All About GST Composition Scheme: A Quick Overview

The Goods and Services Tax (GST) is all-inclusive taxing system reform in India which has the goal to streamline the taxes in the country. Out of all the different schemes it offered to its taxpayers, the GST Composition Scheme is one of the biggest respites for small taxpayers. Go for it if you need a simple means to align with GST requirements because this scheme makes it possible. This blog will provide you with a step by step explanation on what you must know about the GST Composition Scheme.

What is the GST Composition Scheme? 

The Goods and Services Tax (GST) Composition Scheme is one of the measures taken by the Indian Government under the GST structure to bring ease to the small taxpayers. As a GST registration threshold for businesses up to an annual turnover of ₹1.5 crore (75 lakh for certain special category states), the scheme provides quarterly pay at a simpler, fixed tax rate of 1% of turnover for traders and manufacturer, 5% for restaurants, excluding home delivery of FOC meals and room service meals, and 6% of turnover up to ₹50 lakh for service providers, eliminating most complex mathematical computation and record Concerning filing of returns, they file quarterly returns under this scheme, known as GSTR-4, making compliant even easier. Nevertheless, the entities registered under the composition scheme cannot claim input tax credit and cannot do B2B supply across the states or supply through E-Commerce Portal. The scheme is ideal to small manufacturers, traders and restaurant business people where they are now sure of their tax liability and also they have to make minimal compliance to start with enabling them to exploit their businesses without necessarily having to spend a lot of time struggling with complex legislation. However, while being advantageous the scheme has some drawbacks like the restrictions for certain types of goods or services and impossibility to recover the input tax credit, thus the scheme is better to use for companies that work primarily within the state. 

GST Composition Scheme eligibility criteria which are follow:  

To qualify for the composition scheme under GST, businesses must meet specific criteria: •  

Turnover Limit: The scheme is usable for entities having an aggregate turnover of upto ₹1.5 crore in most of states and ₹75 lakh in special category states including Uttarakhand and 7 North Eastern states. 

Business Type: It is so impersonal as to apply to manufacturers, traders and restaurants except those dealing in liquors. The scheme can also be availed by service providers who come under a special category provided the annual turnover of the provider does not exceed ₹50 lakh.  

Nature of Supplies: Supplies made by businesses within the same state are only allowed, which rules out interstate commerce supplies. Inter-state suppliers and the e-commerce operators are not part of the system.  

Exclusion of Certain Goods: Companies in the possibility of producing, selling, and distributing products like ice cream, pan masala, or tobacco products are barred from registering under the scheme.  

Voluntary Registration: The scheme is however voluntary and one has to make an application to be registered under the contemplated scheme.  

Compliance with GST Laws: The taxpayer must have no unpaid GST amounts, or any registered non-compliance within the last six months. Advantages of GST Composition Scheme  

Lower Tax Rates: The businesses that fall under the scheme get to pay taxes at a standardized lower percentage; 1% for manufacturers and traders, 5% for restaurants (excluding alcohol sales), and 6% for eligible service providers to lighten the tax burden.  

Simplified Compliance: The scheme makes it easier for small businesses to manage their taxes since there are fewer returns to fill, fewer records to keep, and fewer returns are to be filed; quarterly returns (GSTR-4).  

Predictable Tax Liability: Such structure makes it easier for the businesses to plan for their expenses and cash flows and this reduces the chances of a business being surprised by large taxes to be paid. 

Focus on Business Growth: Since input tax credits and specific reports are simplified, businesspersons can manage their enterprises more effectively and focus on development plans.  

Cost-Effective: The scheme has low compliance costs under the technical production process; professional fees and administrative costs are low, attracting the small enterprises.  

Enhanced Liquidity: As compared to businesses, they cannot claim input tax credit which means they do not attempt to block their money in GST credits, making it easier for them to manage cash flows. 

GST Composition Scheme Turnover Limit 

The current turnover limit under GST Composition Scheme The turnover limit has been fixed at ₹1.5 crore for most of the states and ₹75 lakh for the special category states for availing the GST Composition Scheme. There is also a turnover threshold to guarantee that only small business operates under the scheme and avails itself of easier compliance and reduced Tax rates. Small enterprises with a turnover of less than ₹1,280,000 can register for the scheme to reduce tax rates, which stands at 1% for manufacturers and traders and 5% for restaurants. The scheme also reduces the filing burden by making it mandatory for businesses to file only quarterly returns for a sum of Rs 10,000 and above, in the form of GSTR-4. Although businesses under the Composition Scheme cannot file input tax credit and do not engage in inter-state transactions and therefore not very complicated for businesses that are not very large or operational in multiple states.  

Merits and Demerits of the GST Composition Scheme 

Merits of the GST Composition Scheme:  

1. Lower Tax Rates: Low taxation — 1% of the turnover for manufacturers and traders, 5% for restaurants making it cheap for small businesses. 
2. Simplified Compliance: Quarterly return only needs to be filed in GSTR-4, thereby eliminating much paper work and efforts required in compliance. 
3. Reduced Administrative Burden: For computing input tax credit, there is no requirement to maintain detailed records: Reduction of compliance burden for small businesses. 
4. Lower GST Liability: They enjoy taxes by turnover which results to small taxes to be paid and free cash flows.

Demerits of the GST Composition Scheme: 

1. No Input Tax Credit (ITC): Purchases cannot attract any ITC meaning that organizational costs are bound to rise. 
2. Limitations on Inter-State Sales: Interstate supplies cannot be made by businesses this limits the market scope.
3. Eligibility Restrictions: They are eligible only up to a turnover of ₹1.5 crore although for special category states it is ₹75 lakh. 
4. Not for Certain Sectors: The scheme available for Electricity Metering Services is not suitable to the establishments that offer services (other than restaurants) or operates through an internet-based sale platform. 

Common Terms Associated with the GST Composition Scheme 

Turnover Limit: The maximum level of turnover recognised for business to qualify for the scheme in a particular year. It is ₹ 1.5 crore for other States and ₹ 75 lakh in respect of Uttarakhand and 7 North Eastern   

Taxable Person: This is a trader or manufacturer who is either a GST registered entity and is registered under Composition Scheme depending on the turnover.  

GSTR-4: The TAX GERN01 that each business under the Composition Scheme submits quarterly to declare its tax obligations and turnover.  

Input Tax Credit (ITC): The credit businesses receive on the tax on inputs that they make. But under the Composition Scheme one cannot avail the input tax credit on purchases made by the business.  

Inter-State Supply: The exchange of goods or services from one state to another. Some of the conditions include the fact that the businesses under the Composition Scheme cannot make cross-state supplies (only for exports or to units in SEZs).  

Flat Tax Rate: A fixed ratio of turnover that the businesses under the scheme pay as tax and is less than the normal GST rates.  

GSTIN: The GSTIN which every trader and manufacturer must acquire for being registered under the GST and to be made eligible for availing the composition scheme.  

Composition Taxpayer: One of the business who choose to pay tax at a lower rate and file simple returns under the Composition Scheme.  

Reverse Charge Mechanism (RCM): A system where by the buyer of goods or services is expected to pay for the tax as opposed to the seller. This is not mostly possible to implement for companies under the Composition Scheme. 

Exempted Goods: Exempted goods and the products that are not under the ambit of the Composition Scheme, for instance, the horticulture produce.  

How to Register for the GST Composition Scheme? 

Registration for the composition scheme in GST can be done through the GST portal: 

Log in to the GST Portal: 

• Visit the official GST portal: www.gst.gov.in 

• Use your existing GSTIN and login credentials to access the portal. 

 Navigate to ‘Services’ > ‘Registration’ > ‘Application for Registration’: 

• Go to the ‘Services’ tab, then select ‘Registration’, and click on ‘Application for Registration’. 

• If you already have a GST registration, you can modify it to opt for the Composition Scheme. 

Select ‘GST Composition Scheme’ Option: 

• On the application form, select the option to apply for the GST Composition Scheme. 

• Provide the necessary details about your business, including turnover, type of business, and tax liability. 

Submit the Application: 

• Complete the form and submit it for approval. The GST portal will verify your details and may ask for additional information. 

GST Composition Scheme Approval: 

• Once your application is approved, you will receive an acknowledgment and confirmation of your enrollment in the scheme. 

• After approval, you will be assigned a GST Composition Scheme certificate. 

File GST Returns: 

• After registration, you must file quarterly returns (GSTR-4) instead of monthly returns, reporting your turnover and tax liabilities. 

 This process ensures that eligible businesses can avail of the simplified tax system, reducing their compliance burden. Be mindful to recheck eligibility criteria and submit necessary documents as required. 

Examples of Businesses That Can Opt for This Scheme 

Small Retailers like grocery stores and clothing shops with turnover below ₹1.5 crore (₹75 lakh for special states). 

Manufacturers such as small-scale producers of textiles, furniture, or food products. 

Wholesalers like distributors of electronics or clothing to retailers. 

Restaurants and Food Service Providers with a turnover under the limit. 

Local Traders dealing in goods like stationery, toys, or handicrafts. 

Artisans producing handmade or craft items like pottery or jewelry  

Conclusion 

The GST Composition Scheme is a great way for small businesses to simplify their tax processes and reduce their tax burden. Whether you’re a retailer, restaurant owner, or dealer, this scheme can help you stay GST-compliant with less effort. However, it’s important to consider both the benefits and limitations before signing up. 

For more information on how the GST Composition Scheme can help your business, check out resources like the GST council UPSC guidelines and GST bare act. 

The Legal Dost is here to assist you in understanding GST and guiding you through the best choices for your business.