GST Composition Scheme

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Tally Solutions | Nov-11-2019

Introduction

Composition Scheme under GST is a relief mechanism, especially for small tax payers, wherein they can not only have comparatively less tedious compliance practices to deal with, but also pay GST at a lower, fixed composition tax rate on their turnover. Thus, it is important for businesses to be clear about, what is the composition scheme.

What are the conditions for availing Composition Scheme?

*Update as on 10th Jan 2019

As per 32nd GST Council Meeting held on 10th Jan 2019, Service Providers can opt into the Composition Tax Scheme, and the Government has set the threshold turnover for service providers at Rs. 50 lakhs to be eligible for this scheme.

Turnover Limit for GST Composition Scheme

Any taxpayer, whose turnover is less than INR 1.5 Crore, in Rest of India, and less than INR 75 Lakhs in Special Category States (North Eastern States and Himachal Pradesh), can opt for the composition scheme under GST. The point to be noted is that the GST composition scheme limit is based on the turnover of all businesses which are registered with the same PAN, and thus all businesses under the same PAN can either be registered regular dealers or can be composition dealers – not a combination of both.

Persons Ineligible for the GST Composition Scheme

The following taxable persons cannot opt for the composition scheme under GST:

  • Taxpayer supplying Exempt supplies
  • Supplier of services other than restaurant related services
  • Manufacturer of ice cream, pan masala, or tobacco
  • Casual Taxable Person or a Non-resident Taxable Person
  • Businesses which supply goods through an e-commerce operator

GST Composition Scheme Rules

A business will need to comply with the following rules, as per the composition scheme under GST:

  • No Input Tax Credit can be claimed
  • No Inter-state supply of goods can be done
  • No GST exempted goods can be supplied
  • As per the composition scheme rules, tax needs to be paid at normal GST rates for transactions under the Reverse Charge Mechanism
  • If a taxable person has multiple segments of businesses under the same PAN, they must all collectively opt for or opt-out of the composition scheme
  • The words 'composition taxable person' must be displayed prominently on every notice or signboard at the place of business
  • As per the composition scheme bill format, the words 'composition taxable person' must be displayed prominently on every bill of supply which is issued
  • Services worth up to INR 5 Lakh can be supplied under the scheme, by a taxable person who is also supplying goods

What is the GST composition scheme limit?

GST Composition Scheme Last Date for Applying

To opt for the composition scheme a taxpayer has to file GST CMP-02 on the GST portal. The composition scheme registration should be done at the beginning of every financial year, for which a dealer wants to opt for the composition scheme. In other words, the GST composition scheme last date for the next year will be 31st of March of the previous financial year.

Composition Scheme Billing

Bill of Supply under GST

As per the GST composition scheme rules, a composition dealer cannot issue a GST tax invoice, because he can neither charge tax from his customers nor claim the input tax credit. In other words, the tax needs to be paid out of their own pocket. Thus, as per the rules with regards to the GST composition scheme bill format, a composition dealer needs to issue a Bill of Supply, and in addition, the words ‘composition taxable person’ should be clearly mentioned on it, as discussed above.

GST Composition Scheme Rate

The GST Composition Scheme Rate is a standard lower rate of tax, which is specified as follows:

Entity Composition Tax Rates
Manufacturer & Traders of Goods 1%
Restaurants not serving alcohol for human consumption 5%

Service providers are not eligible to apply for the composition scheme. However, a taxable person who is supplying goods, and is under the composition levy may provide services up to INR 5 Lakh, as discussed above.

Composition Scheme Return Filing

A composition scheme dealer is required to file a quarterly return i.e. Form GSTR-4 by the 18th of the month after the end of the quarter. Also, an annual return i.e. Form GSTR-9A has to be filed by the 31st of December of the next financial year.

Also, it is worth noting, that for the sake of compliance under GST, a composition dealer is not required to maintain detailed records, in order to file returns.

Advantages of Composition Scheme

The following are the advantages, small businesses can expect out from registering under the composition scheme:

  • Lesser compliance activity
  • Limited tax liability
  • High cash liquidity as the composition scheme rate under GST is lower compared to the usual GST rates

Disadvantages of Composition Scheme

The following are the disadvantages of composition scheme, which a business will need to keep in mind, before making the decision to go ahead:

  • Not allowed to carry out inter-state transactions
  • Not eligible to collect tax from customers and not eligible to claim Input Tax Credit
  • Not eligible to supply exempt goods
  • Not eligible to drive business on e-commerce

FAQs on GST Composition Scheme

What are the conditions for availing Composition Scheme?

Composition Scheme under GST is a scheme which offers comparatively lesser compliance activity, as well as a flat rate GST tax rate for small businesses. Thus, it is important for businesses to be clear about, what is the composition scheme under GST. There are several rules and conditions to avail the GST composition scheme for different individuals. To get more details on who can avail this scheme, eligibility criteria and return forms, click GST Composition Scheme Rules.

What is the GST composition scheme limit?

The following taxable persons cannot opt for the composition scheme under GST:

  • Taxpayer supplying Exempt supplies
  • Supplier of services other than restaurant related services
  • Manufacturer of ice cream, pan masala, or tobacco
  • Casual Taxable Person or a Non-resident Taxable Person
  • Businesses which supply goods through an e-commerce operator

How can a taxpayer opt for composition scheme?

To opt for composition scheme a taxpayer has to file GST CMP-02 with the government. This can be done online by logging into the GST Portal. This intimation should be given at the beginning of every Financial Year by a dealer wanting to opt for the Composition Scheme. 

What documents should a composition dealer issue while making supply?

A composition dealer can’t issue a tax invoice. This is because a composition dealer can’t charge tax from their customers. They are required to pay the tax out of their own pocket. Therefore, the dealer has to issue a Bill of Supply. The dealer must also mention “composition taxable person, not eligible to collect tax on supplies” at the top of the Bill of Supply.

How should GST payment be made by a composition dealer?

In making the GST payment, the GST act allows the businesses to set the eligible input tax credit (ITC) with the output GST collected on the sales. Thus, before making GST payment, businesses need to first apply the GST payment calculations. The GST payment calculations steps are given below

  • Determine the total output GST
  • Determine the eligible ITC
  • Set-off the output GST with the ITC. Here you need to follow the set-up order of CGST, GST and IGST.
  • The balance is the GST liability that a business needs to pay.

What are the returns to be filed by a composition dealer?

A dealer is required to file a quarterly return GSTR-4 by 18th of the month after the end of the quarter. Also, an annual return GSTR-9A has to be filed by 31st December of the next financial year. Here are the details of all the forms to be filed by a composition dealer.

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