The Composition Scheme under GST is a streamlined tax mechanism designed to reduce the compliance burden for small businesses. By opting for this scheme, taxpayers can pay GST at a reduced, fixed rate on their total turnover and file simplified returns, freeing up time to focus on business growth rather than complex paperwork.
Composition taxpayers generally furnish Form CMP-08 quarterly and file Form GSTR-4 annually. However, they cannot claim Input Tax Credit (ITC) or collect GST separately from customers, and they must comply with restrictions on interstate outward supplies and other statutory conditions.
Eligibility Criteria
- Turnover Limit: A business may register under composition scheme if their aggregate Turnover does not exceed ₹1.5 crore in the previous financial year. (Note: While some special category states have a reduced limit of ₹75 lakh, the limit for Jammu & Kashmir remains ₹1.5 crore)
- Service Providers: GST has a special Composition Scheme designed for service providers as well. The businesses whose turnover in the last financial year was up to ₹50 lakh can opt for this scheme.
- For Mixed Businesses (both goods and services): Eligible manufacturers and traders can also supply certain services up to the higher of ₹5 lakh or 10% of turnover in the State/UT in the preceding financial year.
- All PAN-Based Units: If a taxpayer uses the same PAN for several business branches or segments. The scheme must be opted collectively by all registered under the same PAN.
Types of Business not eligible under the composition scheme
- Manufacturers of goods like ice cream, pan masala, tobacco are not eligible.
- Suppliers of goods not taxable under GST (for example, alcohol for human consumption).
- Suppliers making inter-state outward supplies of goods or services.
Composition Tax Rate
| Business Category | Turnover Limit | Composition Tax Rate |
|---|---|---|
| Manufacturers | Up to ₹1.5 crore (₹75 lakh for some states) | 1% of turnover (0.5% CGST + 0.5% SGST) |
| Traders (Goods) | Up to ₹1.5 crore (₹75 lakh for some states) | 1% of turnover (0.5% CGST + 0.5% SGST) |
| Restaurants (Not Serving Alcohol) | Up to ₹1.5 crore | 5% of turnover (2.5% CGST + 2.5% SGST) |
| Service Providers (Other than Restaurants) | Up to ₹50 lakh | 6% of turnover (3% CGST + 3% SGST) |
| Brick Manufacturers (Separate Specific Category) | Up to ₹20 lakh | 6% without ITC |
Advantages of the Composition scheme under GST
- Lower Tax Rates: Under the Composition Scheme, the eligible businesses can pay GST on their total sales at lower fixed rates.
- Simplified Compliance: Unlike the regular dealers, the composition dealers are required to file fewer returns and maintain simpler records. This makes it easier for small taxpayers to manage GST obligations.
- Less Administrative Burden: The businesses can skip the hassle of maintaining complicated invoices and records. This in turn helps them to save time and focus more on running their business.
- Better Cash Flow Management: As the taxes are paid at a fixed rate on turnover, the businesses can estimate their tax liability. This would enable them to plan their finances more effectively.
- Reduced Cost of Compliance: The filing process and record-keeping requirements are much simpler. This means that the businesses can save on accounting and professional fees spent on the accountants and CAs.
- Easy Tax Calculation: The calculation part of tax is much easier as it is calculated on the overall sales done in a quarter. This makes it easy for the business to determine the amount of tax to be paid.
- Update for E-commerce: Previously, businesses selling through e-commerce portals (like Amazon or Flipkart) were strictly barred from the scheme. However, as of October 1, 2023, composition dealers are legally permitted to supply goods through e-commerce operators subject to the prescribed procedure and conditions, including the restriction on interstate supplies.
Disadvantages of the Composition Scheme under GST
- No Input Tax Credit (ITC) Allowed: Composition dealers cannot claim credit (ITC) for the GST paid on purchases of raw materials, goods, or services. The tax paid by them becomes an additional cost which increases the overall cost of operations.
- Restricted Interstate Sales and exports: Businesses under this scheme are not allowed to make interstate sales and export of goods. They are permitted to sell goods only within their state of registration.
- Cannot Issue Tax Invoices: A composition dealer must issue “Bill of Supply” instead of “Tax Invoice”. Therefore, they cannot charge and collect GST from their customers. Which means the tax must be paid by the dealer himself.
- B2B Disadvantage: The regular dealers often prefer not to purchase from the composition dealers as they cannot claim credit (ITC). This makes them less competitive in the Business-to-Business (B2B) market.
- Exclusion of Non- Taxable Goods: The supply of non-taxable goods such as alcohol for human consumption are excluded from this scheme.
- Applicability of Reverse Charge Mechanism: Composition taxpayers must pay tax under reverse charge where applicable under the relevant provisions and notifications.
Returns and Reports for Composition Scheme
Taxpayers registered under the composition scheme have simplified return filing requirements compared to regular GST taxpayers.
- GSTR-4 (Annual Return): Composition taxpayers must file GSTR-4 annually, which contains business’s total turnover, inward supplies, and tax paid during the financial year. The due date for filing the GSTR-4 is on 30th June of the following financial year. One must ensure filing returns on time is important to avoid penalties and interest charges under GST.
- CMP-08 (Quarterly Statement): Composition taxpayers must file CMP-08 every quarter which includes the summary of the overall sales, tax payable, and tax payment details. The due dates for filing the CMP-08 are as follows:
- April – June: 18 July
- July – September: 18 October
- October – December: 18 January
- January – March: 18 April
Key differences between a regular and a composition dealer
| Basis | Regular Dealer | Composition Dealer |
|---|---|---|
| Tax Rate | Pays GST at normal rates applicable to goods or services. | Pays tax at a fixed lower rate on total turnover. |
| Input Tax Credit (ITC) | Can claim Input Tax Credit on purchases. | Cannot claim Input Tax Credit. |
| Collection of GST | Can collect GST from customers and show it separately on invoices. | Cannot collect GST separately from customers. |
| Type of Invoice | Issues a Tax Invoice. | Issues a Bill of Supply instead of a tax invoice. |
| Compliance Requirements | Requires detailed records and multiple return filings. | Compliance is simpler with fewer returns and less documentation. |
| Inter-State Sales | Can sell goods or services across states. | Not allowed to make inter-state outward supplies. |
| Eligibility | Available to all eligible GST-registered businesses. | Available only to small businesses within specified turnover limits. |
| Suitability | Suitable for medium and large businesses or B2B transactions. | Suitable for small businesses dealing mainly with end consumers. |
Frequently Asked Questions about Composition Scheme
Question 1: What is the Composition Scheme under GST?
Answer: The Composition Scheme under GST is a simplified tax scheme exclusively built for small businesses where the taxpayers pay GST at a fixed lower rate on overall sales and file returns quarterly.
Question 2: Who is eligible for the Composition Scheme under GST?
Answer: Small businesses with turnover up to ₹1.5 crore in the previous financial year can opt for the Composition Scheme under GST. For certain special category states, the turnover limit is ₹75 lakh. For J&K, 1.5 crore limit applies.
Question 3: Can service providers opt for the Composition Scheme under GST?
Answer: Yes, service providers with turnover up to ₹50 lakh can opt for a special Composition Scheme and pay GST at a concessional rate, subject to prescribed conditions.
Question 4: What are the benefits of the Composition Scheme under GST?
Answer: The Composition Scheme offers lower GST rates, simplified compliance, quarterly return filing, reduced paperwork, and easier tax calculation for small businesses.
Question 5: Can composition dealers claim Input Tax Credit (ITC)?
Answer: No, taxpayers registered under the Composition Scheme cannot claim Input Tax Credit (ITC) on purchases made for business purposes.
Question 6: What is the difference between a regular dealer and a composition dealer under GST?
| Regular Dealer | Composition Dealer |
|---|---|
| Can claim Input Tax Credit (ITC) | Cannot claim Input Tax Credit (ITC) |
| Can make inter-state sales | Restricted from making inter-state sales |
| Can collect GST from customers | Cannot collect GST from customers |
| Issues a Tax Invoice | Issues a Bill of Supply |
Question 7: Which returns are filed under the Composition Scheme?
Answer: Composition taxpayers are required to file CMP-08 quarterly and GSTR-4 annually under the GST Composition Scheme.
Need help choosing or switching?
Our team can compare your tax cost under both schemes, handle your CMP-02 or CMP-04 filings, and take care of your CMP-08 and GSTR-4 on time. Contact us for a free initial consultation.
Disclaimer: This article is for general information and does not constitute professional advice. Rates, limits and due dates are subject to change by notification, so please consult us before acting.
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