Comprehensive Guide to GST Composition Scheme for Small Businesses

Understanding the tax landscape can be a challenging endeavor for small businesses, which is why the Government introduced the Composition Scheme under the Goods and Services Tax (GST) regime. Designed to simplify GST compliance and reduce the associated costs, this alternative scheme is an effective solution for small taxpayers with turnover up to a specific limit. This comprehensive guide provides a detailed overview of the Composition Scheme, including its eligibility, conditions, rates, advantages, and more.

Who can opt for Composition Scheme:

Who can opt for the Composition Scheme:

(1) A taxpayer whose turnover is below Rs 1.5 crore can opt for the Composition Scheme. In the case of North-Eastern states and Himachal Pradesh, the limit is now Rs. 75 lakhs. A composition dealer can also supply services to an extent of 10% of aggregate turnover (turnover of all businesses registered with the same PAN), or Rs.5 lakhs, whichever is higher.

(2) As per Sec.10 (2A) of the CGST Act 2017 [applicable w.e.f April 2019 vide Notification No. 2/2019-Central Tax (Rate) dated 07th March, 2019], in case of Intra State supply of goods or services or both, if a registered taxable person has first supplies of goods or services or both up to an aggregate turnover of Rs.50 lakhs made on or after the 1st day of April in any financial year, he is eligible to pay GST under the composition levy. In addition to complying with all general conditions attached to the composition scheme for eligibility, this person should not be eligible to pay tax under the composition scheme under sec.10(1). This simplified scheme is introduced w.e.f. 1-4-2019 for small service providers (and those who are suppliers of goods as well as services exceeding 10% of turnover within the State/Union Territory) whose aggregate turnover during the previous FY did not exceed Rs. 50 lakhs.

Explanation: For the purposes of this notification, the expression “first supplies of goods or services or both” shall, for the purposes of determining eligibility of a person to pay tax under this notification, include the supplies from the first day of April of a financial year to the date from which he becomes liable for registration under the said Act but for the purpose of determination of tax payable under this notification shall not include the supplies from the first day of April of a financial year to the date from which he becomes liable for registration under the Act. One more condition to avail the scheme has been provided where any registered person who has availed of input tax credit opts to pay tax under this notification, he shall pay an amount, by way of debit in the electronic credit or cash ledger, equivalent to the credit of ITC in respect of inputs held in stock and inputs contained in semi-finished or finished goods in stock and on capital goods as if the supply made under this notification attracts the provisions of section 18(4) of the Act and the rules made there-under and after payment of such amount, the balance of input tax credit, if any, lying in his electronic credit ledger shall lapse.

Conditions & Restrictions under Composition Scheme:

• The dealer should not be a manufacturer of ice cream & any edible ice, pan masala, tobacco & tobacco substitutes or Aerated water.
• The dealer should not be a person making outward inter-state supplies (Includes export of goods or services).
• He should not be a casual taxable person or a non-resident taxable person. (No restriction on inward inter-state supply)
• He should not be an E-commerce operator or doing business through E-Commerce operators.
• The dealer should not be a supplier of non-taxable goods or services.
• No Input Tax Credit available to dealers opting for composition scheme.
• Pay tax at normal rates for transactions under the Reverse Charge Mechanism.
• If having different segments of businesses (such as textile, electronic accessories, groceries, etc.) under the same PAN, bring all such businesses under the scheme collectively or opt out of the scheme.
• Mention the words ‘composition taxable person’ prominently on every notice or signboard displayed at the place of business.
• Mention the words ‘composition taxable person’ on every invoice.
• The goods held by him in stock on the appointed date must not be purchased from a place outside his state. The goods should therefore not be classified as: Interstate purchase/Imported Goods/Branch situated outside the State/Agents or Principal situated outside the State.

Inclusions/ Exclusion of Aggregate Turnover under the Scheme as per Sec.2(6):

Inclusions	Exclusions
Value of Exported goods or services	Inward supplies attracting GST under RCM
Exempted supplies	CGST, SGST, IGST, UTGST or Compensation cess (But tax is included with input cost for pricing purpose under composition scheme)
Inter-state supplies between persons having same PAN	Interest or discount on deposits, loans or advances
Supplies on own account or on behalf of the supplier	Supplies of goods by a Job-worker after completion of work
Supplies on own account or on behalf of the supplier	Outward supply of good or services

Raising of Invoice:

A composition dealer cannot issue a tax invoice. This is because composition dealers cannot charge tax from their customers. They need to pay tax out of their own pocket. Hence, the dealer has to issue a Bill of Supply.

GST Rate under Composition Scheme:

Type of business	CGST	SGST	TOTAL
Manufacturers & Traders of goods	0.5%	0.5%	1%
Manufacturers & Traders of goods	2.5%	2.5%	5%
Other service providers -Sec.10(2A) w.e.f Apr2019	3%	3%	6%

Advantages of Composition Scheme:

• Lesser compliance (Lesser frequency of payments/returns, maintaining minimum books of accounts, non-issuance of invoices).
• Limited tax liability.
• High liquidity, as taxes is at a lower rate.
• A dealer registered under composition scheme is not required to maintain detailed records.

Disadvantages of Composition Scheme:

• A limited territory of business. The dealer is barred from carrying out inter-state transactions.
• No Input Tax Credit available to composition dealers.
• The taxpayer will not be eligible to supply non-taxable goods under GST such as alcohol and goods through an e-commerce portal.

Returns to be filed by a composition dealer:

• A dealer is required to pay tax in a quarterly statement CMP-08 by 18th of the month after the end of the quarter. A return in form GSTR-4 has to be filed annually by 30th April of next financial year.
• GSTR-9A is an annual return to be filed by 31st December of the next financial year.

GST payment to be made by a composition dealer:

GST Payment has to be made out of pocket for the supplies made. The GST payment to be made by a composition dealer comprises of the following:

• Tax on supplies made.
• Tax on reverse charge.
• Tax on purchase from an unregistered dealer.

Intimation for Composition Levy:

1. Persons registered under pre-GST regime (Irrelevant now as this was a transitional provision):

Any person being granted registration on a provisional basis (registered under VAT Act, Service Tax, Central Excise laws, etc.) and who opts for Composition Levy shall electronically file intimation in FORM GST CMP-01, duly signed, before or within 30 days of the appointed date (date from which GST came into effect I.e., 1/7/2017).

2. Persons registered under GST and wants switching to Composition Scheme:

Every registered person under GST who opts to pay taxes under Composition Scheme, must follow the following rules: (i) File an intimation in FORM GST CMP- 02 for exercise of option within 30 days of commencement of the relevant financial year. (ii) File a statement in FORM GST ITC- 3 for details of ITC relating to inputs lying in stock, inputs contained in semi-finished or finished goods within 60 days of commencement of the relevant financial year.

3. Persons who applied for fresh register under GST to opt scheme:

A person who wishes to register himself as a composition taxpayer from the very beginning shall opt for the scheme in Part-B of FORM GST REG-01 and that shall be deemed to be an intimation for opting under the scheme i.e., no other intimation is required to be filed in such cases after the registration is granted.

Effective date for composition levy:

1. When Person registered under pre-GST regime & wants switching to composition scheme: Effective date will be the appointed day

2. When Person registered under GST and wants switching to Composition Scheme: Effective date of registration under composition levy shall be the date of filing such intimation.

3. Persons who applied for fresh register under GST to opt scheme:

(a) Where the application for registration has been submitted within 30 days from the day he becomes liable for GST registration, effective date of registration under composition levy shall be the date of becoming liable for registration.

(b) Where the application for registration is filed after 30 days, effective date of registration under composition levy shall be the date of grant of registration.

Summary-Intimation & effective date:

Category of Assesses	Intimation form & due date	Effective date of registration under Composition scheme
Persons registered under pre-GST regime	GST CMP 01-within 30 days of appointed date	Appointed date
Persons already registered under GST	GST CMP 02- within 30 days of start of FY & GST ITC 3 (ITC availed on stock lying)- within 60 days of start of FY	Date of intimation
Persons applying for fresh registration		(a) If submit application within 30 days of becoming liable for registration-Date of becoming liable for registration; (b) Otherwise-Date of grant of registration.

Aggregate Turnover (Sector wise):

Category of Assessee	Aggregate turnover in the PY	Aggregate turnover for CY GST calculation
Manufacturer	Taxable + Exempted goods & services	Taxable + Exempted goods & services
Trader	Taxable + Exempted goods & services	Taxable goods & services
Restaurant	Taxable services	Taxable services

Note: Exempted services does not include interest or discount on loans, advances and deposits.

Validity of Composition Levy:

As per Rule 6 of Chapter II of CGST Rules, 2017, option exercised by a person to pay tax on composition basis remain valid as long as he satisfies the conditions.

Conditions satisfied	Conditions not satisfied	Self-withdrawal	Proper officer has reason to believe taxpayer not eligible for the composition levy
Composition levy allowed	Pay tax as per normal rates. Issue tax invoice for taxable supply. Within 7 days file Form GST CMP – 4 as intimation. File Form GST ITC 01(Stock & capital goods balance) within 30 days of violating condition, to take credit of ITC.	Before the date of withdrawal file an application Form GST CMP-4 as intimation within 7 days from the date he ceases to satisfy the conditions	Issue Show Case Notice in Form GST CMP – 05 • Within 15 days taxpayer must file reply in Form GST CMP – 06 • Issue order within 30 day in Form GST CMP – 07 either by accepting or denying the composition levy.

Filing of Return (by every registered person paying tax under sec.10 or availing the benefit of Notification No. 02/2019 CT (R) dated 07.03.2019):

Filing of Form GSTR-4 on quarterly basis electronically on common portal. Due date of filing GSTR-4 is 18th of the month following the quarter. If the GSTR – 4 is not filed for a given quarter, then the taxpayer cannot file the next quarter’s return either. Penalty for delay in filing form.4 is Rs.100 for CGST & Rs.100 for SGST per day or Rs.5000 for each, whichever is more. Maximum penalty is Rs.5000 each for CGST & SGST. GSTR-4 cannot be revised after filing on the GSTN Portal. Any mistake in the return can be revised in the next month’s return only.

Various Forms for Composition levy assessee:

Form	Purpose	Due date of filing
GST CMP-01	Opting for scheme by provisional registration holder	Within 30 days of the appointed date
GST CMP-02	Intimation of willingness to opt for scheme by registered person	Within 30 days of the commencement of FY
GST CMP-03	Details of stock and inward supplies from unregistered person	Within 90 days of exercise of option
GST CMP-04	Intimation of withdrawal from scheme	Within 7 days of occurring of event. Details of stock and capital goods required to be filed in GST ITC-01 within 30 days of occurring of event
GST CMP-05	SCN on contravention of rules or Act, issued by Proper Officer	On contravention
GST CMP-06	Reply to show cause notice	Within 15 days of receipt of notice
GST CMP-07	Issue of order	Within 30 days of receipt of reply
GST CMP-08	Details of payment of self-assessed tax (w.e.f 1-4-19)	Within 18 days of the month succeeding the quarter

Penalty Provision:

As per section 10(5) of the CGST Act, 2017 if a person who has paid tax under composition scheme is found as not being eligible for composition scheme, then such person shall be liable to penalty to an amount equivalent to the tax payable by him under the provisions of the Act i.e., as a normal taxable person and that this penalty shall be in addition to the tax payable by him.

Conclusion:

The Composition levy scheme is quite beneficial for the small suppliers and intra-state local suppliers as it prevents them from various procedural compliances and gives a hassle-free working environment. In pre-GST era, to make compliances better for small businesses, States had provisions in their VAT law about the Composition Levy scheme. Similarly, even in GST, Composition Levy scheme has been introduced to safeguard the interests of small businesses. Therefore, it is advisable for the small taxpayers to have a clear understanding on this scheme to take the advantage of this scheme, if they are eligible for the same.