The Composition Scheme under GST (Goods and Services Tax) in India is a simplified taxation system designed to reduce the compliance burden for small businesses. It allows eligible taxpayers to pay GST at a lower rate with minimal paperwork, enabling them to focus more on their core business activities.
In this post, we’ll explore the key features, benefits, eligibility criteria, tax rates, and examples related to the Composition Scheme in India.
What is the Composition Scheme?
The Composition Scheme is an alternative method of tax payment under GST for small taxpayers. Businesses opting for this scheme pay tax at a fixed percentage of their turnover instead of the standard GST rates and file simplified returns.
Key Features of the Composition Scheme
- Lower Tax Rates: Fixed tax rates, much lower than the standard GST rates.
- Simplified Compliance: Fewer returns to file (quarterly instead of monthly).
- No Input Tax Credit (ITC): Businesses cannot claim ITC on their purchases.
- Restricted Interstate Sales: Applicable only for intrastate (within the same state) transactions.
- B2B and B2C Transactions: Suitable for businesses dealing with end consumers or local transactions.
Eligibility for the Composition Scheme
To avail of the Composition Scheme, businesses must meet the following criteria:
Turnover Limit:
- For most states: Annual turnover up to ₹1.5 crore.
- For special category states: Annual turnover up to ₹75 lakh.
Nature of Business:
- Manufacturers, traders, and small service providers can opt for the scheme.
Exclusions:
- Businesses involved in interstate supply.
- Businesses dealing in goods that are not taxable under GST (e.g., alcohol).
- Businesses supplying through e-commerce platforms.
Tax Rates under the Composition Scheme
| Type of Business | GST Rate |
|---|---|
| Manufacturers and Traders | 1% of turnover |
| Restaurants (not serving alcohol) | 5% of turnover |
| Service Providers (under CMP-08) | 6% of turnover |
Benefits of the Composition Scheme
- Reduced Tax Liability: Lower rates of GST reduce the overall tax burden.
- Simplified Compliance: Only quarterly returns and a single annual return are required.
- Cost-Effective: Saves on compliance costs and time.
- Ease of Business: Beneficial for businesses serving local markets and consumers.
Limitations of the Composition Scheme
- No ITC Benefit: Businesses cannot claim credit for GST paid on purchases.
- Restricted Transactions: Interstate sales are not allowed.
- GST Invoice Restrictions: Cannot issue tax invoices; must issue a bill of supply.
- Not Suitable for Large Businesses: Limited turnover threshold.
Filing Returns Under the Composition Scheme
- Form GST CMP-02: To opt for the Composition Scheme at the beginning of a financial year.
- Form GSTR-4: Quarterly return to report turnover and tax liability.
- Form CMP-08: Quarterly challan for tax payment.
- Form GSTR-9A: Annual return summarizing turnover and taxes paid.
Examples of the Composition Scheme
Example 1: Small Manufacturer
A furniture manufacturer in Jaipur has an annual turnover of ₹50,00,000. Opting for the Composition Scheme:
- GST Rate: 1%
- Tax Liability: ₹50,000 (1% of ₹50,00,000)
Example 2: Local Restaurant
A restaurant in Mumbai (not serving alcohol) earns an annual turnover of ₹30,00,000. Opting for the Composition Scheme:
- GST Rate: 5%
- Tax Liability: ₹1,50,000 (5% of ₹30,00,000)
Example 3: Service Provider
A small graphic design studio in Delhi has a turnover of ₹20,00,000. Opting for the Composition Scheme:
- GST Rate: 6%
- Tax Liability: ₹1,20,000 (6% of ₹20,00,000)
How to Opt for the Composition Scheme
- Registration: Eligible taxpayers must opt for the scheme by filing Form GST CMP-02.
- Effective Date: The scheme becomes applicable from the beginning of the financial year.
Differences Between Regular GST and Composition Scheme
| Criteria | Regular GST | Composition Scheme |
|---|---|---|
| Tax Rates | Standard rates (5%, 12%, 18%, 28%) | Lower fixed rates (1%, 5%, 6%) |
| Compliance | Monthly returns (GSTR-1, GSTR-3B) | Quarterly returns (GSTR-4) |
| Input Tax Credit (ITC) | Available | Not available |
| Transaction Scope | Interstate and intrastate sales | Only intrastate sales |
Who Should Opt for the Composition Scheme?
- Local businesses catering to end consumers.
- Small manufacturers and traders with limited turnover.
- Service providers with basic service offerings.
Conclusion
The Composition Scheme is a boon for small businesses seeking a simplified tax structure. By understanding its features, limitations, and compliance requirements, businesses can make informed decisions about opting for this scheme.
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