Composition Scheme Under GST – Updated 2024

Composition Scheme under GST: The Composition Scheme is like a shortcut to pay GST and filing GST returns easily. They can bypass all the complexities of the Goods and Services Tax and follow this easier alternative.

The Composition Scheme operates on a different principle than the normal system in which taxes are paid based on sales and purchases made. It’s like paying a fixed rate of GST rather than calculating taxes for each transaction.

For small businesses, the Composition Scheme is a saviour. This means spending less time on taxes and more concentrating on their business activities. Furthermore, this process enables them to maintain compliance without getting trapped into obligations of filing returns.

GST Composition Scheme offers easy payment of tax facilities designed particularly for small businesses. However, as with any other scheme, it has its pros and cons too. In this article, we discuss both aspects in detail to help you know whether a composition scheme suits your business or not．

Summary

Topic	Summary
GST Composition Scheme	Simplifies GST for small businesses with fixed rates, reduced complexity, and easier compliance.
Qualification Standards	Based on turnover limits: INR 1.5 crore (INR 75 lakh for special category states).
Opting for Composition Scheme	Requires understanding of eligibility, turnover calculation, benefits, and limitations.
Tax Calculation under GST Law	Determines GST liability by aggregating all types of supplies and inter-state sales.
Businesses Not Eligible	Excludes service providers (except restaurants), inter-state suppliers, specific goods manufacturers, casual taxable persons, non-residents, etc.
Steps to Opt into Composition	Follows specific procedures during GST registration or scheme switch, adhering to GST rules.
Consequences of Composition	Includes reverse charge liability, bill of supply issuance, no input credit, quarterly tax payment, filing returns, and specific tax rates based on business type.
Tax Rates under Composition	Varies: 1% for manufacturers/traders, 5% for restaurants, 6% for service providers (including restaurants), 6% for brick manufacturers.
Conclusion	Emphasizes understanding eligibility, and legal procedures, and weighing benefits against limitations before joining the scheme.

GST Composition Scheme Eligibility

The Goods and Services Tax (GST) composition scheme provides an opportunity for registered persons to simplify their tax formalities. However, there are some eligibility criteria for opting for the GST composition Scheme.

Requirements for Eligibility Under the Composition Scheme

The GST system has a simplified payment method called the Composition Scheme. This allows businesses with low turnovers to pay taxes at lower rates, which reduces their compliance costs.

The turnover limit is the most important factor that determines whether one is eligible or not under this scheme. The ceiling in most states is fixed at Rs 1.5 crore in the financial year preceding registration.

But there are some special cases where the ceiling is fixed at Rs 75 lakh instead of Rs 1.5 crore;

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

Opting Based On PAN: One should understand that if they opt for this system using one PAN, then it should apply across all their registrations made either within the same state or different states but under that particular PAN.

Eligibility Criteria for Composition Scheme: Example

Let’s take the instance of Sham Karyana Store, a small grocery shop situated in Delhi, to understand the eligibility criteria for the composition scheme:

Threshold Limit: During the last year, this store recorded an overall turnover of INR 1.2 Crores from sale of groceries, household items as well as snacks.

Exceptions by Special States: In Delhi, if your turnover is less than INR 1.5 crores, you may be part of the composition scheme. There are no exceptions because the state rules don’t require them.

Now let us see whether or not this establishment qualifies under such circumstances:

So indeed yes if we look at it from that perspective then all these things make sense namely;

Hence Sham Karyana Store satisfies the conditions required by GST law since its aggregate revenue falls below what has been laid down by the GST Act.

Understanding Total Turnover in the GST Law

The term ‘total turnover’ under the GST law refers to an aggregate sum of all kinds of supplies made by a company. Such supplies include:

• (a) Taxable supplies: Goods or services that are sold on which tax is levied under the GST regime.
• (b) Exempt supplies: Goods or services that are not taxed under GST.
• (c) Non-taxable supplies: Goods or services that do not fall within the ambit of taxation under GST legislation.
• (d) Nil rated supplies: Goods or services that attract 0% rate of tax.
• (e) Export of goods/services: Sale made with customers located outside India.
• (f) Inter-State supplies to distinct persons: Sale to different entities having the same PAN but situated in different states.

Aggregate turnover is computed on an all-India basis, excluding taxes paid through the reverse charge mechanism and inward supplies attracting the reverse charge component.

Understanding Total Turnover in the GST Law – An Example

Let us assume a case where you have a business selling handmade crafts:

• Taxable Supplies: You sell handmade crafts within your state for INR 500,000/- and you charge GST on it.
• Exempt Supplies: From time to time, you sell exempted items like Pottery (Earthern Pots, Clay Lamps etc), worth INR 50,000/- in total value.
• Non-Taxable Supplies: You conduct workshops on crafting techniques free of cost i.e., without any monetary value involved in it.
• Nil-Rated Supplies: Your sales for children’s drawings or colouring books are INR 200,000/- which is taxed at zero per cent GST rate.
• Export of Goods: Ship crafts worth INR 300,000/- to overseas customers.
• Inter-State Supplies to Distinct Persons: Sold goods worth INR 100,000/- each under the same PAN number but across different states.

Now we need to find out what would be your aggregate turnover.

• Total Taxable Supplies = INR 500,000/-
• Exempt Supplies = INR 50,000/-
• Nil Rated Supplies = INR 200,000/-
• Export of Goods = INR 300,000/-
• Inter-State Supplies to Distinct Persons= INR 100,000/- each *2 (different states under same PAN)
• Aggregate Turnover = Total Taxable Supplies + Exempt Supplies + Nil Rated Supplies + Export of Goods + Inter-State Supplies to Distinct Persons
• Aggregate Turnover= 5,00,000+50,000+2,00,000+3,00,000+1,00,000
• Aggregate Turnover= 11.5 lakhs (approx)
• Hence your aggregate turnover for GST would be around Rs.11.5 lakh.

People Who Cannot Take The Composition Scheme

Some registered persons cannot take benefits under the composition scheme as per GST law. These are:

1. Persons Providing Service: Except those providing specific services mentioned in Schedule II like restaurant service.
2. Persons Supplying Goods or Services Not Taxable Under GST: People dealing with goods or services not covered by GST.
3. Persons Making Inter-State Supplies: Individuals doing sales or service transactions across states.
4. Persons Making Services Supplies Through E-commerce Operators Subject to TCS: Those who provide services through e-commerce platforms where Tax Collected at Source (TCS) is applicable.
5. Manufacturers of Notified Goods: Manufacturers of particular goods such as ice cream, pan masala, aerated water, tobacco products, fly ash bricks etc.
6. Traders Engaged in Specific Goods Trading: Traders of certain goods are eligible for this however manufacturers of these same goods are not notified.

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

7. Brick Kiln Sector: From 1st April, 2022 the scheme of composition has been withdrawn for brick kiln sector and it is now under a separate tax structure.

8. Casual Taxable Persons: People who undertake transactions occasionally or irregularly are subject to GST.

9. Non-Resident Taxable Persons: Individuals liable to pay GST on specified transactions but not living in India.

These limitations are designed to make sure that eligible businesses use the composition scheme in the right manner and to achieve the wider tax goals of the GST framework as well.

Specially composition scheme for service providers under GST

• The general composition scheme which we already discussed does not apply to any service provider except those serving as restaurants or caterers. But there is good news! The Finance (No 2) Act, 2019 has introduced another special composition scheme for other categories of service-providing persons.
• Any registered person who was not covered by the general composition scheme and whose aggregate turnover in the preceding financial year did not exceed 50 lakh rupees can opt for this special scheme.
• Under this particular Composition Scheme, a 3% per cent tax rate (6 per cent for IGST) shall be levied on the turnover of supplies of goods or services effected within the State or Union territory by such eligible person.
• It provides an easy way to pay taxes for small-scale service providers thereby reducing their compliance burden in the GST framework.

Steps to follow for opting into Composition Scheme under GST

Certain steps need to be followed while choosing a Composition Scheme. These steps differ according to whether you are applying for registration for the first time or already registered and want to switch over to the scheme. Let us understand what these steps are.

Opting for Composition Scheme while Applying for Registration

Filing Application for Registration to Opt for Composition Scheme (Step – 1):

1. When you apply for GST registration, form GST REG-01 needs to be filled on GSTN portal.
2. Here, choose the composition scheme option and indicate your intention of complying with its conditions and restrictions.
3. In case of a special composition scheme (explained earlier), select ‘Any other supplier eligible for composition levy’ in Form GST REG-01.

Processing of Registration Application and Intimation by the Proper Officer (Step – 2):

• The GST department will process your registration application as per the provisions of registration under GST law.

Effective Date of Opting into Composition Scheme (Step – 3):

• The intimation of opting into the composition scheme through Form GST REG-01 shall become effective only when your registration is approved.
• You can start paying tax under the composition scheme from the date of the grant of registration order.
• You need not file a fresh intimation every year but continue on till you opt out or violate any conditions thereof.

By adhering to these processes one can smoothly opt into the regime of the Compositions Scheme within the framework of Goods and Services Tax.

Entering the Composition Scheme for Taxpayers Registered under Normal Scheme

Those who are registered under GST law already and pay taxes on the normal scheme can change to the composition scheme. This is how you can do it:

Step 1: Filing an Intimation for Opting Composition Scheme

• You can opt for a composition scheme by filing an intimation in Form GST CMP-02 before the commencement of the financial year for which you want to apply.
• Please note that you can keep the draft of your intimation saved on GSTN for 15 days from when you started filling.

Step 2: Effective Date of Opting Composition Scheme

• Once you file Form CMP-02, the composition scheme will be effective from the beginning of such financial year as specified in your said intimation.

Step 3: Payment of Tax on Inputs, Capital Goods, etc. Held in Stock

On opting into the composition scheme, you are required to pay tax in respect of input tax credit (ITC) availed on inputs held in stock, semi-finished goods or finished goods held in stock and capital goods held in stock as immediately preceding the day of exercising such option.

To meet this requirement furnish a statement in Form GST ITC-03 within sixty days from the commencement of relevant financial year.

By following these steps one can smoothly shift from a normal scheme to a composition scheme thus enabling themselves to conveniently fulfil their tax obligations.

Consequences of Opting Composition Scheme under GST

The composition scheme involves several conditions, restrictions and compliance requirements to be followed by a registered person. Let’s discuss these provisions:

1. Reverse Charge liability on Person Opting Composition Scheme:

Though the person who has opted for the composition scheme should be relieved from other GST provisions he is still required to discharge his reverse charge liability.

2. Requirement to Issue Bill of Supply:

Instead of tax invoices, a registered person paying tax under the composition scheme shall issue a bill of supply.

3. No Input Tax Credit under Composition Scheme:

Input tax credit cannot be availed on taxes paid by persons opting composition scheme.

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

Tax is required to be paid quarterly through electronic cash ledger and details are furnished in Form GST CMP-08.

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

Every financial year return has to be filed in Form GSTR-4 by persons opting composition scheme.

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

Annual return is required in form GSTR 9A with exemptions provided for specific fy based upon 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%

Conclusion

For businesses like Sham Karyana Store in Delhi, the Composition Scheme is very important because it reduces tax paperwork and allows them to concentrate on their main business.

It is essential for any enterprise that wants to join this scheme to know whether they qualify or not, how to calculate their total sales, and understand what will happen if they opt-in. Companies should evaluate benefits vis-à-vis restrictions: from special state exceptions through input tax credit prohibition.

Following all necessary steps provided by law together with meeting the required criteria will enable businesses to smoothly shift into a composition scheme under GST framework and start reaping its advantages.