On this page you will read detailed information about GST Composition Scheme.
As a business owner, you always want to employ strategies that simplify tax compliance and support your company’s growth. The Goods and Services Tax or GST composition scheme is one such measure by the Indian government that can benefit small businesses. Under this scheme, you can opt to pay taxes at a fixed rate of turnover instead of paying taxes on each transaction. This helps reduce the compliance burden significantly.
To avail the composition scheme, your annual turnover should not exceed Rs. 1.5 crore. You will need to file summarized returns on a quarterly basis instead of monthly returns. However, you cannot issue tax invoices under this scheme and input tax credit is not available either. The scheme is ideal for small businesses and startups in the initial years of operations until the turnover crosses the threshold.
This introductory overview of the GST composition scheme should help you determine if your business can benefit from this tax compliance simplification measure. When planned and utilized well, the composition scheme can positively impact your working capital requirements and administrative overheads.
What Is the GST Composition Scheme?
The GST composition scheme is an option for small businesses with an annual turnover of up to Rs. 1.5 crore. Under this scheme, eligible businesses can pay GST at a fixed rate of turnover instead of paying tax at regular GST rates. This helps to reduce the compliance burden for small businesses.
What are the benefits?
The composition scheme offers several benefits for small businesses:
- Simple compliance: Businesses only need to file one quarterly return (GSTR-4) and an annual return (GSTR-9A). No need to maintain detailed records of inward and outward supplies.
- Low tax rates: Businesses pay GST at a fixed rate of 1% (manufacturers), 2.5% (restaurants), and 0.5% (traders) of turnover. This is lower than regular GST rates.
- No input tax credit: Businesses cannot claim input tax credit on purchases but can pass on the flat rate of tax to customers. This helps avoid the hassle of maintaining purchase invoices and ledgers.
Who can opt for the composition scheme?
To be eligible for the composition scheme, a business must:
- Be a manufacturer, trader, or restaurant with an annual turnover of up to Rs. 1.5 crore.
- Not be engaged in inter-state outward supply of goods and/or services.
- Not supply goods and/or services through e-commerce operators.
- Not supply certain taxable goods like tobacco, pan masala, and aerated waters.
- Register as a regular taxpayer and then opt for the composition scheme. The option to opt-in is available throughout the year by filing FORM GST CMP-02.
- Continue to be eligible for the scheme. If turnover crosses Rs. 1.5 crore during a fiscal year, the business must register as a regular taxpayer.
The composition scheme offers a straightforward method for small businesses to comply with GST requirements. By availing the benefits of lower tax rates and minimal compliance, small businesses can focus on growing their operations. However, businesses should evaluate if the restrictions around inter-state trade and input tax credit suit their business needs before opting for the composition scheme.
Who Is Eligible for the GST Composition Scheme?
To be eligible for the GST Composition Scheme, you must satisfy certain conditions. The scheme is available for small businesses with an annual turnover of up to Rs 1.5 crore.
Eligibility criteria:
- Your business must be registered under GST. Both new and existing GST-registered businesses can opt for the Composition Scheme.
- Your annual turnover must not exceed Rs 1.5 crore in the preceding financial year. The turnover threshold varies for businesses in different states and union territories. Businesses in the North Eastern States can have an annual turnover of up to Rs 75 lakh.
- You must not be engaged in inter-state supply of goods and/or services. Your business should only make intra-state taxable supplies.
- You must not make any supply of goods and/or services through an e-commerce operator who is liable to collect tax at source.
- You must not supply any goods and/or services that are not leviable to GST. Your business should only deal in goods and services that attract GST.
- You must not manufacture certain notified goods like tobacco products, pan masala, aerated waters, etc. Some goods are excluded from the Composition Scheme.
- You must not render any service other than restaurant and outdoor catering services. Most services are excluded from the Composition Scheme. Only a few services like restaurant services are allowed.
Opting for the Composition Scheme can help small businesses comply with GST in a simpler manner. Businesses that satisfy the eligibility criteria can file quarterly returns and make tax payments at a nominal fixed rate of their turnover. The compliance requirements are minimal compared to regular GST-registered businesses. If your business qualifies for the Composition Scheme, you can apply for it through the Government’s GST portal.
In the previous post, we had shared information about An Overview of the Payment of Gratuity Act 1972, so read that post also.
How Does the Composition Scheme Work?
The GST composition scheme allows small businesses to pay GST at a fixed rate of turnover instead of paying GST at regular rates. This simplified scheme was introduced to reduce the compliance burden for small taxpayers.
How Does the Composition Scheme Work?
Under the composition scheme, businesses with an aggregate turnover of up to Rs. 1 crore (Rs. 75 lakh for special category states) can opt to pay GST at a fixed rate of turnover. For goods, the rate is 1% of the turnover and for services, the rate is 6% of the turnover. The tax needs to be paid on a quarterly basis.
Businesses that opt for the composition scheme don’t need to maintain detailed records that are typically required under GST. They are also not required to issue tax invoices or file regular GSTR-1, GSTR-2 and GSTR-3 returns. However, they need to file a simplified quarterly return in FORM GSTR-4.
To be eligible for the composition scheme, the business should not be engaged in inter-state outward supply of goods or services. They should also not be engaged in the supply of goods through an e-commerce operator who is required to collect tax at source.
The composition scheme can be opted for by all suppliers of goods and services whose aggregate turnover does not exceed Rs. 1 crore. The scheme can be availed for all businesses carried out by the taxable person in the same state. Once a business opts for the composition scheme, it cannot opt out before the end of the financial year.
The composition scheme aims to simplify tax compliance for small businesses. By paying GST at a fixed rate on turnover, small businesses can avoid the detailed records and compliance typically associated with GST. The low tax rate also reduces the tax burden on small businesses. Overall, the composition scheme can be beneficial for small businesses to simplify tax compliance under GST.
Pros and Cons of Opting for the Composition Scheme
Opting for the GST composition scheme has both advantages and disadvantages for businesses. As with any tax scheme, you must weigh the pros and cons carefully based on your business’s needs before making a decision.
Pros
One of the biggest benefits of the composition scheme is its simplicity. Businesses do not have to maintain detailed records and accounts of their transactions, making tax compliance easier. They only have to pay a fixed percentage of turnover as tax without input tax credits.
The tax rates under the composition scheme are also lower than regular GST rates. Most businesses can save on their tax outgo by opting for the composition scheme. The current GST rate for composition dealers is 1-5% depending on the type of goods or services.
Another advantage is that businesses do not have to issue tax invoices, file monthly returns, and get accounts audited. This can help reduce the compliance burden significantly.
Cons
However, there are some downsides to consider as well. Businesses cannot claim input tax credit on their purchases under the composition scheme. They have to pay tax on their total turnover, so their profit margins may be affected.
Businesses also cannot issue taxable invoices to customers or collect tax from them. They cannot charge GST on their sales and the tax paid cannot be passed on to the customer. This may impact their competitiveness in the market.
The turnover threshold to avail the composition scheme is Rs 1.5 crore. Businesses with higher turnover will have to move to the regular GST scheme, making them ineligible for the simplified compliance of the composition scheme.
In summary, the composition scheme works well for small businesses looking to reduce their tax and compliance burden. However, the inability to claim input credits and pass on taxes to customers can impact profitability. Businesses should evaluate both the advantages and drawbacks carefully before opting for the composition scheme.
How to Register for the GST Composition Scheme
To register for the GST Composition Scheme, you must meet certain eligibility criteria and follow a few simple steps.
Eligibility
To qualify for the Composition Scheme, you must:
- Be a supplier of goods or services
- Have an aggregate turnover of less than Rs. 1 crore in the preceding financial year
- Not be engaged in inter-state supply of goods
- Not be engaged in supply of goods through an e-commerce operator
Registration Process
Once you have verified your eligibility, you can register for the Composition Scheme in a few easy steps:
- Log in to the GST Portal using your login credentials.
- Click ‘Dashboard’ and select ‘Composition Scheme’ under ‘Registration’ menu.
- Select the option ‘Register for Composition Scheme’ and fill in the required details.
- Upload documents such as proof of turnover to support your application.
- Submit the application and you will receive an acknowledgement on the GST Portal.
- The application will be reviewed by the Tax Department. Once approved, you will receive the Certificate of Registration for Composition Scheme on the GST Portal.
Compliance
After registering for the Composition Scheme, you must:
- File a quarterly return in GSTR-4, providing details of turnover
- File an annual return in GSTR-9A
- Maintain invoices and accounts as per GST rules
- Prominently display a signboard at all places of business, stating ‘Composition Taxable Person’.
The Composition Scheme offers easier compliance for small businesses. However, you cannot charge GST from customers or claim Input Tax Credit. Carefully evaluate the pros and cons to determine if the Composition Scheme is right for your business.
Conclusion
As a small business owner, you now have a clear understanding of the GST composition scheme and how it can benefit your business. By opting for the composition scheme, you can avoid the tedious GST filing and compliance requirements, allowing you to focus on growing your business. The nominal tax rates also reduce your tax burden, improving your cash flows. However, you need to ensure your business remains within the specified turnover threshold to continue availing the benefits. You should also keep proper records of your supplies and file the quarterly returns on time. The composition scheme offers an easy way for small businesses to enter and operate in the GST regime. Make the most of it and choose what is right for your business needs.
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