GST Composition Scheme
After the GST implementation, GST registration of businesses takes place in large numbers under the GST Act 2017. Apart from this, the system of doing alternative tax registrations such as a composition scheme is also available for the benefit of smaller businesses. There are key changes in the GST Composition scheme in comparison to the earlier Composition scheme which was operated under the VAT regime.
The composition scheme under GST is currently applicable to businesses with an aggregated turnover of Rs. 1.5 crores or less (lower limit is applicable in case of special category states).
Composition Scheme Limit
Initially, 1 Crore limit featured for the composition scheme which means that only business having an annual turnover of less than Rs 1 Crore could opt for composition levy registration. The GST composition scheme turnover limit for North Eastern states and hill states was kept lower at Rs 75 Lakhs annually. North-Eastern states have a smaller tax base as compared to other states in India.
After the 32nd GST Council meeting held on 10th January 2019, the GST composition Scheme limit for states was increased to Rs 1.5 Cr. All these changes in the GST composition scheme came into effect from 1st April 2019.
GST Composition Scheme Rules
As per the provisions of the GST act, businesses such as manufacturing and service sectors including restaurants as well as traders register under the Composition Scheme.
The GST composition scheme does not apply to the following persons/entities*:
- Non-resident taxable person or a casual taxable person
- Businesses/persons making supply of goods via e-commerce portal operator that collects tax at source (u/s 52)
- Businesses/person deals in inter-state supply of goods.
- The manufacturer of ice cream and other edible ice with/without cocoa as additive.
- The manufacturer of tobacco products, tobacco substitutes, and pan masala.
- Businesses/persons who made the purchasing of the goods from unregistered supplier (allowed if GST is paid on such goods on reverse charge basis).
- Suppliers involved in the supply of goods that are exempt under the GST Act.
*The list is indicative and subject to change.
Please note that as per the existing rules all entities or individuals registered under the Composition Scheme are not allowed to engage in the interstate supply of goods and services, they are only allowed to procure goods or services from suppliers who are doing interstate operations under the GST Act.
Thus businesses/individuals registered under the composition scheme can purchase goods/services from outside the state but cannot sell goods/services to consumers/businesses outside the state.
Originally service providers other than restaurant services were not allowed to register under the GST composition scheme. The change came from January 2019 when the 32nd GST Council Meeting announced that services sector businesses (apart from restaurant services) would also be allowed to register under the composition scheme.
Composition Scheme GST rate
All businesses and individuals who are registered under the Composition Scheme are required to pay a GST rate of 1% to 6% depending on the type of business activity conducted by the registered person or business entity.
The applicable composition scheme GST rate features equal SGST/UGST and CGST split i.e. 1% GST = 0.5% CGST + 0.5% SGST/UGST, 6% GST = 3% SGST/UGST + 3% CGST. The composition levy rates under GST are as follows:
- 1% of the turnover for traders and other suppliers eligible for composition scheme registration
- 2% of the turnover for manufacturers apart from manufacturers of products not eligible for GST composition scheme.
- 5% of the turnover for restaurant services
- 6% of the turnover for businesses providing services/mixed services (other than restaurant services).
GST Composition Scheme Return
According to currently applicable GST Composition Scheme rules, electronic returns on the official GST portal will have to be filed quarterly by registered businesses or individuals by the “18th Month of succeeding last month of the previous quarter”.
For composition registered individuals/businesses, the returns are to be filed using the GSTR-4 Form. You can use the GSTR-4 Offline Tool to prepare your returns before online submission.
Composition Scheme Forms under GST
| Form Number/ Name | Purpose of the form |
GST CMP- 01
| Intimation of tax payment under the Composition scheme (For provisionally registered business or entity or individual)
|
GST CMP -02
| To opt for Composition scheme (Unregistered entity / persons)
|
GST CMP- 03
| To provide details of stock /inward supply from unregistered business or person.
|
GST CMP- 04
| To withdraw from a GST composition scheme.
|
GST CMP - 05
| Show-cause notice issued by appropriate tax official n contravention of GST Act rules.
|
GST CMP- 06
| Reply to a show-cause notice issued in the form of GST CMP- 05
|
GST CMP - 07
| Order indicating acceptance or rejection of show- cause notice reply
|
GST REG- 01
| To register under the Composition Scheme
|
GST ITC - 01
| Details of inputs available with the Composition registered supplier in the form of raw material or semi-finished and finished goods.
|
The list of forms is indicative and other forms may be required to apply for/operate under the GST composition scheme.
GST Composition Scheme Bill Format
All those businesses and individuals registered under the Composition Scheme are not allowed to issue tax invoices or GST invoices as they cannot charge GST on outward supplies of goods or services.
Thus, a composition dealer needs to issue a Bill of Supply in case of outward supply of goods/services.
This bill of supply is mandatory required to feature the words – “Composition Taxable Person, Not Eligible to Collect Tax on Supplies” on it.
Key details that need to be included in a Bill of Supply are:
- Supplier name, GST Identification Number (GSTIN) and Address.
- Unique serial number termed as bill of supply number.
- Date of issue of bill of supply.
- Recipient details such as name, address and GSTIN (if registered).
- HSN code of goods being supplied
- Description/quantity of Goods/services (as applicable)
- Total value of supplies (adjusted for applicable discounts)
- Signature/digital signature of the supplier
GST payments by Composition Registered Business or Individual
Businesses or individuals are not allowed to claim an Input Tax Credit if they are registered under the GST Composition. In that case, the suppliers need to make payments of GST out of pocket.
Key instances where GST Payment made by Composition scheme registered dealers are:
- Tax payments on goods received from unregistered dealers.
- Tax payments in lieu of goods supplied under reverse charge mechanism.
- Tax incurred for import of services
Benefits of GST Composition Scheme Registration
- Reduces compliance requirements, hence considered as a right option for small businesses with limited resources.
- Limited liability in terms of tax payable instead of composition levy.
- Higher liquidity for small businesses as tax rates are lower.
Limitations of the GST Composition Scheme Registration.
- Limited area of operation as composition dealer cannot engage in inter-state sales transactions (outward supplies).
- Unavailability of input tax credit mechanism to offset GST payments.
