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GST

How does GST Composition Schemes Work?

Discover the benefits and limitations of the GST Composition Scheme, designed to simplify tax compliance for small businesses.

Introduction

The Composition Scheme under GST is a boon for small businesses, providing relief from complex formalities. Eligible taxpayers with an annual turnover below ₹ 1.5 crore can avail themselves of this scheme and pay GST at a fixed rate based on turnover. With reduced compliance, limited tax liability, and higher liquidity due to lower tax rates, businesses can focus on growth. However, drawbacks include limited inter-state operations, no Input Tax Credit, and restrictions on certain goods. Businesses must carefully assess their needs before choosing the GST Composition Schemes for streamlined compliance.

GST Composition Scheme

The GST Composition Schemes, a simplified and taxpayer-friendly option under GST, offers respite to small businesses from the burden of complex formalities. Eligible taxpayers with an annual turnover of less than ₹ 1.5 crore can avail themselves of this scheme and pay GST at a fixed rate based on their turnover. This liberates them from the intricacies of regular tax calculations and extensive record-keeping. By entering the GSTIN in the GST search tool and checking the ‘Taxpayer Type’ column, one can easily determine whether a taxpayer has opted for the GST Composition Schemes. The recent increase in the threshold limit to ₹ 1.5 crores by the CBIC is expected to benefit more small businesses seeking simplified GST compliance.

6th February 2023:

For the financial year 2023-24, businesses eligible for the Composition Scheme and those wishing to opt-in can do so by submitting a declaration in Form CMP-02 on the GST portal before 31st March 2023.

1st February 2023:

Budget 2023 Update

Section 10 of the CGST Act has been amended to allow businesses supplying goods through an e-commerce operator to opt for the GST Composition Schemes. However, the notification by CBIC is yet to be issued.

5th July 2022:

(a) The due date for filing GSTR-4 for FY 2021-22 has been extended with a late fee waiver up to 28th July 2022, as per Notification 12/2022 dated 5th July 2022.

(b) The due date for CMP-08 for April-June 2022 quarter has been extended up to 31st July 2022, as per Notification 12/2022 dated 5th July 2022.

26th May 2022:

As per CGST Notification no. 7/2022 dated 26th May 2022, late fee waiver has been provided for the delay in filing GSTR-4 for FY 2021-22, if filed between 1st May and 30th June 2022.

24th February 2022:

Businesses eligible for the Composition Scheme for the financial year 2022-23 must submit a declaration in Form CMP-02 on the GST portal by 31st March 2022.

28th May 2021:

In the 43rd GST Council meeting, the following updates were announced:

(1) Interest relief for filing CMP-08 for Jan-March 2021 quarter, with no interest charged until 3rd May, 9% reduced interest until 17th June, and 18% thereafter.

(2) The due date for filing GSTR-4 for FY 2020-21 is extended up to 31st July 2021.

(3) The maximum late fee for GSTR-4 is capped at ₹ 500 for nil filing and ₹ 2000 for other than nil filing.

1st May 2021:

(1) The due date for filing GSTR-4 for FY 2020-21 was extended from 30th April 2021 to 31st May 2021.

(2) Relaxation in interest charges for Form CMP-08 for January-March 2021, with no interest until 8th May, 9% interest until 23rd May, and 18% thereafter.

(3) The time limit for newly opted composition taxable persons to file ITC-03 for FY 2021-22 extended up to 31st May 2021.

Who Cannot Opt for the Composition Scheme?

The Composition Scheme under GST offers significant benefits to eligible taxpayers, but it’s essential to note that not everyone can opt for this scheme. The following categories of individuals are excluded from the scheme:

Manufacturer of Ice Cream, Pan Masala, or Tobacco: Individuals engaged in the manufacturing of ice cream, pan masala, or tobacco products are ineligible for the Composition Scheme. This exclusion aims to maintain strict control over the taxation of goods that may have higher social or health implications.

Persons Making Inter-State Supplies: Businesses involved in inter-state supplies are not eligible for the Composition Scheme. This restriction ensures that businesses engaged in multi-state operations comply with the standard GST procedures, simplifying the taxation process across different states.

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Casual Taxable Person or Non-Resident Taxable Person: The Composition Scheme is not available to casual taxable persons or non-resident taxable persons. These individuals are typically involved in temporary or occasional business transactions in a different state or union territory, and they must adhere to regular GST provisions during their temporary business operations.

For all other eligible taxpayers, the Composition Scheme provides a valuable opportunity to reduce compliance burdens, benefit from lower tax rates, and streamline their business operations under the GST regime. It’s crucial for businesses falling within the scheme’s scope to carefully assess their eligibility and make an informed decision on whether to opt for this simplified taxation approach.

What Are the Conditions for Availing Composition Scheme?

Here are the conditions that must be satisfied to opt for the Composition Scheme under GST:

No Input Tax Credit: Dealers opting for the composition scheme cannot claim input tax credit, making it important to consider this factor before choosing the scheme.

Goods Taxable under GST: The dealer cannot supply goods that are not taxable under GST, such as alcohol, as part of the scheme.

Reverse Charge Mechanism: Transactions under the Reverse Charge Mechanism should be taxed at normal rates, not under the composition scheme.

Collective Registration: If a taxable person operates multiple businesses (e.g., textile, electronic accessories, groceries) under the same PAN, they must either register all businesses collectively under the composition scheme or opt out of the scheme entirely.

Display Notice: A dealer under the composition scheme must prominently display the words ‘composition taxable person’ on all notices and signboards at their place of business.

Mention on Bills: The words ‘composition taxable person’ must also be mentioned on every bill of supply issued by the dealer.

Service Provision: As per the CGST (Amendment) Act, 2018, manufacturers or traders under the composition scheme can also provide services up to ten percent of their turnover or ₹ 5 lakhs, whichever is higher, starting from 1st Feb 2019.

Meeting these conditions is essential for businesses considering the Composition Scheme, as it provides them with simplified compliance and reduced tax liability, but it comes with certain limitations that must be carefully evaluated beforehand.

How Can a Taxpayer Opt for a Composition Scheme?

To opt for the Composition Scheme, a taxpayer must file GST CMP-02 with the government. This can be done conveniently online through the GST Portal. The intimation to opt for the scheme should be given at the beginning of each Financial Year. Here’s a step-by-step guide to file CMP-02 on the GST Portal.

How Should a Composition Dealer Raise Bill?

As part of the Composition Scheme, dealers face certain limitations when it comes to issuing invoices. Unlike regular taxpayers who issue tax invoices, composition dealers cannot charge tax from their customers. Instead, they need to bear the tax liability themselves. Hence, composition dealers must issue a ‘Bill of Supply’ while conducting transactions. To ensure compliance, the dealer should prominently mention ‘composition taxable person, not eligible to collect tax on supplies’ at the top of the Bill of Supply. This practice helps inform customers and authorities about the dealer’s status under the Composition Scheme, ensuring smooth and transparent business operations.

What Are the GST Rates for a Composition Dealer?

 

Composition Scheme -Applicable GST Rates
Type of Business CGST SGST Total
Manufacturer and Traders (Goods) 0.5% 0.5% 1.0%
Restaurants not serving alcohol 2.5% 2.5% 5.0%
Other service providers 3.0% 3.0% 6.0%

How Should GST Payment Be Made By a Composition Dealer?

Under the Composition Scheme, the burden of GST payment falls on the composition dealer themselves, as they cannot charge GST from their customers. The GST payment made by a composition dealer includes the following components:

GST on Supplies Made: The composition dealer must calculate and pay GST on the supplies made by them. This amount is based on the applicable GST rates and the value of the supplies.

Tax on Reverse Charge: In certain cases, where the reverse charge mechanism applies, the composition dealer is responsible for paying the GST on such transactions.

Tax on Purchase from an Unregistered Dealer: For specific categories of goods and services, and as per notified class of registered persons, the composition dealer might be liable to pay GST on purchases from unregistered dealers. However, this provision is yet to be notified and is not applicable until 1st Feb 2019.

It’s essential for composition dealers to be aware of these components and fulfil their GST payment obligations to ensure compliance with the GST regulations. By understanding and managing these aspects, composition dealers can navigate the taxation process smoothly and operate their businesses in a hassle-free manner.

What Are the Advantages of the Composition Scheme?

Registering under the Composition Scheme offers several compelling advantages for eligible businesses:

Lesser Compliance: Businesses opting for the GST Composition Schemes enjoy reduced compliance requirements. They need to file fewer returns, maintain simplified books of records, and are exempt from issuing regular tax invoices. This streamlined approach saves time and effort, allowing them to focus on their core business activities.

Limited Tax Liability: Composition dealers benefit from a lower tax liability compared to regular taxpayers. The GST rates under the scheme are significantly lower, resulting in reduced tax outflow, which can positively impact their bottom line.

High Liquidity: With lower tax rates, composition dealers experience higher liquidity. This means they retain more cash in hand, which can be utilised for business expansion, investment, or managing day-to-day operations, leading to better financial flexibility.

These advantages make the GST Composition Schemes an attractive option for small businesses seeking to simplify their tax compliance, manage their cash flow efficiently, and optimise their tax liabilities. However, businesses should carefully assess their eligibility and the implications before making a decision to ensure it aligns with their specific needs and objectives.

What Are the Disadvantages of the Composition Scheme?

While the Composition Scheme offers benefits, it also comes with certain drawbacks that businesses must consider before registering:

Limited Territory: Composition dealers are restricted to conducting business within their state only. They are prohibited from engaging in inter-state transactions, which may limit their market reach and growth opportunities.

No Input Tax Credit: Unlike regular taxpayers, composition dealers cannot claim Input Tax Credit (ITC) on their purchases. This means they cannot offset the taxes paid on inputs against their output tax liability, potentially affecting their cost structure.

Restriction on Goods: Composition dealers cannot supply goods that are not taxable under GST, such as alcohol. Additionally, they are not permitted to sell goods through an e-commerce portal, which could restrict their ability to tap into the online market.

Businesses need to weigh these disadvantages against the advantages of the Composition Scheme to make an informed decision. The scheme may be suitable for smaller businesses with limited inter-state operations and those willing to forgo ITC benefits in exchange for reduced compliance and tax liabilities. However, larger enterprises or those with extensive inter-state transactions may find regular GST registration more beneficial in the long run. Careful consideration of these factors is crucial to choosing the most suitable GST registration option for the business’s unique needs and growth aspirations.

Conclusion

The GST Composition Schemes serves as a valuable option for small businesses seeking simplified tax compliance. It offers advantages like reduced compliance, limited tax liability, and increased liquidity. However, the scheme comes with limitations, including inter-state transaction restrictions and no input tax credit. Businesses must carefully assess their eligibility and weigh the pros and cons before opting for the Composition Scheme to ensure it aligns with their specific requirements and growth objectives.

If you wish to do a GST calculation for your business you can use the GST calculator by Vakilsearch. Vakilsearch has a team of expert lawyers and advisors who can help you make your GST registration process hassle-free and give 100% assistance.

FAQs

Who is eligible for the composition scheme under GST?

Businesses with an annual turnover of less than ₹ 1.5 crore can opt for the Composition Scheme under GST. For North-Eastern states and Himachal Pradesh, the threshold limit is ₹ 75 lakh.

What is the GST limit for the composition scheme?

The GST limit for the Composition Scheme is an annual turnover of ₹ 1.5 crore or less for most states. However, for North-Eastern states and Himachal Pradesh, the limit is ₹ 75 lakh or less.

What is the 6% GST composition schemes?

The 6% GST Composition Scheme is applicable to service providers registered under the scheme, where they need to pay a flat GST rate of 3% for CGST and 3% for SGST/UTGST on their turnover.

What is the difference between GST regular and composition?

The main difference between GST regular and composition is that regular taxpayers can claim Input Tax Credit (ITC) on their purchases, while composition dealers cannot. Regular taxpayers have more compliance requirements, while composition dealers enjoy reduced compliance and pay GST at a fixed rate based on turnover.

Which is the best composition or regular?

The choice between composition and regular GST depends on the specific needs and nature of the business. Composition is suitable for small businesses with limited inter-state operations, seeking simplified compliance and lower tax liability, while regular GST is more appropriate for larger businesses with complex operations, availing Input Tax Credit and willing to fulfil comprehensive compliance requirements.

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