GST Composition Scheme: Its Features, Eligibility & Tax Rates

The Goods and Services Tax (GST) Composition Scheme is a simplified tax scheme aimed at providing relief to small taxpayers by reducing their compliance burden under the GST system. The scheme is available to eligible businesses with an annual aggregate turnover up to a specified threshold, which may vary based on government notifications.

Read this blog to learn more about the GST composition scheme, its features, eligibility criteria and tax rate.

Features of GST Composition Scheme

Businesses registered under the Composition Scheme are required to pay GST at a lower rate than regular taxpayers. The reduced tax rates vary for different types of businesses, such as manufacturers, traders, and restaurants.
One of the significant advantages of the Composition Scheme is the reduced compliance burden. Composition taxpayers need to file quarterly returns, simplifying the process compared to monthly returns for regular taxpayers.
Perhaps the most significant restriction under the Composition Scheme is that businesses enrolled in it cannot claim Input Tax Credit on their purchases. They are unable to set off the GST paid on their inputs against the GST collected on their sales, resulting in higher costs for them.
Small businesses with an annual turnover below the prescribed threshold (generally up to Rs. 1.5 crore) can opt for the Composition Scheme. For certain special category states, this threshold is lower, typically up to Rs. 75 lakhs.
Certain businesses are not eligible for the Composition Scheme. This includes service providers (except restaurants), manufacturers of notified goods, interstate sellers, and e-commerce operators.
Composition taxpayers cannot issue tax invoices. Instead, they need to mention “Composition taxable person, not eligible to collect tax on supplies” on their invoices. They have to pay GST out of their pocket and cannot collect it separately from their customers.

Also Read: Types of GST in India: CGST, SGST and IGST

Eligibility Conditions for GST Composition Scheme

Threshold Turnover

A business must have an annual aggregate turnover within the specified threshold to be eligible for the Composition Scheme. The threshold turnover is generally up to Rs. 1.5 crore for most states in India. However, for certain special category states, the threshold is lower, typically up to Rs. 75 lakhs. Businesses with turnover exceeding the prescribed limit are not eligible for the scheme.

Nature of Business

The Composition Scheme is not available to all types of businesses. It is primarily intended for small businesses dealing in goods. The following categories of businesses are not eligible for the Composition Scheme:

Service Providers: Any business that provides services (except restaurants) is not eligible for the Composition Scheme.
Manufacturers of Notified Goods: Businesses engaged in the manufacture of ice cream, pan masala, tobacco, or any other goods as may be notified by the government are not eligible.
Interstate Suppliers: Businesses engaged in the supply of goods or services between different states (interstate) are not eligible.
E-commerce Operators: E-commerce operators who are required to collect TCS (Tax Collected at Source) under GST laws are not eligible for the Composition Scheme.

No Other Registration

A business opting for the Composition Scheme cannot have any other registration under GST. This means that if a business has multiple businesses or branches, only one of them can opt for the Composition Scheme. All other businesses/branches should be registered as regular taxpayers.

No Input Tax Credit (ITC)

A taxpayer registered under the Composition Scheme is not allowed to claim Input Tax Credit on purchases made for business purposes. They need to pay GST on their supplies out of their own pocket.

Also Read: Step by Step Guide for GST Registration

Tax Rates Under GST Composition Scheme

The tax rates under the GST Composition Scheme in India vary based on the type of business. Businesses opting for the Composition Scheme are subject to lower tax rates compared to regular taxpayers. Here are the applicable tax rates under the Composition Scheme for different categories of businesses:

Manufacturers and Traders: For manufacturers and traders of goods, the tax rate is generally 1% of their turnover. This means they need to pay 1% GST on their total turnover.
Restaurants: Restaurants that are not serving alcohol can opt for the Composition Scheme. For such restaurants, the applicable tax rate is typically 5% of their turnover. This 5% GST includes both Central GST (CGST) and State GST (SGST).

Conclusion

The GST Composition Scheme serves as a valuable lifeline for small businesses in India, offering them a simplified and cost-effective approach to comply with the Goods and Services Tax (GST) regulations. By availing this scheme, eligible businesses with turnovers within the prescribed threshold can significantly reduce their compliance burden, easing the financial strain on budding entrepreneurs. With lower tax rates specifically tailored to different business categories, manufacturers, traders, and restaurants can enjoy reduced tax liabilities under the Composition Scheme.

To conclude, the GST Composition Scheme stands as a strategic option for eligible small businesses seeking simplicity and reduced tax burdens. By understanding its features, eligibility criteria, and tax rates, entrepreneurs can make informed decisions, optimizing their GST compliance and fostering growth in the dynamic Indian market.

FAQs

What is the GST Composition Scheme?

The GST Composition Scheme is a simplified tax scheme under GST designed for small businesses. It allows eligible taxpayers to pay GST at reduced rates and enjoy fewer compliance requirements.

Who is eligible for the Composition Scheme?

Small businesses with an annual aggregate turnover up to the prescribed threshold (generally up to Rs. 1.5 crore) can opt for the Composition Scheme. For certain special category states, the threshold is lower, typically up to Rs. 75 lakhs.

What is the tax rate under the Composition Scheme?

The tax rate under the Composition Scheme varies based on the type of business. For manufacturers and traders, the tax rate is usually 1% of their turnover, while restaurants (not serving alcohol) are charged around 5% GST on their turnover.

What are the key features of the Composition Scheme?

The key features include lower tax rates, reduced compliance burden (quarterly returns instead of monthly), and the inability to claim Input Tax Credit (ITC) on purchases.

Can all businesses avail the Composition Scheme?

No, not all businesses are eligible. Service providers (except restaurants), manufacturers of notified goods, interstate suppliers, and e-commerce operators are not eligible for the Composition Scheme.

What are the benefits of the Composition Scheme?

The benefits include reduced tax liabilities, simplified compliance, and lesser paperwork, making it attractive for small businesses to focus on their growth.

Are there any limitations to the Composition Scheme?

Yes, the main limitation is the inability to claim Input Tax Credit (ITC) on purchases, which can affect the overall profitability of the business.

Can a business under the Composition Scheme issue tax invoices?

No, composition taxpayers cannot issue tax invoices. They need to mention “Composition taxable person, not eligible to collect tax on supplies” on their invoices.

Can a taxpayer switch from regular to the Composition Scheme?

Yes, eligible taxpayers can opt for the Composition Scheme at the beginning of a financial year or during the financial year, subject to meeting the necessary conditions.