GST Composition Scheme

Probably by now we all are mostly aware of the existence of the term ‘Composition Scheme’ under Goods and Services Tax (GST). But due to the frequently changing GST law and complication involved therein, even the simple looking ‘GST Composition Scheme’ has become quite complex.

Importantly, the GST composition scheme is voluntary/ optional scheme. In order to analyze whether to opt under the scheme or not, it is firstly vital to understand the structure of the composition scheme under GST; privileges available under the scheme and merits as well as demerits of the scheme.

The present article tries to clear up all the complexations involved under the GST Composition Scheme for service providers and briefly explains the merits and demerits of the scheme.

What is Composition Scheme under GST

Before going into the nitty-gritty of the structure of the composition scheme, first of all, let us list down the categories of composition taxable persons who cannot opt for the composition scheme. The list is briefed hereunder-

  • A person engaged in manufacturing pan masala; tobacco; or ice cream GST rate
  • The person engaged in carrying out inter-state supplies;
  • A casual taxable person;
  • A non-resident taxable person;
  • The person engaged in supplying goods via an e-commerce operator.

Who Can opt for a Composition Scheme 

So now, let us look into the categories of persons who can opt for a composition scheme list is covered in this  GST composition scheme article. Referring to notification no. 14/2019- Central Tax dated 7th March 2019, categories of the person eligible to opt under compositions scheme are-

  1. A person registered under north-eastern states and Himachal Pradesh having aggregate turnover in the preceding financial year is less than INR 75 Lakhs; or
  2. A person registered under any other states having aggregate turnover of less than INR 150 Lakhs in the preceding financial year.
Composition Scheme under GST

Notably, from 1st April 2019, vide notification no. 2/2019-Central Tax (Rate) dated 7th March 2019, service providers, having turnover up to INR 50 Lakhs, was for the first time given the opportunity to avail the benefit of the composition scheme.

After briefly understanding the eligibility and ineligibility of the composition scheme, let us now understand the conditions to be satisfied under the scheme.

The conditions to be satisfied by the person wiling to opt under the scheme, as prescribed under section 10(2) of the Central Goods and Services Tax Act, 2017, are briefed hereunder-

Condition 1The person should not be engaged in supplying goods or services which is not taxable under GST

Condition 2The person should not be engaged in carrying out inter-state supply of goods or services

Condition 3The person should not be a non-resident taxable person or a casual taxable person

Condition 4The person should not be engaged in supplying goods or services via e-commerce operator liable to collect TCS under section 52 of the Central Goods and Services Tax Act, 2017.

Condition 5The person can supply services only to the extent of higher of 10% of turnover or INR 5 Lakhs.

Condition 6The person should not be engaged in manufacturing goods like ice cream and other edible ice; pan masala; all goods like Tobacco and manufactured tobacco classified under heading 24.

Now, let us understand the procedure to be followed for opting under the composition scheme. The following table simplifies the procedure-

Situation

Procedure to be followed for opting under the composition scheme

The person is applying for fresh GST registration and wants to directly opt for a composition scheme

As per rule 3(2) of the Central Goods and Services Tax Rules, 2017, such a person just has to select the option in Part B of application Form GST REG-1.

The person is already registered under GST and wants to opt for a composition scheme

As per rule 3(3) of the Central Goods and Services Tax Rules, 2017-

  • Such person needs to file an intimation in Form GST CMP-02 prior to commencement of the Financial Year for which the option of Composition Scheme is to be exercised;
  • Additionally, the person also needs to submit a statement in Form GST ITC-3, within a period of 60 days from the commencement of the Financial Year.

Composition Dealer Privileges 

Following are some of the important privileges available to the person who has opted under the composition scheme-

1. Lower GST rates

As per section 10(1) of the Central Goods and Services Tax Act, 2017 read with rule 7 of the Central Goods and Services Tax Rules, 2017, the composition scheme dealer will have to pay GST at lower rates.

The GST rate on services applicable to the composition scheme dealer are tabulated hereunder-

Sr. No.

Classification of business

GST Rate

1

Manufacturer

1% [0.5% CGST and 0.5% SGST]

2

Specified restaurant services

5% [2.5% CGST and 2.5% SGST]

3

Trader or any other eligible supplier

1% [0.5% CGST and 0.5% SGST]

4

Service providers

6% [3% CGST and 3% SGST]

1. Lesser filing of GST returns

The filing of GST return is simplified under the composition scheme. Accordingly, the composition dealer is required to furnish fewer GST returns, as per the table detailed below-

 Forms 

Reference of respective rule

Description

Return filing  duration

Due date of filing of return

Form GST CMP-08

Rule 62(1)(i) of the Central Goods and Services Tax Rules,  2017

Statement for payment of self- assessed tax

Quarterly basis

Within 18 days of the month following the quarter

Form GSTR-4

Rule 62(1)(ii) of the Central Goods and Services Tax Rules,  2017

Return for the Financial Year of the person who has opted for composition levy under GST

Annual

Within 30th April  of the succeeding Financial Year

GST Composition Scheme Merits Details

Various merits of the compositions scheme are briefed hereunder-

Lesser tax liability

As seen in the table above, the composition scheme dealer is required to pay less GST taxes. The minimal as well as nominal tax binding on the composition scheme dealer is the core USP of the composition scheme.

Limited compliance

As seen above, the composition scheme dealer is required to furnish only five returns i.e. four quarterly returns in Form GST CMP-08 and one annual return in Form GSTR-4.

Such limited compliance, as compared to other registered persons under GST, enables the composition scheme dealer to reduce its compliance cost to a greater extent.

High liquidity/ cash flow

One of the important benefit available to the composition scheme dealer is the availability of high liquidity/ cash flow. The following flowchart explains how the same is possible-

composition scheme dealer

Less payment of GST and non-blockage of funds under input tax credit results into high liquidity/ cash flow for composition scheme dealer.

Good opportunity marketplace

It is always presumed that the person opting under the composition scheme losses the competitive edge. Factually, the scenario, if interpreted properly, can be different.

Comparatively, the small supplier under the composition scheme generally has a high profit margin. If the dealer adequately utilizes the same and offer a competitive price then they can easily extend their foot prints to deeper local markets. 

Demerits of the composition scheme

Similar to two sides of the coin, even a composition scheme involves both merits and demerits. After briefly understanding the merits, let us analyze the demerits of the composition scheme

Non-availability of input tax credit

The major drawback being faced by the composition scheme dealer is that they are not eligible to avail any input tax credit. On top of that, the person buying goods/ services from the composition scheme dealer is also not allowed to avail Input Tax Credit under GST involved in the same.

Non-availability of input tax credit to the buyer, under the scheme, is hindering the business of person registered under the composition scheme. Since any GST registered buyer is likely to prefer buying from a normal registered person in order to avoid loss of input tax credit.

Non-collection of GST taxes

It is fact that the rate of GST payable by the composition scheme dealer is very less. But another hard fact is that the composition scheme doesn’t permit the dealer to collect any amount in terms of GST taxes.

 Due to this the payment of GST taxes on the outward supplies from their own pockets adds up to the cost of the dealer.

Less preferred

GST registered person is less likely to prefer buying from the composition scheme dealer since GST involved in the transaction is not available to the buyer as an input tax credit. Further, since the dealer is not allowed to collect any amount in terms of GST, the possibility is more that the dealer will increase the basic purchase price and hence the same will probably turn out to be costlier.

Limitation of territorial business

Apart from the non-availability of an input tax credit, another major drawback under the composition scheme under GST limit is it debars inter-state supplies. Scaling up of the business becomes a bit problematic due to debarring of inter-state supplies under the composition scheme.

GST Composition Scheme Synopsis

The gist of the entire article is summarized here under

Eligibility under the Composition Scheme

Person registered under north-eastern and Himachal Pradesh having annual turnover of less than INR 75 Lakhs in the preceding Financial Year.
Any other person having annual turnover of less than INR 150 Lakhs in the preceding Financial Year.

Ineligibility under the Composition Scheme

  1. A person engaged in manufacturing of ice cream; pan masala or tobacco; or
  2. The person engaged in carrying out inter-state supplies; or
  3. A casual taxable person; or
  4. A non-resident taxable person; or
  5. The person engaged in supplying goods via an e-commerce operator.

Rate of GST under the Composition Scheme

  • Manufacturer – 1%
  • Specified restaurant service – 5%
  • Traders – 1%
  • Service provider – 6%

GST Return filing under the Composition Scheme

  1. Quarterly return in Form GST CMP-08; and
  2. Annual return in Form GSTR-4.

Merits of the Composition Scheme

  1. Lesser tax liability;
  2. Limited compliance;
  3. High liquidity/ cash flow; and
  4. Good opportunity marketplace.

Demerits of the Composition Scheme

  1. Non-availability of input tax credit;
  2. Non-collection of GST taxes;
  3. Less preferred; and
  4. Limitation of territorial business.

CA Poonam Gandhi

About the author

Poonam Gandhi is a Chartered Accountant and a Lawyer. She is a Professional Freelance Content Writer/ Editor and an Educator.

She masters in creating result-oriented as well as Search Engine Oriented Content. Currently, she is associated with some of the topmost leading sites of India.

She holds more than 3 years of experience in the content field. Before entering the content writing field, she possessed a wide practice experience of more than 9 years, specifically, in the field of Indirect Taxation.

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