The Goods and Services Tax (GST) regime introduced the Composition Scheme as a relief mechanism for small taxpayers, aimed at reducing their tax liability and easing compliance. It allows eligible registered persons to pay tax at a fixed prescribed rate of turnover and follow simplified return filing procedures. While the scheme is beneficial in terms of lower tax rates and minimal procedural requirements, it also comes with certain limitations and conditions. Understanding the basic provisions is crucial before opting into the scheme. The following points summarise the 15 most important concepts of the GST Composition Scheme.
1.The GST Composition Scheme is governed by Section 10 of the CGST Act, 2017 and Rule 5 & 7 of CGST rules,2017, and is designed for small taxpayers to reduce their compliance burden by allowing tax payment at a concessional rate on turnover.
2. A person can opt for the scheme if their aggregate turnover in the preceding financial year does not exceed ₹1.5 crore (or ₹75 lakh in specified special category states i.e. Arunachal Pradesh, Mizoram, Uttarakhand, Nagaland, Manipur, Sikkim, Meghalaya & Tripura). For service providers, the threshold is ₹50 lakh, as per relevant notifications.
3. The prescribed tax rates under the scheme vary by type of business: 1% for manufacturers (Other than the manufacturer of notified goods) and traders, 5% for restaurants not serving alcohol, and 6% for service providers (3% CGST + 3% SGST), under Notification No. 2/2019-Central Tax (Rate). It is important to note that a composition dealer is not permitted to collect any tax separately on goods or services supplied, including services provided under the 6% composition rate. The tax liability is to be borne by the dealer and deemed inclusive in the value of supply.
4. Composition taxpayers are not eligible to claim Input Tax Credit (ITC) on inward supplies. Likewise, their customers are also not eligible to claim ITC on goods or services supplied by them.
5. A registered person under the scheme is not permitted to make inter-State outward supplies, except in the case of services covered under Notification No. 2/2019. Only intra-State supplies of goods and services are allowed.
6. Composition dealers are not allowed to supply goods or services through e-commerce operators liable to collect tax at source under Section 52 of the CGST Act. Further, a person registered as casual taxable person or non-resident taxable person is not entitled to opt for composition scheme.
7. Instead of a tax invoice, such persons are required to issue a “bill of supply”, since they are not authorised to charge tax separately on outward supplies made under the scheme.
8. The scheme offers simplified compliance: quarterly filing of Form CMP-08 for payment of self-assessed tax, and annual filing of GSTR-4 as the return for the financial year.
9. To opt into the scheme, an intimation in Form GST CMP-02 must be filed before the start of the financial year, along with Form GST ITC-03 for reversal of ITC on inputs held in stock.
10. If the turnover crosses the prescribed threshold or any condition under the scheme is violated, the taxpayer automatically becomes ineligible, and must file Form GST CMP-04 to withdraw from the scheme and switch to the regular tax regime.
11. Even under the composition scheme, the taxpayer is liable to pay tax under Reverse Charge Mechanism (RCM) for notified categories of goods/services and import of services, in line with regular GST provisions.
12. Every composition taxpayer must display the words “composition taxable person” prominently on every notice/signboard at the place of business and mention the same on every bill of supply issued, as per Rule 5 of CGST Rules.
13. Unlike regular GST dealers, composition taxpayers cannot collect GST separately from their customers. The tax is paid out of the turnover, and the price charged to customers is deemed to be inclusive of tax.
14. The composition scheme applies at the PAN level, meaning that if a person has multiple GST registrations under the same PAN, all such registrations must opt into the scheme uniformly, or else none can avail the benefit.
15. When a taxpayer migrates from composition to the regular scheme, they may be eligible to claim ITC on inputs, semi-finished or finished goods held in stock on the transition date, subject to the conditions laid down in Section 18(1)(c) and Rule 40 of the CGST Rules.
Conclusion:
The Composition Scheme under GST is a beneficial option for small businesses that wish to reduce their tax outgo and ease compliance. However, it comes with specific restrictions on turnover, supply type, input tax credit, and billing practices. Taxpayers must assess their business model, supply chains, and compliance capacity before opting in.
