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GST Composition Scheme: a complete guide

With the implementation of the Goods and Service Tax Act (GST) in India, a lot of complications emerged regarding the new system and requirements of compliances that were introduced. Dealing with newer compliances relatively becomes more difficult for smaller owing to their limited understanding of its legalities and its limited revenues to outsource the same.
In order to help small businesses overcome this difficulty, the Government of India introduced the new GST Composition Scheme under the Goods and Service Tax Act. One of the basic conditions of being eligible for the GST Composition Scheme is the aggregate annual turnover limit of the business. However, overall criteria regarding the same changes from time to time.

Table of Contents

What is the GST Composition Scheme?

The composition scheme under GST is one of the easiest and most effective mechanisms of paying GST especially for smaller businesses. The composition scheme is different from the regular scheme of GST filing in terms of benefits for the smaller businesses. By opting for the composition scheme under GST, businesses do not have to fulfill complicated compliances under GST. The GST composition scheme reduces tax liability of enrolled businesses as compared to the regular scheme of GST.
Businesses opwill pay at a fixed rate of taxes ranging from 1% to 6% of the annual turnover. The aforesaid aspect is one of the best advantages for small businesses. A taxpayer can opt for Composition Scheme if the annual turnover is less than Rs. 1.5 crore in a particular financial year. Please note for Himachal Pradesh and North-Eastern states, the threshold limit is 75 lakh.

Who can opt for the GST Composition Scheme?

A taxpayer can opt for the Composition Scheme under GST if he or she has been a regular taxpayer under GST and his aggregate annual turnover in a particular financial year has amounted to less than Rs.1.5 crores.
In case of Himachal Pradesh and North-Eastern states, the threshold limit is 75 lakh. According to Central Goods and Services Tax Act, (Amendment), 2018, a Composition Dealer can supply services up to 10% of his aggregate annual turnover or Rs.5 lakh whichever is higher. The amendment was implemented on 1st February, 2019.

Who cannot opt for a Composition Scheme?

However, there are some of the taxpaying entities which cannot opt for the GST Composition Scheme. A list of all such taxpaying entities has been provided below.
  • Suppliers supplying goods which are not taxable under GST laws
  • Casual Taxpayers
  • Taxpayers involved in the Inter-state supply of Goods
  • Non-Resident Indian Taxpayer
  • Foreign taxpayer
  • Tax Collector or TDS Collector
  • Input Service Distributor 
  • Manufacturer of ice cream,  tobacco or pan masala
  • Supplier of goods through a e-commerce operator

What are the Rules for taxpayers under the GST Composition Scheme?

In order to avail the composition scheme under GST, a taxpayer must fulfill the following conditions:
  • A taxpayer opting for composition scheme cannot claim Input Tax Credit (ITC)
  • The supplier cannot supply goods that are not subject to tax under GST
  • Under the Reverse Charge Mechanism, the taxpayer must pay taxes at normal rates for transactions
  • In case the taxpayer has diversified business interests such as electronic accessories, textile, groceries etc. under the same PAN, then the taxpayer has to obtain GST registration for all the different business activities under the GST composition scheme
  • On every bill of supply issued by the taxpayer, he or she mentions the words “Composition Taxable Person”.
  • Also, the taxpayer has to mention the words “Composition Taxable Person” on every signboard displayed at his or her shop or place of business.

What are the benefits of the GST Composition Scheme?

The following are some of the benefits of opting for the GST Composition Scheme:
  • Reduced tax liability
  • Lesser Compliance and Paper work including issuance of invoices, returns, maintenance of books of accounts etc.
  • Higher liquidity of businesses as a result of lower rate of taxes

What are the drawbacks of the GST Composition Scheme?

The following are some of the drawbacks of the GST Composition Scheme under:
  • The dealer or supplier will be barred from conducting an inter-state supply of goods and services and will have limited territory to conduct business operations
  • The composition dealers cannot avail Input tax Credits (ITC).
  • The dealer will not be eligible to supply non-taxable goods under GST such as alcohol and goods supplied through e-commerce portals.

FAQ's

A taxpayer has to file form GST CMP-02 in order to opt for composition Scheme under GST with the Government. The filing of the aforesaid form can be done by login into the GST portal. A taxpayer will be given intimation at the beginning of the financial year to opt for the composition scheme.
A tax invoice cannot be issued by a composition dealer as the composition dealer is not liable to shift the tax burden to its customers. A composition dealer has to pay the entire amount of GST from his own pocket. Thus, a composition dealer is liable to issue a Bill of Supply. Also, the composition dealer has to mention “Composition Taxable Person, Not Eligible to Collect Tax on Supplies” at the top of the Bill of Supply.

A composition dealer should make GST Payment out of his own pocket for the supplies made by him. The GST payments made by a Compositions Dealer includes the following:

  • GST on Reverse Charge
  • GST on sale of goods and services
  • GST on purchasing goods from an unregistered dealer under GST
A composition dealer has to pay taxes on a quarterly basis and furnish a statement CMP-08 by the 18th of the month after the end of the quarter. Also, a composition dealer has to file a return in form GSTR-4 annually by 30th April of the next financial year. Apart from that, the composition dealer is supposed to file GSTR-9 as annual return by 31st of December of the next financial year. It is also to be noted that a composition dealer does not require maintaining records of each transaction.

Conclusion

With the above analysis, it can be concluded that the GST composition scheme has significant benefits for smaller businesses. A composition Scheme can be availed by logging into the GST portal by filling necessary forms. Along with a number of benefits the scheme has a few drawbacks as well, the most important one being that the composition dealer cannot avail Input Tax Credit.

About Setindiabiz

Setindiabiz is an organized team of experienced CA, CS, & Lawyers, duly supported by a pool of trained accountants & paralegal staff that provides quality & affordable compliance services to startups & small businesses in India. The views, statements and recommendations expressed in this article or post are only for the sole objective of providing information, and it does not constitute professional advice or recommendation of the company. Neither the author nor the company or its affiliates accepts any liability for any loss or damage arising from any information in this article or any actions taken in reliance thereon.
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