India’s Goods and Services Tax (GST) system is a revolutionary tax reform designed to streamline the taxation process. However, it can be overwhelming, especially for small business owners. That’s where the GST Composition Scheme comes in. This scheme offers a simplified tax mechanism for small businesses, reducing their compliance burden and making it easier to focus on growth rather than navigating complex tax regulations.
In this blog, we will dive deep into everything you need to know about the GST Composition Scheme in India, including the rules, turnover limits, tax rates, benefits, and much more. Whether you are a small business owner or a startup, understanding this scheme is crucial to making informed decisions about your business taxes.
What is the GST Composition Scheme?
The GST Composition Scheme is a simplified taxation scheme designed for small businesses under the Goods and Services Tax (GST) regime in India. Its primary objective is to make the tax filing process easier and more affordable for businesses with a relatively low turnover. This scheme allows eligible businesses to pay a fixed percentage of their turnover as tax rather than adhering to the regular GST tax structure, which can be complicated and costly for small businesses.
Target Audience: Who Can Benefit from the GST Composition Scheme?
The GST Composition Scheme is tailored for small businesses, including manufacturers, traders, and certain types of service providers, offering a simplified taxation process. This scheme is a great option for businesses looking to reduce the complexities of regular GST filing and tax calculation. However, not every business can opt for it. So, let’s look at the key eligibility criteria.
Difference Between Regular GST and the Composition Scheme
Under the regular GST system, businesses must pay tax on the value of their goods and services and can claim an input tax credit (ITC) for the taxes they have paid on purchases. On the other hand, under the Composition Scheme, businesses pay tax at a fixed rate on their turnover and are not allowed to claim input tax credit. This makes the Composition Scheme a simpler option, but it also comes with certain limitations.
Eligibility Criteria for GST Composition Scheme
Before opting for the GST Composition Scheme, it’s crucial to understand the eligibility requirements. Not all businesses can avail of this scheme. Here are the essential points that determine eligibility:
Turnover Limits:
- For manufacturers and traders (excluding manufacturers of notified goods), the maximum aggregate turnover allowed is ₹1.5 crore in a financial year.
- For restaurants not serving alcohol (i.e., providing only food and non-alcoholic beverages), the limit is also ₹1.5 crore.
- For other service providers, the turnover limit is ₹50 lakh in a financial year, under the Composition Scheme for Services (introduced under Notification No. 2/2019-Central Tax (Rate) dated 7th March 2019).
Note: The turnover threshold is ₹75 lakh for businesses in special category States (such as Mizoram, Tripura, Manipur, Nagaland, etc.), except for Jammu & Kashmir and a few others where it is ₹1.5 crore.
Types of Businesses Excluded:
- Businesses engaged in the supply of goods or services that are not taxable under GST.
- Businesses making inter-state outward supplies of goods or services.
- Casual taxable persons and non-resident taxable persons.
- Businesses engaged in e-commerce through platforms requiring TCS under Section 52 of the CGST Act.
Other Conditions:
- The business must not be engaged in manufacturing of notified goods such as ice cream, pan masala, and tobacco products.
- The business must not supply goods through an e-commerce operator required to collect TCS.
- The taxpayer must issue a bill of supply, not a tax invoice, and must not collect tax from customers.
Turnover Limit under GST Composition Scheme
The turnover limit is one of the most crucial factors that determine whether your business qualifies for the GST Composition Scheme. Let’s break down the limits more clearly:
- For manufacturers and traders: If your aggregate turnover in a financial year is less than ₹1.5 crore (or ₹75 lakh in special category States), you qualify for the scheme.
- For restaurants (not serving alcohol): The turnover cap is also ₹1.5 crore. Restaurants offering only food and non-alcoholic beverage services can benefit if their turnover doesn’t exceed this limit.
- For other service providers: The turnover limit is ₹50 lakh under the special composition scheme for services.
It’s important to note that the aggregate turnover is calculated on a pan-India basis, across all GSTINs held under the same PAN, and includes taxable, exempt, export, and inter-state supplies.
GST Composition Scheme Tax Rate
One of the major attractions of the GST Composition Scheme is its lower tax rate. Unlike the regular GST structure, where tax rates can go as high as 28% for some goods and services, the Composition Scheme offers fixed tax rates based on the type of business. Here’s a quick breakdown of the applicable rates:
| Type of Business | GST Rate (on Turnover) |
| Manufacturers and Traders (excluding notified goods) | 1% (0.5% CGST + 0.5% SGST) |
| Restaurants (not serving alcohol) | 5% (2.5% CGST + 2.5% SGST) |
| Other Service Providers (under Notification No. 2/2019) | 6% (3% CGST + 3% SGST) |
The key advantage of this scheme is that it simplifies the tax structure. Unlike the regular GST regime, where you must calculate taxes for every transaction, the Composition Scheme offers a fixed rate based on total turnover, eliminating the need for detailed calculations for every sale.
Advantages of GST Composition Scheme
Small businesses that opt for the GST Composition Scheme enjoy several benefits that make it an appealing option for tax filing. Let’s look at the major advantages:
Lower Tax Burden
Businesses under the Composition Scheme pay a fixed percentage of their turnover as tax, which is generally lower than regular GST rates. This can significantly reduce the overall tax liability.
Simplified Compliance
Filing GST returns under the Composition Scheme is much easier than for regular GST. Composition taxpayers are required to file returns quarterly using Form CMP-08, rather than monthly.
Reduced Documentation
With a lower compliance burden, businesses under the Composition Scheme do not need to maintain complex records, making tax filings simpler and less time-consuming.
Cost-Effective for Small Businesses
Since small businesses are often cash-strapped, the lower tax rates and reduced compliance costs make the Composition Scheme an ideal choice for boosting profitability.
Fixed Tax Structure
The fixed tax rate based on turnover simplifies calculations and helps with financial forecasting and planning.
Disadvantages of GST Composition Scheme
Despite the numerous benefits, there are a few disadvantages that small businesses should be aware of before opting for the scheme:
No Input Tax Credit (ITC)
The biggest drawback of the Composition Scheme is that businesses cannot claim Input Tax Credit on their purchases. This means businesses cannot set off the taxes they pay on their inputs, making the scheme less beneficial for businesses that rely heavily on raw materials.
Restrictions on Interstate Sales
Businesses under the Composition Scheme can only conduct intra-state sales, meaning they cannot supply goods or services to customers in other States. This restricts market reach.
Limited Applicability
The scheme is not available to casual taxable persons, non-residents, e-commerce sellers, or businesses dealing in notified goods. Businesses offering services (except restaurants) need to fall under the ₹50 lakh limit to qualify under the special notification.
Mandatory Display
Composition taxpayers must display the words “composition taxable person” on every notice or signboard at their place of business and also mention it on every bill of supply.
How to Opt for the GST Composition Scheme
Opting for the GST Composition Scheme is a relatively straightforward process. Here’s a step-by-step guide to help you get started:
- Eligibility Check:
Ensure your business meets all the eligibility criteria, including turnover limits and the type of goods/services sold. - Login to GST Portal:
Visit the official GST portal and log into your account using your GSTIN. - Application for Composition Scheme:
Navigate to the ‘Services’ tab > ‘Registration’ > ‘Application to Opt for Composition Levy’. Fill out Form GST CMP-02 and submit it before the beginning of the financial year. - Intimation to Department:
Once filed, it is deemed approved. No separate approval is sent. - Filing CMP-03:
If opting mid-year, submit Form CMP-03 (stock details) within 90 days from the effective date of opting in.
Compliance and Filing Requirements for GST Composition Scheme
Businesses opting for the Composition Scheme must adhere to the following compliance requirements:
Quarterly Tax Payment and Return:
- File Form CMP-08 quarterly to declare tax liability and pay the due amount.
Annual Return:
- File GSTR-4 annually (not to be confused with the older quarterly GSTR-4, which has been replaced by CMP-08).
Record Maintenance:
Though simplified, basic records of sales, purchases, and tax payments must be maintained.
Penalties for Non-compliance:
Non-compliance may result in interest, late fees, or withdrawal from the scheme, and tax may be payable under the regular GST scheme retrospectively.
Final Thoughts
The GST Composition Scheme is an excellent option for small businesses looking to simplify their tax processes. With its lower tax rates, reduced compliance burdens, and cost-effective filing system, it’s no wonder that many small businesses are opting for it. However, it’s crucial to weigh the benefits and limitations before making a decision. By understanding the scheme’s rules, turnover limits, tax rates, and filing requirements, you can make a more informed decision about whether it suits your business.
As always, it’s a good idea to consult with a tax professional to ensure that you are making the right choice for your business’s needs and future growth.
