GST: What is a composition scheme? Who can opt for it? What are the rates? A Cleartax explainer

The GST regime has brought in many changes along with the following:

  • Increase in the number of GST returns
  • Payment of tax on a monthly basis
  • Small and new taxpayers will find it difficult to comply with so many rules.

Hence, the government has introduced the concept of Composition Scheme. Composition Scheme is a simple and easy scheme under GST for taxpayers. Small taxpayers can get rid of tedious GST formalities and pay GST at a fixed rate of turnover. This scheme can be opted by any taxpayer whose turnover is less than Rs. 75 lakh.

Now there is an option for small and new taxpayer to opt for Composition scheme and have lesser compliance. Also, a taxpayer opting for composition scheme has to pay tax at a nominal rate.

A taxpayer whose turnover is below Rs 75 lakhs can opt in for Composition Scheme. In case of North-Eastern states and Himachal Pradesh, the limit is Rs 50 lakh.

The following people cannot opt for the scheme:

  1. Supplier of services other than restaurant related services
  2. Manufacturer of ice cream, pan masala, or tobacco
  3. Casual taxable person or a non-resident taxable person
  4. Businesses which supply goods through an e-commerce operator

No Input Tax Credit can be claimed by a dealer opting for composition scheme

The following conditions must be satisfied in order to opt for composition scheme:

  1. The taxpayer can only make intra-state supply (sell in the same state) i.e. no inter-state supply of goods
  2. The dealer cannot supply GST exempted goods
  3. Taxpayer has to pay tax at normal rates for transactions under Reverse Charge Mechanism
  4. If a taxable person has different segments of businesses (such as textile, electronic accessories, groceries, etc.) under the same PAN, they must register all such businesses under the scheme collectively or opt out of the scheme
  5. The taxpayer has to mention the words ‘composition taxable person’ on every notice or signboard displayed prominently at their place of business
  6. The taxpayer has to mention the words ‘composition taxable person’ on every bill of supply issued by him.

Composition scheme: To opt in for composition scheme a taxpayer has to file Form GST CMP-01 or GST CMP-02 with the government. This can be done online after logging into the GST portal. This intimation should be given at the beginning of every Financial Year by a dealer wanting to opt for Composition Scheme.

A composition dealer cannot issue tax invoice. This is because a composition dealer cannot charge tax from their customers. They need to pay tax out of their own pocket. Hence, the dealer has to issue a Bill of Supply. The dealer should also mention “composition taxable person, not eligible to collect tax on supplies” at the top of the Bill of Supply.

GST rates for a composition dealer

comp-scheme

GST Payment has to be made out of pocket. It means that a dealer opting for Composition Scheme cannot charge GST in their Invoice. The consumer/ the receiver of supplies will not be liable to pay GST to the supplier who has opted for Composition Scheme.

A dealer is required to file a quarterly return GSTR-4 by 18th of the month after the end of the quarter. Also, an annual return GSTR-9A has to be filed by 31st December of next financial year. Also, note that a dealer registered under composition scheme is not required to maintain detailed records.

The following are the advantages of registering under composition scheme:

  1. Lesser compliance (returns, maintaining books of record, issuance of invoices)
  2. Limited tax liability
  3. High liquidity as taxes are at a lower ra

Let us now see the disadvantages of registering under GST composition scheme: A limited territory of business. The dealer is barred from carrying out inter-state transactions

  1. No Input Tax Credit available to composition dealers
  2. The taxpayer will not be eligible to supply goods through an e-commerce portal

(This article was first published in ClearTax. You can access it here.)