate. The rate varies between 1% to 6% based on the nature of their business and is usually lower than the regular GST tax rates.

Specific businesses from the manufacturing and services sector can opt for the Composition Scheme. One can visit the GST portal and check the Composition Scheme eligibility and fill in Form CMP-02 to opt for the scheme.

Once registered for the GST Composition Scheme, businesses can make quarterly payments (GSTR-4) and file one annual return (under GSTR-9A). This naturally reduces paperwork and the tax burden, improves cash flow and enables businesses to stay compliant.

Also read: GSTR 9 annual return – Know about the annual returns filing process

Who is eligible for the Composition Scheme?

The GST Composition Scheme eligibility is limited to specific Manufacturing and Services sector businesses with an annual turnover limit of up to ₹1.5 crores (₹75 lakhs for special category states such as Himachal Pradesh and states in North-Eastern India).

GST Composition Scheme eligibility:

Some of the businesses eligible for the Composition Scheme under GST are:

  • Businesses with up to ₹1.5 crores in annual turnover (i.e., sum total of turnover with the same PAN)
  • Manufacturing businesses, dealers, small traders and restaurants (that do not serve alcohol)
  • Services sector businesses (except restaurants) with turnover up to ₹50 lakhs annually
  • Manufacturers of bricks, building materials, earthen or roofing tiles, and fly ash bricks and blocks

Non-eligibility for Composition Scheme:

Businesses that are not eligible to opt into the Composition Scheme include:

  • Suppliers of non-taxable goods and services
  • Businesses doing inter-state supply of goods
  • E-Commerce business suppliers who collect TCS (tax at source)
  • Manufacturers of pan masala, ice-cream and tobacco
  • Casual tax paying and non-resident taxable person

Composition scheme turnover limit:

  • ₹1.5 crores for regular taxpaying businesses
  • ₹75 lakhs for special category states such as Himachal Pradesh and North-East states
  • ₹50 lakhs for service providers

Composition Scheme under GST

How to opt for Composition Scheme under GST Laws?

As a registered regular taxpayer, you will have to opt for the Composition Scheme. You will have to visit the GST portal, login to your account, and submit a CMP-02 form as a declaration of wanting to opt for the Composition Scheme. This can be done before the beginning of the financial year. Here are the basic steps to follow:

  • Verify eligibility in terms of business turnover limit and other requirements
  • Login to the GST Portal and navigate to the ‘Services’ section to find the Composition Scheme (Services > Registration > Application to Opt for composition levy)
  • Select the checkboxes for declaration and verification
  • Fill in other details (i.e., Authorised Signatory name and Place), upload and document required, and Save the records (Note: DSC is required for businesses registered as a Company or LLP)
  • Click ‘Proceed’ confirming your choice to opt for the scheme and wait for the application to be submitted
  • View the acknowledgment message and check your email/mobile for the confirmation receipt

Also read: How to register your business under GST?

What are the Composition Scheme tax rates?

The Composition Scheme tax rates are designed to simplify the burden of varying taxes for small businesses. The Composition Scheme turnover limit being ₹1.5 crores (and ₹75 lakhs for special states), makes it necessary for businesses to understand the tax slab (between 1% to 6%) to ensure they are adhering to compliance.

Under the Composition Scheme, the GST rate percentage is fixed – 1% to 6% of annual turnover and based on the nature of the business, GST is charged accordingly. This is usually lower than the standard GST tax rates.

Composition Scheme rates:

Business type Composition Scheme applicable tax slab
Manufacturers and Traders 1%
Restaurants (non-alcohol serving) 5%
Service Providers 6%
Manufacturers of bricks 6%

Note: Here, the total GST is split equally between CGST and SGST.

Also read: GST tax slab and structure

What are the Composition Scheme rules?

As a taxpayer availing the Composition Scheme under GST, there are some basic rules or conditions that you will have to navigate and abide by. Here’s the list:

  • Businesses must operate intra-state to qualify (i.e., within the same state or Union Territory)
  • Input Tac Credit (ITC) cannot be claimed
  • Limited to specific businesses e.g., cannot be dealing with non-taxable goods
  • Must adhere by the Composition Scheme turnover limit of ₹1.5 crores (for regular businesses), ₹75 lakhs (for NE and hilly states), and ₹50 lakhs for services businesses
  • Quarterly payment of taxes due to simplify the process
  • Only one annual return form (GSTR-9A) to be filed every year
  • Bill of Supply must be issued
  • Participant must opt for the Scheme on their own on the GST Portal before the beginning of the financial year

GST Composition Scheme rules

Advantages and Disadvantages of the Composition Scheme

The Composition Scheme under GST naturally comes with several benefits for small businesses, especially when it comes to reduced paperwork, compliance complexities, and tax burdens. There are also some challenges associated with it.

Listed below are some of the advantages and disadvantages of the Composition Scheme to help you decide if you should opt for it or not.

Composition Scheme benefits:

  • Simplified compliance and burden of regular returns filing (i.e., quarterly payments and one annual return filing)
  • Lesser paperwork and documentation required
  • Lower tax rates than standard GST rates (i.e., 1% to 6% based on the nature of business)
  • Reduced tax liabilities (overall) enabling business to have more cash flow
  • Ease of doing business as focus can be directed at running the business instead of managing compliance and tax requirements

Composition Scheme challenges:

  • Scheme comes with geographic limitations, with business requiring to operate within the state
  • Participants are not eligible to make ITC claims
  • Limited to specific businesses operating in the manufacturing and service industries
  • Penalties and disqualification prevails if turnover exceeds the threshold limit or any compliance errors
  • Cannot issue tax invoices i.e., only issue Bill of Supply which is not ideal in all circumstances

Also read: GST advantages and disadvantages for businesses

Returns forms for Composition Scheme members

A merit of the Composition Scheme under GST is that taxpayers have to submit only one annual return filing and quarterly payments. Let us take a look at some of the GSTR forms and other forms that Composition Scheme members must know about.

Forms for Composition Scheme members

Form type Purpose
GSTR 9A ·       Annual return

·       Last date: 31 December of next financial year

GSTR 4 ·       Annual return for consolidating quarterly sales and tax details

·       Last date: 30 April of next financial year

CMP-02 ·       Confirmation to opt for Composition Scheme

·       Frequency: One time

·       Last date: Before beginning of financial year

CMP-04 ·       Application for withdrawal from Composition Scheme levy
CMP-08 ·       Quarterly tax statement (self-assessed) and payment challan

·       Frequency: Quarterly

·       Last date: 18th of the first month following the quarter

GST Composition Scheme forms

FAQs

What is the composition scheme under GST?

The Composition Scheme under GST is designed to enable small businesses reduce their tax burdens. Manufacturing businesses with an annual turnover of up to ₹1.5 crores can opt for this scheme and pay GST at fixed rates on the turnover (i.e., 1% to 6%). For services sector businesses, the turnover limit is ₹50 lakhs, whereas businesses from NE states have a limit of ₹75 lakhs.

What is the difference between composition and regular GST?

There are several differences between Composition Scheme participants and regular taxpayers.

Composition Scheme Regular taxpaying business
Turnover limited to ₹1.5 crores All businesses
Fixed tax slab based on annual turnover, which is lower than regular GST slab Higher tax slab (standard rates)
Less documentation and compliance Complete compliance
Cannot claim ITC Can claim ITC
Can only operate within the state Can operate across the country (as applicable)
Only one annual return filing and quarterly payments As per requirements and applicability (e.g., GSTR-1, GSTR-2B, GSTR-3B and others)

What is the rule 3 of composition scheme under GST?

Rule 3 of the Composition Scheme under GST highlights the need for a business to submit Form GST CMP-02 online on the GST portal before the beginning of the financial year to opt for the scheme.

How to check GST Composition Scheme?

To learn about the Composition Scheme under GST, please visit the official website: //www.gst.gov.in/

You can also visit the tutorial section to find answers to frequently asked questions on the Composition Scheme.

If you wish to track application status, visit the official website, and look for ‘Track Application Status’ under ‘Services’.

*This article is for information only. For more details please visit the official GST website or consult with a GST practitioner or CA or tax consultant for professional advice.

Sohini Banerjee

Sohini is a seasoned content writer with 12 years’ experience in developing marketing and business content across multiple formats. At Tata nexarc, she leverages her skills in crafting curated content on the Indian MSME sector, steel procurement, and logistics. In her personal time, she enjoys reading fiction and being up-to-date on trends in digital marketing and the Indian business ecosystem.