The Composition Scheme under GST is considered to be the most simplified scheme for taxing purposes, where the primary reason behind its conception was the need to simplify the tax filling process for these small entities operating in India. Under the composition scheme for the tax system in India through the implementation of the GST Bill, certain taxpayers will be able to remit their taxes using the fixed rate system that depends on their total turnover.
For all individuals who have any form of business or services in India, the knowledge of GST Composition Scheme will be highly beneficial.
It is necessary for you as an entrepreneur to determine if the GST Composition Scheme fits your needs or not.
What is the Composition Scheme Under GST?
The Composition Scheme of Goods & Services Tax is optional in nature and is for those taxpayers whose income is below the limit prescribed by the government. This taxpayer does not need to pay the GST at normal rates, but he is supposed to pay lower rates as per his total income. This scheme is quite useful for smaller business entities.
How To Register For A Composition Scheme Under GST?
Registering for the Composition Scheme under GST is simple and can be done online through the GST portal. Here’s a clear step-by-step guide:
1. Log in to the GST Portal
Visit the official GST portal and log in using your credentials (GSTIN Number, username, and password).
2. Navigate to Composition Scheme Option
Go to Services → Registration → Application to Opt for Composition Levy
3. File Form GST CMP-02
Select and submit Form GST CMP-02 to opt for the Composition Scheme.
4. Submit Before Deadline
Existing taxpayers must file CMP-02 before the beginning of the financial year. While the new taxpayers can choose the Composition Scheme at the time of GST registration for small businesses.
5. File Stock Intimation (if required)
You may need to file Form GST ITC-03 (for details of stock and input tax credit reversal).
6. Confirmation of Registration
Once approved, you will be registered under the Composition Scheme and can start paying tax at fixed rates.
Eligibility Criteria for Composition Scheme Under GST
To opt for the Composition scheme under GST, businesses must meet the following criteria:
- Annual turnover should not exceed ₹1.5 crore (₹75 lakh for special category states).
- The business must not be engaged in interstate supply of goods.
- E-commerce sellers (through platforms like Amazon, Flipkart) are not eligible.
- The taxpayer should not supply non-taxable goods.
- Service providers are allowed only under specific conditions (with a separate scheme up to ₹50 lakh).
Before opting for the Composition scheme under GST, it is crucial to ensure that all eligibility conditions are met.
Who Should Opt for a Composition Scheme Under GST?
The Composition scheme under GST is ideal for:
- Small Retailers and Traders: Local shop owners with limited turnover and operations within a single state.
- Small Manufacturers: Businesses producing goods on a small scale with minimal interstate supply.
- Restaurants (Without Alcohol): Small eateries can benefit from lower tax rates and simplified compliance.
- Service Providers (Limited Turnover): Freelancers and service providers with turnover up to ₹50 lakh can opt for a similar scheme.
- However, businesses dealing in interstate trade or heavily reliant on ITC should avoid the Composition scheme under GST.
Who Should NOT Opt for a Composition Scheme?
The Composition scheme under GST is not suitable for:
- Exporters and interstate suppliers
- E-commerce sellers
- Businesses requiring input tax credit
- Companies planning rapid expansion
In such cases, the regular GST scheme is a better option.
Key Features of the Composition Scheme Under GST
The following are the salient features of the Composition Scheme in GST:
- Low Taxation Rates: Firms are taxed at lower rates (1% for trading/industrial entities, 5% for eating joints, etc.).
- Easier Compliance Procedures: Filing quarterly returns rather than monthly returns.
- Little Bookkeeping: The necessity for accounting is minimal.
- No Input Tax Credit: The firm cannot claim Input Tax Credit under the Composition Scheme.
- This scheme is only suitable for some businesses but not for all.
Tax Rates Under Composition Scheme
Rates of tax under the Composition Scheme under GST depend upon the kind of business conducted.
- Manufacturer & Trader: Turnover at 1%.
- Restaurant (without alcohol): Turnover at 5%.
- Service Provider: Turnover at 6%.
Advantages of Composition Scheme Under GST
Some benefits of selecting the Composition Scheme for GST include:
- Convenient Compliance: Return filing can be done once every quarter rather than once a month.
- Reduced Tax Liability: It involves lower tax liability owing to the flat tax rate.
- Minimal Documentation: Little documentation is required, and invoices are not mandatory.
- Improved Cash Flow: Calculating taxes based on turnover makes cash flow management easy.
When Should You Switch to a Regular Scheme?
A business must exit the Composition scheme under GST if:
- Turnover exceeds the prescribed limit
- The business starts interstate supply
- Voluntary withdrawal is chosen
Switching is mandatory once conditions are violated.
Conclusion
The Composition Scheme of GST can prove to be very useful for small businesses that want simplicity in taxation procedures. However, it does have certain limitations like no Input Tax Credit and restriction on the type of business being run.
However, before deciding on the Composition Scheme of GST, it is important for companies to consider their business model and future plans. The Composition Scheme of GST can be useful for some small companies as the first step towards organizing their business.
If wisely implemented, the Composition Scheme of GST can work wonders for small businesses.
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FAQs
1. Is the Composition Scheme mandatory under GST?
No, the Composition Scheme is completely optional. Eligible taxpayers can choose whether to opt for it based on their business needs.
2. Can a taxpayer switch from the Composition Scheme to the regular GST scheme?
Yes, a taxpayer can voluntarily switch to the regular scheme at any time or must switch if they no longer meet eligibility conditions.
3. Can Composition Scheme dealers collect GST from customers?
No, taxpayers under this scheme cannot collect GST separately from customers. They must pay tax out of their own pocket.
4. Is Input Tax Credit (ITC) available under the Composition Scheme?
No, businesses opting for this scheme cannot claim Input Tax Credit on their purchases.
