Composition Scheme Under GST – Updated 2024

Composition Scheme Under GST: The Composition Scheme is like a shortcut for small businesses when it comes to paying taxes. Instead of dealing with all the complicated rules of GST, they can follow this simpler way.

Basically, instead of paying taxes based on how much they sell and buy, businesses in the Composition Scheme just pay a fixed amount based on their turnover. It’s like paying a set fee rather than calculating taxes for each transaction.

For small businesses, the Composition Scheme can be a lifesaver. It means they spend less time worrying about taxes and more time focusing on their work. Plus, it helps them stay on the right side of the law without getting bogged down by complicated paperwork.

The GST Composition Scheme offers a simplified tax payment mechanism tailored for small businesses. However, like any other scheme, it comes with its own set of benefits and limitations. In this article, we’ll delve into the details of both, helping you understand whether the Composition Scheme is the right fit for your business.

Understanding Eligibility for the GST Composition Scheme

The Composition Scheme in the realm of Goods and Services Tax (GST) presents an optional avenue for registered individuals to streamline their tax obligations. However, certain eligibility criteria govern the accessibility of this scheme. Let’s delve into the details to understand who can benefit from the Composition Scheme.

Composition Scheme Eligibility Criteria

The Composition Scheme offers a simplified tax payment method within the GST framework. It allows eligible businesses to pay tax at a fixed rate based on their turnover, easing compliance burdens.

Turnover Threshold: The key criterion for eligibility under the Composition Scheme is the aggregate turnover of the registered person. For most states, this threshold is set at Rs. 1.5 Crores in the preceding financial year.

Special State Exceptions: However, if the registered person operates in specific states like Arunachal Pradesh, Manipur, etc., the turnover limit reduces to Rs. 75 lakhs. This provision aims to support businesses in economically challenged regions.

These are the states where the turnover limit for the Composition Scheme is set at Rs. 75 lakhs instead of Rs. 1.5 Crores:

  • Arunachal Pradesh
  • Manipur
  • Meghalaya
  • Mizoram
  • Nagaland
  • Sikkim
  • Tripura
  • Uttarakhand

PAN Basis Opt-In: It’s crucial to note that opting for the Composition Scheme applies to all registrations under the same PAN. A person cannot selectively choose the scheme for individual registrations within the same state or across different states.

Composition Scheme Eligibility Criteria: An Example

Let’s explore the eligibility criteria for the Composition Scheme with the example of Sham Karyana Store, a small grocery shop located in Delhi:

  1. Turnover Threshold: In the previous financial year, Sham Karyana Store had a total turnover of Rs. 1.2 Crores from selling groceries, household items, and snacks.
  2. Special State Exceptions: Although Sham Karyana Store operates in Delhi, where the turnover limit for the Composition Scheme is Rs. 1.5 Crores. So, special state exceptions is not applicable here.

Considering this scenario, let’s assess if Sham Karyana Store is eligible for the Composition Scheme:

Therefore, Sham Karyana Store meets the eligibility criteria for the Composition Scheme, as their total turnover falls below the threshold set by GST law.

Understanding Aggregate Turnover in GST Law

The term ‘Aggregate Turnover’ in GST law refers to the total value of various types of supplies made by a business. It includes:

(a) Taxable supplies: Goods or services sold on which GST is applicable. (b) Exempt supplies: Goods or services that are not subject to GST. (c) Non-Taxable supplies: Items that are not taxed under GST law. (d) Nil rated supplies: Goods or services taxed at a 0% rate. (e) Export of goods or services: Sales made to customers outside India. (f) Inter-State supplies to distinct persons: Sales to different entities having the same PAN number across different states.

The aggregate turnover is calculated on a nationwide basis, excluding the tax component and inward supplies on which the recipient pays tax through reverse charge mechanism.

Understanding Aggregate Turnover in GST Law: An Example

Let’s illustrate aggregate turnover with a hypothetical scenario for your handmade crafts business:

  1. Taxable Supplies: You sell handmade crafts within your state worth Rs. 5,00,000, on which you charge GST.
  2. Exempt Supplies: Occasionally, you sell exempt items like Pottery (Earthern Pots, Clay Lamps etc), with a total value of Rs. 50,000.
  3. Non-Taxable Supplies: You provide free workshops on crafting techniques, with no monetary value.
  4. Nil Rated Supplies: Your sales of children’s drawings or colouring books, which are taxed at a 0% GST rate, amount to Rs. 2,00,000.
  5. Export of Goods: You ship crafts worth Rs. 3,00,000 to customers overseas.
  6. Inter-State Supplies to Distinct Persons: Sales to customers in different states under the same PAN number total Rs. 1,00,000.

To calculate your aggregate turnover, you add up all these amounts:

Total Taxable Supplies: Rs. 5,00,000 Exempt Supplies: Rs. 50,000 Nil Rated Supplies: Rs. 2,00,000 Export of Goods: Rs. 3,00,000 Inter-State Supplies to Distinct Persons: Rs. 1,00,000

Aggregate Turnover = Rs. 5,00,000 + Rs. 50,000 + Rs. 2,00,000 + Rs. 3,00,000 + Rs. 1,00,000

Aggregate Turnover = Rs. 11,50,000

So, your aggregate turnover for GST purposes would be Rs. 11,50,000.

GST Composition Scheme Turnover Limit: A Comprehensive Guide

Persons Not Eligible for Composition Scheme

The GST law specifies that certain registered individuals cannot avail the benefits of the composition scheme. These include:

  1. Persons Engaged in Service Supply: Except for those involved in specific services mentioned in Schedule II, such as restaurant services.
  2. Persons Supplying Goods or Services Not Taxable Under GST: Those dealing in items or services not subject to GST.
  3. Persons Making Inter-State Supplies: Individuals making sales or services transactions across state borders.
  4. Persons Making Services Supplies Through E-commerce Operators Subject to TCS: Those providing services through e-commerce platforms where Tax Collected at Source (TCS) is applicable.
  5. Manufacturers of Notified Goods: Manufacturers of specific goods such as ice cream, pan masala, aerated water, tobacco products, fly ash bricks, etc.
  6. Traders Engaged in Specific Goods Trading: Although traders of certain goods are eligible, manufacturers of these same goods are not, as per the notification.
Sl. No. HSN Notified Goods
(a) 2105 00 00 Ice cream and other edible ice, whether or not containing cocoa
(b) 2106 90 20 Pan masala
(c) 2202 10 10 Aerated Water
(d) 24 All goods, i.e. Tobacco and manufactured tobacco substitutes
(e) 6815 Fly ash bricks; fly ash aggregate; fly ash blocks
(f) 6910 00 10 Bricks of fossil meals or similar siliceous earths
(g) 6904 10 00 Building bricks
(h) 6905 10 00 Earthen or roofing tiles

Brick Kiln Sector: As of April 01, 2022, the composition scheme benefit has been withdrawn from the brick kiln sector, which now operates under a different tax structure.

7. Casual Taxable Persons: Individuals involved in occasional or irregular transactions subject to GST.

8. Non-Resident Taxable Persons: Individuals not residing in India but liable for GST on certain transactions.

These restrictions ensure that the composition scheme is utilized appropriately and effectively by eligible businesses, while also aligning with the broader tax objectives of the GST framework.

Special Composition Scheme for Service Providers under GSt

The general composition scheme, which we discussed earlier, isn’t open to service providers, except for those offering restaurant or catering services. However, there’s good news! The Finance (No. 2) Act, 2019 introduced a special composition scheme tailored for other service providers.

This special scheme is open to all registered individuals not covered by the general composition scheme and whose turnover in the preceding financial year doesn’t exceed Rs. 50 lakhs.

Under this special composition scheme, eligible individuals need to pay tax at a rate of 3% (6% for IGST) of the turnover of supplies of goods and services within their respective state or union territory.

This scheme offers a simplified tax payment method for small service providers, easing their compliance burden within the GST framework.

Procedure for Opting into Composition Scheme under GST

When it comes to choosing the Composition Scheme, there are specific procedures to follow, depending on whether you’re applying for registration for the first time or already registered and looking to switch to the scheme. Let’s break down the steps for both scenarios:

Opting for Composition Scheme while Applying for Registration

  1. Filing Application for Registration to Opt for Composition Scheme (Step – 1):
    • When applying for GST registration, you’ll need to fill out Form GST REG-01 on the GSTN portal.
    • Specifically select the option for the composition scheme and declare your intention to abide by its conditions and restrictions.
    • For the special composition scheme (as discussed earlier), choose the option of ‘Any other supplier eligible for composition levy’ in Form GST REG-01.
  2. Processing of Registration Application and Intimation by the Proper Officer (Step – 2):
    • Your registration application will be processed by the GST department according to registration provisions under the GST law.
  3. Effective Date of Opting into Composition Scheme (Step – 3):
    • The intimation for opting into the composition scheme, filed in Form GST REG-01, becomes effective only after your registration is granted.
    • You can start paying tax under the composition scheme from the effective date of registration.
    • There’s no need to file a fresh intimation every year; you can continue under the scheme until you opt out or violate any related conditions.

By following these steps, you can smoothly opt into the Composition Scheme and enjoy its benefits within the GST framework.

Opting into Composition Scheme for Taxpayers Registered Under Normal Scheme

If you’re already registered under the GST law and currently paying taxes under the normal scheme, switching to the composition scheme is possible. Here’s how you can do it:

  1. Filing an Intimation for Opting Composition Scheme (Step – 1):
    • You can opt for the composition scheme by filing an intimation in Form GST CMP-02 before the start of the financial year you wish to apply it to.
    • Remember, you can save the draft of your intimation application on GSTN for up to 15 days from the date of initiation.
  2. Effective Date of Opting Composition Scheme (Step – 2):
    • Once you file Form CMP-02, the composition scheme will become effective from the beginning of the financial year specified in your intimation.
  3. Payment of Tax on Inputs, Capital Goods, etc. Held in Stock (Step – 3):
    • Upon opting for the composition scheme, you’ll need to pay tax equal to the input tax credit (ITC) on inputs, semi-finished or finished goods, and capital goods held in stock as of the day before you exercise this option.
    • To comply with this requirement, submit a statement in Form GST ITC-03 within 60 days from the start of the relevant financial year.

Following these steps will ensure a smooth transition from the normal scheme to the composition scheme, allowing you to streamline your tax obligations effectively.

Implications of Opting into Composition Scheme under GST

When a registered person chooses the composition scheme, there are several conditions, restrictions, and compliance requirements they need to follow. Let’s break down these provisions:

1. Reverse Charge Liability on Person Opting Composition Scheme:

  • Even though the composition scheme overrides other GST provisions, the person opting for it still needs to fulfill reverse charge liability obligations.

2. Requirement to Issue Bill of Supply:

  • Instead of tax invoices, registered persons paying tax under the composition scheme must issue a bill of supply.

3. Tax Not to be Collected from Recipient:

  • Those under the composition scheme are not required to collect tax from the recipient on supplies made.

4. Other Conditions and Restrictions for Composition Levy:

  • Various conditions need to be met, including not being engaged in certain activities, mentioning composition taxable person on bills and notices, and more.

5. No Input Tax Credit under Composition Scheme:

  • Persons under the composition scheme cannot avail input tax credit for taxes paid.

6. Payment of Tax and Filing of Form GST CMP-08:

  • Tax must be paid quarterly through the electronic cash ledger and details furnished in Form GST CMP-08.

7. Lower Rate of Interest on Late Payment of Tax during Covid-19 Pandemic:

  • Relaxation was provided for tax payable during the pandemic period, with reduced interest rates on late payments.

8. Filing of Return in Form GSTR-4 (Composition Scheme):

  • Persons under the composition scheme need to file a return every financial year in Form GSTR-4.

9. Filing of Annual Return in Form GSTR-9A (Composition Scheme):

  • Annual return in Form GSTR-9A is required, with certain exemptions provided for specific financial years based on aggregate turnover.

Composition Scheme Tax Rates under GST

Below is the table covering the tax rates for different types of businesses under the GST composition scheme in India:

Type of Business CGST Rate SGST Rate Total Tax Rate
Manufacturers and Traders (Goods) 0.5% 0.5% 1%
Restaurants not serving Alcohol 2.5% 2.5% 5%
Service Providers 3% 3% 6%
Manufacturers of bricks (including building materials) 3% 3% 6%

The Composition Scheme under GST simplifies tax compliance for small businesses, offering a shortcut to navigating the complexities of GST regulations. Instead of intricate tax calculations for each transaction, businesses under this scheme pay a fixed amount based on their turnover.

Conclusion

For small enterprises like Sham Karyana Store in Delhi, the Composition Scheme serves as a lifeline, reducing the burden of tax-related paperwork and allowing them to focus more on their core operations.

Understanding the eligibility criteria, aggregate turnover calculations, and implications of the Composition Scheme is crucial for businesses looking to opt in. From special state exceptions to restrictions on input tax credit, businesses need to weigh the benefits against the limitations before making a decision.

By following the prescribed procedures and complying with the necessary conditions, businesses can smoothly transition into the Composition Scheme and enjoy its benefits within the GST framework.

Categories GST

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