The Composition Scheme in GST has undergone changes with revised turnover thresholds and compliance guidelines. Staying informed about the latest updates is crucial for businesses opting for this simplified taxation scheme.
What is the GST Composition Scheme?
The GST Composition Scheme is a simplified tax scheme for small businesses with an annual turnover of up to ₹1.5 crore. It allows eligible taxpayers to pay a fixed percentage of their turnover as tax instead of normal GST rates, reducing compliance and administrative burdens. Businesses under this scheme cannot claim input tax credit.
Features of the GST Composition Scheme
- Eligibility: Available for businesses with an annual turnover of up to ₹1.5 crore (₹75 lakh for select northeastern states).
- Lower Tax Rates: Taxpayers pay a fixed percentage of turnover as tax:
- 1% for manufacturers and traders
- 5% for restaurants (not serving alcohol)
- 6% for service providers (up to ₹50 lakh turnover)
- Simplified Compliance: Reduced filing requirements with quarterly returns instead of monthly filings.
- Restriction on Input Tax Credit: Businesses under the scheme cannot claim input tax credit.
- Limited Operations: Participants cannot engage in interstate supply of goods or services and must sell only within their state.
- Tax Invoice Restriction: Composition scheme dealers cannot issue tax invoices or collect GST from customers.
This scheme is designed to ease tax compliance for small businesses while keeping costs manageable.
Benefits for Small Businesses
- Lower Tax Liability: Pay a fixed percentage of turnover, reducing the overall tax burden.
- Simplified Compliance: File quarterly returns instead of monthly, easing administrative workload.
- Reduced Costs: Minimize accounting and compliance expenses due to simplified procedures.
- Focus on Business Growth: Less time spent on tax compliance allows more focus on core business activities.
- Cash Flow Management: No need to claim or manage input tax credit, simplifying cash flow.
- Flexibility for Smaller Operations: Designed for businesses with limited turnover and local operations.
This scheme helps small businesses remain competitive while adhering to GST regulations with minimal effort.
Ideal Candidates for the Scheme
- Traders and manufacturers with limited turnover
- Restaurants and other small service providers
- Businesses with intra-state operations (those operating within a single state)
This scheme is particularly beneficial for those who do not want to deal with complex filing procedures and higher tax rates.
GST Composition Scheme Turnover Limit
In India, the GST composition scheme is available for small businesses with an annual turnover of up to ₹1.5 crore. This scheme is voluntary and offers an alternative to regular GST compliance. Businesses opting for the composition scheme can pay tax at a fixed rate, which simplifies their tax obligations and reduces compliance efforts.
The scheme is designed to ease the burden on small businesses by offering straightforward tax calculation methods and minimizing paperwork, making it an attractive option for eligible enterprises. However, businesses under the composition scheme are restricted from claiming Input Tax Credit (ITC) on their purchases.
Eligibility Criteria for GST Composition Scheme
GST Composition Scheme is provided for small traders and manufacturers of ceiling limits and conditions regarding the type of transaction. For eligibility, the businesses can have a turnover of up to ₹1.5 crore in a year or ₹75 lakh for the special category states. But for registration, one’s turnover should not exceed ₹50 lakh; services that cross state borders or supplies of goods that are exempted from taxation such as alcohol cannot be made.
-
Turnover Limits
-
- Basic Turnover Limit: MSMEs having a turnover of up to ₹1.5 crore (₹75 lakh for the special category states) are eligible.
- Service Providers: The scheme is applicable for those service providers who have a turnover up to ₹50 lakh of the previous financial year.
-
-
Ineligible Transactions
-
- Prohibited Supplies: At present, composition dealers cannot register for GST and cannot supply interstate, non-taxable goods like alcohol, and cannot sell through e-Commerce platforms.
-
How to Opt for the GST Composition Scheme?
GST Composition Scheme is applicable for registration at the time of GST registration as well as at the start of a new financial year. This option is available for new applicants at the time of provisional GST registration through Part B of FORM GST REG-01; while the registered taxpayers can fill in for this option through FORM GST CMP-02. Regarding compliance, goods and service tax returns of CMP-08 for quarterly tax payment and GSTR-4 by the end of the subsequent FY April 30 are submitted.
-
Registration Process
To opt for the GST Composition Scheme, businesses must follow a specific registration process.
-
-
- New Applicants: Select the composition scheme while applying for GST registration through the Part B of FORM GST REG-01.
- Existing Taxpayers: Apply for FORM GST CMP-02 at the start of a financial year to convert from the composition scheme.
-
-
Filing Requirements
The GST Composition Scheme has streamlined filing requirements to ease compliance for small businesses.
-
-
- Quarterly Tax Payment: Finish with CMP-08 with amounts due by the 18th of the month after the close of each quarterly period.
- Annual Return: Filing of GSTR-4 must be done by the end of April of the subsequent financial year.
-
Sector-Specific Applicability of Composition Scheme
It entails nil rated percentage for certain sections of sectors like small services, manufacturers, and restaurants etc. Every sector applies the different tax rates and qualifications meant to simplify the processes, minimise costs, and promote the companies with the turnover that does not exceed specified limits.
-
GST Composition for Service Providers
This Scheme is available for all small service providers whose annual turnover does not exceed ₹50 lakh which is charged at a flat gst rate of 6%. This is available for some service providers depending on the agreement with the carbon trust so as to ease tax issues hence minimising tax compliance. Still, the scheme has been designed in a way that those involved in providing inter-state services or e-Commerce sales are not allowed.
-
GST Composition for Manufacturers
Manufacturers can benefit from the current Composition Scheme that allows a tax rate of 1% of the turnover and easy tax remittance by companies that meet the eligibility criteria of the Scheme. Exempted products like alcohol are also not allowed in this scheme and the qualified manufacturers must be operating in only one state.
-
GST Composition for Restaurants and Hotels
Food businesses that do not sell alcohol can take advantage of the Composition Scheme and charge just 5% in taxes for a less complicated process. Hotels if qualified are required to be located within a single state and have turnover thresholds. Affordability is made possible through this option enables a reduction in compliance and maintenance of reasonable tax charges for the small establishments.
-
GST Composition for Jewellers, Contractors, and Others
- It applies certain restrictions to the jewellers and civil contractors where their conditions are different from the others. They have to carry out sales only within their own state, so that they fit the requirements of the scheme to confine operations to just one state. It is hoped that this restriction will help to reduce the tax complexity for smaller scale operations in these sectors.
- And for the persons having rental income from commercial complexes and buildings, civil contractors of intra-State Government contracts, etc.? They get eligible to receive simple tax rates under the scheme that tends to reduce their business complexities within the state boundaries.
GST Composition Rules and Conditions
The GST Composition Scheme also composes of rules and compliance conditions to retain the scheme simple for the businesses. These rules refer to Standard Operating Procedures for pan-consistency across business divisions and keep billing and labelling codes to differentiating composition dealers.
-
Conditions to Avail the Scheme
Taxpayers registered under GST Composition Scheme needed to apply it over all business units claiming the same PAN similarity. They also need to provide a “Bill of Supply” instead of a tax invoice and hang the notice “Composition Taxable Person” at every business point.
-
Forms for GST Composition Scheme
To effectively manage compliance under the GST Composition Scheme, several specific forms must be used:
-
- GST CMP-01: These dealers are required to file details with the GST administration for provisional registration under the GST Composition Scheme.
- GST CMP-02: Submitted at the beginning of the financial year to elect into the scheme.
- GST CMP-08: Necessary for filings of taxes made four times continuously every year.
- GST CMP-04: Submitted to opt out of the scheme if existing is necessary
-
Turnover Limit
The GST Composition Scheme allows manufacturers and traders with an annual turnover of up to ₹1.5 crore and service providers with an annual turnover up to ₹50 lakh to simpler tax returns.
-
Tax Rate
| Category | Tax Rate |
| Manufacturers and Traders | 1% |
| Restaurants | 5% |
| Eligible Service Providers | 6% |
-
GST Composition Scheme Bill Format
In the GST Composition Scheme, the seller has to issue a “Bill of Supply” instead of a tax invoice mentioning “Composition Taxable Person” to stick with the laid norms of the scheme. Find the attached partial gst composition format below,
GST Composition Scheme vs. Regular GST Scheme
However, the GST Composition Scheme is slightly easier in terms of tax compliance when compared to the Regular GST Scheme. Compared to the regular GST system where record keeping, multiple returns and an ability to claim Input Tax Credit (ITC) is mandatory, the Composition Scheme has lesser returns and no input tax credit to claim.
| Aspect | GST Composition Scheme | Regular GST Scheme |
| Compliance | Less burden of documentation and filing; CMP-08 filed quarterly. | Requires detailed record-keeping of sales, purchases, and ITC; multiple returns to be filed regularly. |
| Input Tax Credit (ITC) | Not available. | Available, allowing businesses to claim credit on taxes paid for inputs. |
| Tax Rates | Lower tax rates: 1%, 5%, or 6% (depending on the business category). | Standard GST rates based on the type of goods/services (e.g., 5%, 12%, 18%, or 28%). |
| Cost Implications | Lower tax rates but higher overall costs due to the absence of ITC, affecting cost competitiveness. | Higher tax rates but lower overall costs for reselling businesses due to ITC availability. |
| Suitability | Suitable for small businesses with simpler operations and turnover within the eligibility threshold. | Suitable for larger businesses or those dealing in inter-state supplies, e-commerce, or availing ITC. |
Conclusion on GST Composition Scheme
In conclusion, It was stated that many advantages accrued to the GST Composition Scheme such as GST compliance, lower rates of tax and fewer records to file for business entities. It is preferred for organisations that have low turnover since it is much easier to manage the GST obligations under this regime. Eligibility criteria of the scheme and the simplicity in its execution relieves small enterprises the hassle of dealing with taxes, allowing them concentration on business expansion.
Our team of experts is here to guide you through the complexities of the new GST regulations. With extensive knowledge of the latest amendments, we can help you in GST filing, appeals, and compliance requirements easily
FAQs on GST Composition Scheme
Can e-commerce sellers opt for the composition scheme?
No, the GST Composition Scheme excludes businesses engaged in inter-state transactions and e-commerce activities.
What happens if turnover exceeds the limit during the year?
If a business’s turnover exceeds the specified limit during the year, it must switch to the regular GST scheme and comply with all the necessary GST requirements from that point forward.
Is there an option to exit the composition scheme voluntarily?
Yes, businesses can exit the composition scheme voluntarily by filing CMP-04. They must also fulfil additional requirements, such as reporting stock in ITC-01.
