Everything You Need to Know About the GST Composition Scheme

In recent years, the Indian Government has rolled out a range of schemes to support and invigorate the country's small business sector. One notable development is the introduction of the GST Composition Scheme, designed to make tax compliance easier for eligible businesses. While the Goods and Services Tax (GST) has already streamlined and standardized the taxation process, the Composition Scheme offers an even simpler approach for managing taxes. This scheme is particularly beneficial for small and medium-sized enterprises (SMEs) by reducing their tax burden and administrative hassles. Additionally, it fosters a more transparent business environment and encourages entrepreneurial growth by making tax compliance more manageable.

What is the GST Composition Scheme?

The GST Composition Scheme is a tax mechanism designed to simplify the process for small businesses in India. It offers benefits like reduced tax compliance, less paperwork, and lower tax liabilities.

Businesses with an annual turnover of less than Rs. 1.5 crore can choose to participate in this scheme. Under it, they pay taxes at a fixed rate based on their turnover, ranging from 1% to 6%. This streamlined approach means they only need to file one quarterly return and one annual return each year, as opposed to the four returns required for those not in the scheme (three monthly and one annual).

By reducing the frequency and complexity of tax filings, the GST Composition Scheme allows small businesses to focus more on their operations and growth, rather than getting bogged down by tax-related paperwork. This initiative is part of the government’s broader effort to foster a more business-friendly environment and encourage entrepreneurial activity.

Who is Eligible to Opt for this Composition Scheme?

To qualify for the GST Composition Scheme, businesses must meet specific turnover thresholds. Generally, those with an annual turnover below Rs. 1.5 crore are eligible. However, in Himachal Pradesh and the North-Eastern states, this limit is reduced to Rs. 75 lakh, but this applies only to manufacturers, traders, and restaurants that don’t serve alcohol.

For service providers, the turnover cap is set at Rs. 50 lakh. It’s important to note that the total turnover of all businesses registered under the same Permanent Account Number (PAN) is considered when determining eligibility. This means that if multiple entities are registered under the same PAN, their combined turnover will be used to assess whether they can opt for the Composition Scheme. This approach ensures that the benefits are reserved for genuinely small-scale operations, helping to streamline their tax obligations and reduce administrative burdens.

Who is Ineligible for the Composition Scheme?

Certain businesses and individuals cannot avail themselves of the GST Composition Scheme. These include:

Inter-State Suppliers: Businesses engaged in supplying goods or services across state lines are not eligible for the scheme. The Composition Scheme is restricted to intra-state transactions only.

Manufacturers of Specific Goods: The GST Council has designated certain manufacturing activities as ineligible for the Composition Scheme. This exclusion list is based on the nature and classification of the goods being produced.

Casual Taxable Persons: Those who are registered as casual taxable persons, meaning they require GST registration for a temporary period, cannot opt for the scheme.

Non-Resident Individuals: Non-Resident Indians (NRIs) registered under GST are also excluded from the Composition Scheme.

E-Commerce Sellers: Initially, sellers using e-commerce platforms who collected Tax Collected at Source (TCS) were barred from the scheme. However, this restriction was lifted as of October 1, 2023, allowing these sellers to benefit from the Composition Scheme.

These exclusions ensure that the Composition Scheme is reserved for businesses that fit specific criteria, helping to maintain its focus on smaller, simpler operations and streamline compliance for eligible entities.

 How to Enroll in the GST Composition Scheme

If you want to opt for the GST Composition Scheme, follow these steps:

At the Beginning of the Financial Year: To enroll in the Composition Scheme from the start of a new financial year, you need to submit the GST CMP-02 form. This can be done through the GST portal or with the help of a GST consultant. Make sure to complete this filing before the financial year begins to take full advantage of the scheme's benefits for the entire year.

During GST Registration: If you’re a new taxpayer registering for GST, you have the option to select the Composition Scheme right during the registration process. Simply choose the relevant option to indicate your intention to be part of the scheme.

Keep in mind that once you opt for the Composition Scheme, you are locked into it for the entire financial year. Switching to the regular GST scheme is not permitted until the start of the next financial year.

For more tailored advice and detailed guidance, consulting with a tax professional or reviewing the official GST guidelines is recommended. This ensures that you make an informed decision and comply with all regulatory requirements.

Billing Process for GST Composition Dealers

For dealers opting for the GST Composition Scheme, the billing process differs from that of regular taxpayers. Here’s a straightforward guide on how composition dealers should manage their billing:

No Tax Invoice: Unlike regular taxpayers, composition dealers do not charge GST to their customers. Consequently, they do not issue a tax invoice, which is typically used to reflect tax charges and input credits.

Issuing a Bill of Supply: Instead of a tax invoice, composition dealers must provide a "Bill of Supply" for their transactions. This document acts as a substitute for a tax invoice and outlines the details of the sale without including any tax charges.

Required Declaration: Each Bill of Supply must include a specific declaration: “Composition taxable person, not eligible to collect tax on supplies.” This statement informs customers that the dealer is operating under the Composition Scheme and is not authorized to collect GST on the sale.

This process ensures clarity in transactions and maintains compliance with GST regulations. By following these billing practices, composition dealers can effectively manage their sales and uphold the integrity of their scheme benefits.

Drawbacks of the GST Composition Scheme

Opting for the GST Composition Scheme comes with certain limitations and disadvantages:

Restricted Business Scope: Businesses under the Composition Scheme are not allowed to engage in inter-state transactions. This restriction can hinder their ability to expand their market beyond state boundaries and limit their growth potential.

No Input Tax Credit: Composition dealers cannot claim Input Tax Credit (ITC). This means they cannot recover the tax paid on their purchases against the tax collected on their sales, potentially increasing their overall tax burden on inputs.

Exclusion of Certain Supplies: The scheme imposes restrictions on the types of goods and services that can be supplied. For instance, dealers cannot sell non-taxable items like alcohol or operate through e-commerce platforms.

FAQs

Q. What are the rules for GST composition scheme invoice?

A. A composition dealer has to issue a Bill of Supply. They cannot issue a tax invoice. This is because the tax has to be paid by the dealer out of pocket. A composition dealer is not allowed to recover the GST from the customers.

Q. What are the conditions for a composition scheme?

A. A taxpayer whose turnover is below Rs 1.5 crore* can opt for Composition Scheme.

Q. What is the GST turnover limit for composition scheme?

A. What is the GST limit for composition schemes? The GST limit for composition schemes in India is Rs. 1.5 crore turnover per annum. Composition schemes are voluntary schemes available for small businesses with annual turnovers up to Rs. 1.5 crore who can opt for fixed tax rates instead of regular GST rates.

Q. How many returns are in a GST composition scheme?

A. Unlike a regular taxpayer who is required to furnish 2 monthly returns and an annual return (with certain exemptions), a dealer opting for the composition scheme is required to furnish one return every quarter in Form CMP-08 and Form GSTR 4 once a year by the 30th day of April, following the financial year.

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