Understanding the Composition
Scheme Under GST

A Complete Guide for GST Composition Scheme

Start Online Invoicing

*Free & Easy - no hidden fees.

As seen in:

What is the GST Composition Scheme?

This plan is made to make tax payments easier for small taxpayers. Rather than figuring out GST based on the worth of goods or services, companies give a set percentage from their overall turnover. This method decreases the responsibility of complying and simplifies financial reporting, making daily activities more fluent for small businesses.

The GST Composition Scheme makes the tax system easier for small businesses, providing a simpler process with less compliance needs. This scheme is especially beneficial for enterprises that have smaller turnovers because it lightens their tax responsibility and decreases documentation work.

We will simplify it more. Here are the main aspects of the GST Composition Scheme, comprising turnover thresholds and procedures to register:

Salient Features of Composition Scheme under GST:

Lesser compliance level:

Now, multiple monthly registrations are not required but only one quarterly return GSTR 4 and one annual return GSTR9A are to be filed by the composition scheme operators.

Simplified Taxation:

Fixed tax to be paid at a rate lower than the regular GST rates, making it easy and cheap for small businesses to comply.

What is a Composition Scheme Limit for GST?

As per the Central Board of Indirect Taxes and Customs, the cut-off limit in GST composition scheme is ₹1.5 crore. It suggests that any tax payer can choose this option if his income during financial year is below ₹1.5 crore. For some states, it has been fixed at ₹75 lakh.

Composition Scheme under GST Tax Rates

Manufacturers and Traders:
1% of Turnover
Eating Houses (no liquor):

5% of turnover
Other Service Providers:

6% of turnover (in case the turnover is within ₹50 lakh)

Eligibility Criteria for Composition Scheme

To attain the eligibility for the composition scheme, business enterprises have to be filed for conditions specified as below:

1. Turnover Limitation in composition Scheme:

The total turnover of the business should not exceed ₹1.5 crore in the previous financial year.

2. Inter-state supply is subject to some limitations:

No business is eligible for this scheme which supplies goods through inter-states.

3. Absence of Input Tax Credit:

Companies that operate under the composition scheme are not able to benefit from input tax credit on their acquisitions.

4. Business Nature:

The scheme is available to the manufacturers, traders, and restaurant service providers. However, this plan cannot be applied to any business that trades in alcoholic beverages, tobacco, ice cream or pan masala.

Who is Not Eligible for the Composition Scheme under GST?

The following type of taxpayers is not eligible to opt for GST composition scheme:

A casual taxable person or a non-resident taxable person

An ice cream, pan masala or tobacco manufacturer

A person who has interstate business

Ecommerce or a seller of some tax exemptions products like alcohol.

How to Calculate GST Under the Composition Scheme?

Calculating GST under composition scheme is very simple. This calculates the tax as a percentage of the turnover of the taxpayer.

For example, if a manufacturer has got a turnover of ₹1 crore, then his GST payable would be 1% of ₹1 crore i.e., ₹1 lakh.

Formula:

GST Payable = (Turnover) × (GST Rate)

Where:

Turnover = Total sales or revenue of the taxpayer.

GST Rate strong> = Applicable percentage under the composition scheme (e.g., 1% for manufacturers).

Example:

Let’s say a manufacturer has a turnover of ₹1 crore under the composition scheme.

Turnover = ₹1 crore

GST Rate = 1%

Now apply the formula:

GST Payable = ₹1 crore × 1%

Benefits and Drawbacks of Composition Scheme

Benefits	Drawbacks
Less Compliance: Lesser returns to be prepared, easier record-keeping, and no requirement for preparation of detailed tax invoices.	A Limited Area: The businesses under this scheme are only allowed to supply goods and services intra-state.
A Lower Tax Exposition: The GST rate is lower as compared with a normal GST regime.	A No Input Tax Credit: No input tax credit means greater expenditure for businesses where inputs have significant expenditure.
A Higher Liquidity: As the tax paid is lower in nature, the money available for working capital increases.	Restrictions on business type: The scheme exclude certain businesses for example alcohol or e-commerce.

How to Apply for Composition Scheme under GST?

The GST composition scheme application is a step-wise process and is as follows:

1

Logging in to the GST portal
2

Services tab> Registration>

Application for Composition Levy
3

Submit form CMP-02

stating your decision to opt for the composition scheme.
4

File the form with e-signature or digital signature.

After you receive an approval for your application, you can start filing your returns under composition scheme.

How to Convert from Regular GST to Composition Scheme under GST?

You can also switch from the usual GST regime to composition scheme under GST, if you already have business under the usual GST regime. Switch can be made only through submission of Form GST CMP-02 on the GST portal. The facility to shift is provided at the beginning of every financial year.