GST Composition Scheme: A Comprehensive Guide

The Composition Scheme is a straightforward and user-friendly arrangement within the GST framework designed to benefit taxpayers. It offers small-scale taxpayers the advantage of escaping the cumbersome GST procedures by enabling them to fulfill their GST obligations at a consistent rate based on their turnover. This beneficial scheme is open for adoption by any taxpayer with an annual turnover below Rs. 1.5 crore. This article will look into the GST Composition Scheme in detail. IndiaFilings can help you obtain GST registration quickly. If you're ready to simplify your taxation process and take advantage of the Composition Scheme's benefits, contact us today to get started! [shortcode_4]

Who Qualifies for the Composition Scheme?

Small businesses with an annual combined turnover of up to Rs. 1.5 crore have the option to avail of the GST composition scheme. To ascertain eligibility, the aggregate turnover of all entities sharing the same PAN is aggregated for composition scheme calculation.

Eligible Categories and Special Provisions

Under Section 10, manufacturers, dealers, and restaurants (excluding those serving alcohol) are eligible for the composition scheme.
Meanwhile, service providers can use a parallel scheme for composition dealers as specified in CGST (Rate) notification no. 2/2019, dated March 7, 2019, applicable when the total turnover remains within Rs. 50 lakh.
Notably, a distinctive composition scheme was introduced on March 31, 2022, for brick manufacturers. This covers various bricks, including building bricks, fossil meal-based bricks, earthen or roofing tiles, and fly ash bricks and blocks. Enrollees in this scheme enjoy a fixed tax rate of 6% without the facility of input tax credit.

Exclusions from the Composition Scheme

The composition scheme isn't extended to the following categories:

Manufacturers of ice cream, pan masala, or tobacco products
Businesses involved in inter-state supplies
Casual and non-resident taxable individuals
Suppliers dealing in non-taxable goods as per GST regulations
Entities surpassing the turnover threshold specified for composition scheme eligibility
Companies engaged in the supply of goods through e-commerce operators.

Benefits of Choosing the GST Composition Scheme

Opting for the composition scheme brings forth a range of benefits, including:

Streamlined Compliances

We have reduced the burden of adhering to multiple compliances such as filing returns, maintaining extensive record books, and generating invoices, making business operations smoother.

Quarterly Tax Payments

Businesses can make tax payments every quarter, alleviating the pressure of monthly fees and providing more manageable cash flow management.

Limited Tax Liability

Under the composition scheme, tax liability is confined to a fixed percentage of turnovers, providing predictability and aiding financial planning.

Enhanced Liquidity

With taxes levied at a lower rate, businesses can retain a higher portion of their earnings, leading to improved liquidity for operational and growth needs. Choosing the composition scheme thus offers a more hassle-free compliance experience, periodic tax payments, controlled tax liability, and improved financial flexibility.

Drawbacks of the GST Composition Scheme

While the composition scheme offers its advantages, it also comes with certain limitations, including:

Geographic Limitations

Participation in the composition scheme restricts businesses from engaging in inter-state transactions, potentially limiting market reach and growth opportunities.

Absence of Input Tax Credit

Composition dealers are not entitled to claim input tax credits, which could impact cost efficiency and competitiveness in the long run.

Ineligibility for Certain Goods

Businesses under the composition scheme are prohibited from supplying non-taxable items, including alcohol and goods, via e-commerce platforms, potentially narrowing down the range of products they can offer. While the composition scheme streamlines certain aspects, these disadvantages should be carefully considered when determining its suitability for a particular business.

Composition Scheme GST Rates

Businesses and individuals opting for registration under the composition scheme are subject to GST rates ranging from 1% to 6%, contingent upon the nature of their business activities. The composition scheme's applicable GST rates maintain a balanced distribution between SGST/UGST and CGST, with 1% GST comprising 0.5% CGST and 0.5% SGST/UGST, and 6% GST encompassing 3% SGST/UGST along with 3% CGST. The composition scheme's GST rates are categorized as follows:

1% of the turnover for traders and other eligible suppliers registered under the composition scheme.
2% of the turnover for manufacturers, except those dealing in products ineligible for the GST composition scheme.
5% of the turnover for restaurant services.
6% of the turnover for businesses offering or mixed services, excluding restaurant services. This rate alteration came into effect on April 1, 2019.

The inclusion of service sector businesses, aside from restaurants, into the composition scheme was introduced during the 32nd GST Council Meeting. This extension of the composition scheme to services and mixed services took effect on April 1, 2019. Before this development, service-related businesses and individuals were ineligible for enrollment in the GST composition scheme.

Nature of Business Activity	Composition Scheme GST Rate
Traders and eligible suppliers	1%
Manufacturers (except ineligible products)	2%
Restaurant Services	5%
Services/Mixed Services (excluding restaurants)	6% (from April 1, 2019 onwards)

Conditions for Opting the Composition Scheme

To become eligible for the composition scheme, businesses must adhere to the following conditions:

No Input Tax Credit: Dealers choosing the composition scheme cannot claim Input Tax Credit (ITC) on their purchases, leading to the inability to offset tax liabilities with credits.
Exclusion of Non-Taxable Goods: Businesses under the composition scheme are prohibited from supplying goods that are not taxable under GST, such as alcohol.
Normal Tax Rates under Reverse Charge Mechanism: