The Goods and Services Tax, briefly known as GST, was introduced in 2017. It replaced the previous tax regime, which had a cascading effect on the taxpayers. Under the older tax regime, taxpayers had to pay “tax on tax”, a multilayer tax system where tax was imposed on each activity of the business. To make the system more unified and streamline the process, the Union Government came up with the GST Compliance. It is a destination-based tax, which means that where the goods or services or both are consumed, the place would charge the GST, or simply the state where the services or goods are consumed finally imposes it. With the implementation of highly established and large businesses can often witness the difference, positively. Small businesses face increased compliance costs and difficulty in aligning with the new indirect taxation. To resolve the issues, the authorities introduced the Composition scheme to facilitate the small taxpayers. This article navigates the GST composition scheme for small businesses.
What is the GST Composition Scheme?
Businesses whose annual turnover is below Rs 1.5 Crs are eligible to opt for the composition scheme. The total limit is lower in the North-Eastern States and Himachal Pradesh. The limit in these states is Rs 75 lakhs. In case taxpayers have higher turnovers, they will become ineligible for the composition scheme. Under the composition scheme, compliance is easier, and the taxpayers can pay taxes at comparatively lower rates.
Who is Eligible for the Composition Scheme?
When the total income is below the threshold, businesses can opt for the composition scheme. The following are not eligible
- Manufacturer of ice cream, pan masala, or tobacco
- Persons making interstate supplies or exempt supplies
- A casual taxable person or a non-resident taxable person
- Person supplying services through an e-commerce operator who is to collect TCS
- If person supplying such goods or services notified by the government
Conditions for Availing the Composition Scheme
- Input tax credit is not available for the composition scheme taxpayers
- They cannot supply goods that are non-taxable under GST
- They have to pay tax at normal rates for transactions under the RCM (Reverse Charge Mechanism)
- Taxpayers have to mention “composition taxable person” on every notice or signboard to display at the place of business
GST Rates for Composition Scheme Taxpayers
The following tax rates apply to the taxpayers who have opted for this scheme
| Business Category | CGST | SGST | Total |
| Manufacturers and traders of goods | 0.5% | 0.5% | 1.0% |
| Restaurants not serving alcohol | 2.5% | 2.5% | 5.0% |
| Other service providers | 3.0% | 3.0% | 6.0% |
What Forms to File for the Composition Scheme
Taxpayers who want to opt for this scheme have to file various forms for diverse purposes such as registration to exiting the scheme. These forms are required at several stages. Have a look at these forms and their purposes
| Forms | Purpose |
| GST REG 01 | For getting registration under the composition scheme |
| GST CMP 04 | To exit the scheme |
| GST CMP 03 | To report stock/inward supply details from unregistered sources |
| GST CMP 02 | For applying for the composition scheme for unregistered entities |
| GST CMP 05 | Show cause notice for violation of the GST Act rules |
| GST ITC 01 | To report inputs from the composition registered supplier of raw materials, semi-finished, and finished goods |
| GST CMP 06 | For replying to the show cause notice issued via GST CMP 05 |
Benefits of the Composition Scheme
Though the compliance cost has increased for the taxpayers, it still benefits businesses in so many ways. The composition scheme taxpayers cannot make use of input tax credit, but they are eligible to pay the taxes at lower rates. These businesses do not have to file monthly returns, which results in saving lots of time and resources as well.
- Time saving as the returns are filed quarterly, therefore, the maintenance of records is easier
- Increased cash flow because of lower tax rates
- Limited tax liability, reducing the burden of imposing taxes
Get Started with TaxDunia
- File the GST CMP 08 by the 18th of the month after the end of the quarter
- One annual return on form GSTR 9A by the 31st of December in the next financial year
- Another form, GSTR-4, is also to be filed
Filing all these returns under GST returns consumes time and requires a lot of attention. If you are a growing business and need to have easy compliance and lower tax rates, think of switching to the GST Composition Scheme. Let TaxDunia’s professionals assist you in finance and taxation so that you can realize your goals and achieve targets.
