Learn about the Composition Scheme under GST, its eligibility criteria, tax rates, benefits, and limitations. Find out how small businesses can reduce their compliance burden with this simplified tax scheme.
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What is the Composition Scheme under GST?
The Composition Scheme under Goods and Services Tax (GST) is a simple taxation scheme designed for small taxpayers to reduce compliance burden. It allows eligible businesses to pay GST at a fixed percentage of their turnover instead of following the regular GST rules.
As you might be aware of the thing that if you get registered under GST, you need to make monthly tax calculations, pay tax monthly in case of any tax liability, file GST returns monthly/quarterly, and maintain records of your purchases/stocks/etc. The government has provided a simple Composition Scheme to avoid such hassle, where tax payments and GST return filing are made quarterly.
This article will discuss what this scheme demands from the taxpayers, including compliance, eligibility requirements, tax rates, and other factors. Let’s discuss each topic one by one.
Eligibility for Composition Scheme under GST
The Eligibility to opt for the composition scheme under GST is generally decided based on a person’s aggregate annual turnover. This means that if a person has an aggregate annual turnover below these limits, he can opt for the composition scheme. Other things make a person ineligible to opt for the scheme; we will discuss these later in this article.
Aggregate turnover limit to opt for Composition Scheme under GST
To understand the turnover limits, we need first to understand that GST law has divided Indian states into two categories for this purpose, namely Special Category States and Other States.
Special Category States comprise Arunachal Pradesh, Mizoram, Tripura, Manipur, Nagaland, Meghalaya, Sikkim, and Uttarakhand.
Other states mean states other than those mentioned in the Special Category above.
The aggregate Turnover Limit for Special Category states is Rs.75 lakh, whereas the limit for Other States is Rs.1.5 crore.
So, a basic question arises: what does “Aggregate Turnover” mean?
Aggregate Turnover is a total of All Taxable Supplies (+) Exempt Supplies (including Non-Taxable supplies) (-) inward RCM supplies (-) CGST, SGST, UTGST, IGST, GST Cess to be computed on the India basis having for the same person with same PAN (Permanent Account Number).
Rates of Tax
Under the composition scheme, a person is required to pay the government GST at a reduced rate. GST is calculated based on the total value of the turnover, whether taxable or exempt. I have tried to explain the same in the following table.
| Category of a person | Rate of GST |
| Manufacturers (other than manufacturers of ice cream, pan masala, cold drinks, and tobacco) | 1% of the entire turnover made in the State or Union Territory (0.5% SGST+ 0.5% CGST) |
| Retail/Wholesale Traders | 1% of the taxable turnover (i.e. excluding exempt turnover) made in the State or Union Territory (0.5% SGST+ 0.5% CGST) |
| Restaurant and Outdoor Catering Services | 5% of the entire turnover made in the State or Union Territory (2.5% SGST+ 2.5% CGST) |
| Other Services Providers* | 6% of the entire turnover made in the State or Union Territory (3% SGST+ 3% CGST) |
* The provisions related to other Services Providers are not discussed in this article.
Procedure to opt for Composition Scheme under GST
If you want to opt for the Composition Scheme, a fundamental question arises: How do you opt for this scheme?
If you are getting newly registered under GST, you can choose to register under the Composition Scheme while obtaining registration. The effective date of the composition levy will be your registration date under GST.
Suppose you have already registered under GST but want to opt for the Composition Scheme now. In that case, you need to file an intimation with GST authorities before the commencement of the financial year. In this case, the composition levy’s effective date would be the beginning of the Financial Year.
Persons who are not eligible to opt for the Composition Scheme under GST
Just like we discussed the eligibility, let’s discuss the conditions under which a person cannot apply for the Composition Scheme.
- A person providing services other than the restaurant and outdoor catering services is not eligible to opt for the scheme; however, if an eligible person who has opted for the composition scheme may supply services (other than the restaurant and outdoor catering service) of value not exceeding Rs.5,00,000/- or 10% (whichever is higher) of the turnover in the previous financial year.
- Supplier of Goods or Services not taxable under the GST Act.
- Supplier of inter-state outward supplies. Inter-state means the supplier is located in one state and supplying goods to another state.
- Person supplying goods or services through an electronic commerce operator where such operator is required to collect tax at source under section 52.
- Manufacturer (not trader) of the following notified goods:
| Aerated Water containing added sugar or other sweetening agents or flavored |
| Pan Masala |
| Aerated Water, containing added sugar or other sweetening agents or flavored |
| Aerated Water containing added sugar or other sweetening agents or flavored |
| Fly ash bricks or fly ash aggregate with 90% or more fly ash content; Fly ash blocks |
| Bricks of Fossil meals or similar siliceous earths |
| Building bricks |
| Earthen or roofing tiles |
6. A person who is a casual taxable person or a non-resident taxable person
Validity of Composition Registration
Once a person exercises the composition scheme option, then the same shall remain valid as long as such person satisfies all the conditions mentioned in the said section and rules.
A person shall not be allowed to remain in the scheme from the day on which his aggregate turnover during the financial year exceeds the specified limits of Rs.1.50 crore / Rs.75 lakh.
Once the person becomes ineligible for the scheme, he is required to file an intimation for withdrawal from the scheme in the prescribed form within 7 days of the occurrence of such event.
Frequently Asked Questions (FAQs)
Can I issue a tax invoice if registered as a Composition Person under GST?
No, you can issue a “Bill of Supply’ to the customers and mention the words on the bill as “composition taxable person, not eligible to collect tax on supplies.”
Can I collect GST from customers to pay the government?
No, you cannot collect GST from customers under the composition scheme and must pay it from your own pocket.
What happens if I wrongfully register under the composition scheme and pay tax even if I am not eligible?
In such case, you would be liable for a penalty, and the provisions of section 73 or 74 of the CGST Act shall be applicable for the determination of tax and penalty.
Can I avail the benefit of tax paid on my purchase for payment of GST to the government? Can I avail input tax credit?
No, you cannot avail benefit of input tax credit of taxes paid on purchases.
I hope this article has given you a brief idea of the Composition Scheme under GST. You can visit the official Goods and Service Tax (GST) website for more information.
If you are a CA aspirant and need help on topics related to CA students, you can start your journey with this article.
All due care has been taken to ensure accuracy and reliability in preparing this article. However, tax laws and financial regulations are subject to change, and individual circumstances may vary. Therefore, we strongly recommend consulting a qualified Chartered Accountant (CA) or tax consultant before making any financial decisions or acting based on the information provided. We shall not be held responsible for any damages, losses, or penalties incurred due to reliance on this article.