GST composition scheme is made for small businesses for reducing paper work, accountancy work and other formalities.
Here we will discuss in detail about GST composition scheme like turnover limit, rates, applicability, returns, benefits, limitations, invoices, input tax credit and more.
Updated on 18-09-2017: GST Composition Scheme for traders having turnover Rs.75 Lakh annual sales is now open up to 30th September 2017.
Turnover Limit to Opt for Composition Scheme
The scheme can be opted by any registered tax payer whose taxable aggregate turnover is less than Rs.75 lac or Rs.50 lac (as the case may be).
List of States where turnover Limit of Rs.50 Lakh application for composition scheme.
- Arunachal Pradesh
- Himachal Pradesh
Features of composition scheme
- Composition scheme is optional.
- This scheme has been provided to the dealers dealing in goods only i.e. any person providing service cannot opt for this scheme. But the restaurant sector can opt for this scheme.
- Moreover, the person opting for this scheme does not require to maintain any books of accounts.
- The person opting for composition scheme has to pay tax as the percentage of the turnover.
- The tax which is payable under Reverse Charge will also be payable by the normal taxpayer not the person opting for composition scheme.
- The dealer opting for composition scheme cannot collect the tax payable by him from the purchaser of the goods. The tax should be paid from the own pocket of the dealer.
- The composition scheme cannot be opted by the interstate supplier and a dealer dealing in imports & exports. This scheme can be opted only by the intra-state supplier.
Composition Scheme GST Rates
|Description||Rate of CGST|
(% of Turnover)
|Rate of SGST|
(% of Turnover)
|In case of Manufacturer||1%||1%|
|In case of Restaurant Services||2.5%||2.5%|
|In case of other suppliers/ traders||0.5%||0.5%|
Composition Scheme GST Returns
The person who opts for composition scheme needs to file quarterly returns. The normal taxpayer has to file 3 returns monthly. The returns to be filed are GSTR-4 and GSTR-9A.
- GSTR-4: Quarterly return for compounding taxable person. This return is to be filed on 18th of the next quarter.
- GSTR-9A: Simplified annual return by compounding taxable person.
The burden of filing return is reduced as a normal tax payer has to file in total of 37 returns in the whole year but the composition taxpayer has to file 5 returns.
Invoice and Input Tax Credit under Composition Scheme
The person opting for the composition scheme cannot avail any input tax credit of the tax paid. Moreover, the person also cannot issue a tax invoice. The person who purchases goods from the dealer opting for composition scheme also cannot avail the input tax credit. The tax paid by the dealer will be added to the cost of the product.
If the composition dealer wants to opt the normal scheme to avail the input tax credit, following conditions must be fulfilled by the dealer at the time of transition:
- The inputs should be used for the production of supplies which are taxable under GST
- Under the earlier regime of indirect tax, the dealer was eligible to take credit but due to composition scheme was not able to claim the credit.
- The goods must be eligible under GST for the input tax credit.
- The evidence for the tax paid on such inputs should also be available.
- The invoices should not be older than of 12 months of the GST applicable date.
Note: An amount equal to the input tax credit on goods which are held in stock on the next day of switchover shall be paid if the dealer shifts from the normal scheme to composition scheme. The balance of credit ledger will be assumed to be lapse.
Persons not eligible for Composition scheme
Some persons are not allowed to avail the benefits of composition scheme under GST law. Following persons are not allowed to opt for composition scheme:
- Supplier of services except restaurant service
- Makes supply of interstate goods or import/ export
- Makes supply of goods which are not leviable to tax
- Manufacturer of goods as notified.
- Goods supplied through e-commerce operator
Note: If a business has different units having same PAN, the taxpayer has to register all units under this scheme.
Penalties under Composition Scheme
The person should only opt for the composition scheme if he is clear of his eligibility for the composition scheme. In case the composition dealer makes any default or has availed the benefit of composition scheme wrongly, then such dealer has to pay the tax as if he would be required to pay under the normal scheme. Moreover, if the dealer is given a show cause notice then the dealer is also required to pay an equal amount of tax payable as penalty. The provisions of demand and recovery may also apply to the taxpayer.
Benefits and Limitations of the Composition Scheme
As a coin has two sides, similarly Composition scheme has benefits as well as limitations.
Benefits of Composition Scheme
Benefits of the scheme are explained below:
Less Compliance: There are very less compliance in the composition scheme as compared to the normal tax scheme. The dealer who opts for composition scheme has to file less returns whereas the normal taxpayer has to file more tax returns.
Less Tax liability: The dealer opting for composition scheme has to pay tax @ 5%, 2%, 1% (as the case may be) instead of 18%. Let’s understand this with the help of an example:
|Particulars||Registered as Normal Taxpayer|
GST @ 18%
|Registered under Composition scheme|
|Sale amount excluding tax||50,000||50,000|
|Value of Input goods||30,000||30,000|
|GST paid on inputs @ 18%||5,400||5,400|
|Total Cost of inputs||35,400||35,400|
High liquidity: The liquidity of the supplier registered under composition scheme is more. This is because there is no blockage of funds in the form of input tax credit. This would increase the fund availability with the business. The normal taxpayer has to pay the output tax liability and can utilize the input tax credit paid by him only when it gets reconciled with the return filed by the supplier of purchase made by him. Whereas the supplier registered under composition scheme can the tax liability whenever he can, he does not have to wait for the input tax credit as he cannot avail any input tax credit.
Competitive Edge: It is generally assumed that the supplier under composition scheme lost his competitive edge as he cannot avail the input tax credit. But this is not like that. The profit under composition scheme is more than the normal scheme so the composition dealer can take the advantage of this by providing the goods at lower price and capturing the local market as possible.
Limitations of Composition Scheme
Less Coverage: The business opting for composition scheme can only do the intra-state transaction. He cannot make inter-state transactions and import/ export transactions. The business is limited to the state in which it is registered.
No Input tax credit: The business opting for composition scheme cannot avail the input tax credit of any tax paid by him. The buyer of the goods supplied by the composition dealer also cannot avail the input tax credit. Thus, affecting business adversely.
Tax from own pocket: The tax which is to be paid is to be paid from the pocket of the supplier i.e. the supplier cannot collect the tax from the purchaser of goods.
Penalty: The person who is not eligible for composition scheme if opts for composition scheme has to pay 100% tax liability along with the equal amount of penalty.
E-commerce operator: The e-commerce operator is not covered under the composition scheme. The E-commerce is the business which is now days operated by the many of the people. There are big companies as well as the small business. These small companies cannot opt for the composition scheme as these have to supply goods throughout the India. GST aims at helping startups but the startups in the e-commerce are not allowed to opt this scheme.