Section 10 of the GST law lays down the provisions for the composition scheme under GST. This is an alternative method of taxation designed to simplify compliance and reduce costs for small taxpayers. It allows a business or person registered under this scheme to pay tax at a specific percentage of their turnover. This tax is to be paid every quarter, instead of at the regular rate every month.
This composition scheme under GST was introduced by the government for taxpayers with a turnover below Rs 1.5 crores who do not wish to register as a normal taxpayer. Such taxpayers can choose to get registered under this scheme and opt to pay taxes at a nominal rate.
Why was this scheme introduced?
- Limited compliances for small taxpayers
- Timely recovery of taxes
- Limited tax liability
- High Liquidity for taxpayers
- Quick filing of returns
- Easy generation and maintenance of records
- Simplified invoices and other documents
Eligibility for the composition scheme:
- For manufacturers or traders:
Taxable turnover up to ₹1.5 crore w.e.f 1st April 2019
- For manufacturers or traders of North-Eastern States:
Taxable turnover up to ₹75 lakh
- Service provider:
Taxable turnover is up to ₹50 lakh
The composition scheme limit under GST is based on the turnover of all businesses registered under the same PAN. It is to be noted that businesses falling under the same PAN can be registered either as regular dealers or as composition scheme dealers. It cannot be registered as a combination of both.
Exclusion from the composition scheme under GST:
- Businesses with inter-State supplies
- Exempt supplies
- Services other than restaurant related services
- Casual Taxable Person
- Non-resident Taxable Person
- Manufacturers of the following:
- Ice cream
- Pan masala
- Ecommerce operators
Composition Scheme Rules:
Following are the compliances required in case of composition scheme under GST:
- An input tax credit cannot be claimed
- Tax is required to be paid at normal rates in case of transactions carried out under the reverse charge mechanism
- Different businesses are to be collectively registered under the composition scheme if applicable.
- At the place of business, the words ‘composition taxable person’ are to be compulsorily displayed on every notice or a signboard.
- The words ‘composition taxable person’ must be cited on every bill of supply that is issued.
- A registered person supplying goods can also provide services worth up to Rs 5 lakh under the scheme.
Composition scheme rules under GST require the submission of different forms for different purposes:
- Form GST CMP-01: For those registered under the pre-GST regime. Has to be filed prior to the appointed date or within 30 days of the said date.
- Form GST CMP-02: For GST registered normal taxpayers to be filed before the commencement of the financial year.
- Form GST CMP-03: Includes the details of stock and inward supplies from registered and unregistered persons. Has to be filed within 90 days of the exercise of the option.
- Form GST CMP-04: This form is an intimation of withdrawal from the scheme that has to be filed within 7 days of the occurrence of the event.
- Form GST CMP-05: Show cause notice on contravention of rules or Act by a proper officer, required to be filed on any such contravention.
- Form GST CMP-06: This form is a reply to the show cause notice required within 15 days
- Form GST CMP-07: This form is an issue of order to be filed within 30 days
- Form GST REG-01: This form is for registration under the composition scheme and is required to be filed prior to the appointed date
- Form GST ITC-01: Includes the details of inputs in stocks, semi-finished and finished goods. Due date is 30 days of withdrawing option
- Form GST ITC-03: Intimation of ITC available to be filed within 60 days of commencement of the financial year.
Tax rates under the composition scheme under GST
- Manufacturers and Traders: 1 percent of turnover
- Restaurants (not serving alcohol): 5 percent
- Service providers: 6 percent
The total tax percentage is equally divided between CGST and SGST in all the cases mentioned above. A taxpayer has to give a declaration on the GST portal to be eligible for the composition scheme. This has to be provided at the beginning of every financial year and not in the middle of the year.
Composition Scheme filing of Returns
Form GSTR-4: To be filed quarterly by the 18th of the subsequent month.
Form GSTR-9A: Annual return to be filed by the 31st of December of the next financial year.
Composition Scheme Billing
As per composition scheme rules, a dealer cannot issue a GST tax invoice. This is because tax cannot be charged to the customers and the dealer cannot claim an input tax credit under the scheme. The tax liability, in short, is on the taxpayer.
According to the rules of the composition scheme under GST, a dealer needs to issue a bill of supply. Every bill should compulsorily mention “composition taxable person, not eligible to collect tax on supplies”.
Benefits of this Scheme
- The composition scheme under GST has an option wherein a registered taxable person with turnover under the prescribed limit can pay taxes at a rate that is lower than the existing rate subject to specified conditions.
- Normally 3 returns are to be submitted every month apart from a consolidated yearly return. The non-filing of the prescribed number of returns can attract a penalty. This scheme allows the registered persons to file a single return quarterly and a composite return at the end of the financial year.
- The scheme holder is required to issue a Bill of Supply instead of issue a Tax Invoice making this a suitable option. The details required are far less making the entire process hassle-free.
The composition scheme is highly beneficial for small taxpayers. This scheme ensures the interest of small suppliers and provides an even playing field to the scheme holders with a competitive supply market.