GST Composition Scheme – Rules, Rate, Limits, and Benefits

Rohit Rajpal

Senior Writer

Chief editor

Chief editor

GST Composition Scheme

Have you been wondering about the new GST Composition Scheme? Understandably so – it’s a new system with lots of rules, rates, and limits.

Well, don’t worry, because we are here to give you all the info you need to understand this system and its many benefits. In this blog, we will cover in detail what the GST Composition Scheme is all about; its rules, rates, limits, and benefits. Let us now explore how this scheme can help your business grow. Let’s get started without any further ado.

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What is the GST Composition Scheme?

GST Composition Scheme is a remarkable initiative under GST, which offers small businesses a reprieve from the burden of complex GST administration. 

GST Composition Scheme under GST

Instead of the standard GST rates, small businesses whose annual sales are up to Rs. 1.5 crore can opt for a fixed rate of GST on their annual turnover, making payments more manageable and convenient. This is truly advantageous for these businesses as it helps them sidestep the hassle of complicated GST compliance regulations.

What Are the Rules of Composition Scheme?

Are you a business professional looking to register under the GST Composition Scheme? Understanding the scheme’s rules and the entities/persons who are eligible to register is key. 

From manufacturers and service providers such as restaurants to traders, the GST Composition Scheme applies to them all. However, there are certain entities/persons who are not eligible for the scheme, such as:

  • Non-resident taxable persons
  • Casual taxable persons
  • Businesses/individuals supplying products using an online store operator that withholds taxes
  • Businesses selling inter-state goods – makers of ice cream, other edible ices with or without cocoa as an additive
  • Makers of tobacco products, substitutes of tobacco and pan masala
  • Organizations/people who have purchased items from unregistered suppliers
  • Vendors involved in the supplying of goods that are exempt under the GST Act

It is essential to note that the list is not definitive and could alter. Though composition plan registered entities/persons may not be permitted to deal in interstate supplies of goods/services, they can nonetheless get goods/services from companies authorised to carry on cross-border operations under the GST ordinance. As a result, businesses/individuals subscribed to the composition plan may obtain items/services beyond the state but will not be allowed to sell commodities or services to customers or firms outside their state. 

Under the GST Composition Plan, taxpayers should fill in a single return form, GSTR – 4, four times annually. Tax is paid on the supply of goods and or services at fixed rates on the total taxable turnover of the previous quarter. Apart from that, the taxpayer is also required to display the GST rate on their bill or tax invoice for the current or previous financial year.

What Are the Advantages of the Composition Scheme Under GST?

The Composition Scheme in GST is a great option for small businesses, making GST payments simpler and more manageable. Here are some of the major advantages of the GST composition scheme – 

Advantages of the Composition Scheme

  1. Easy to Comply: The GST composition scheme is easy and less time-consuming to comply with due to its simpler rate structure.  This allows small firms to benefit from fewer compliance requirements that are particularly complicated for non tax experts.
  2. Simplified Taxation Rate: The fixed GST rate applicable under the composition scheme is a flat rate, no matter what combination of goods or services are purchased or sold – this makes it much easier for entrepreneurs to understand their GST liabilities and plan for incoming payments.
  3. Lower Tax Liability: Since the fixed rate of GST imposed by the composition scheme is much lower than the standard rates applicable to other businesses, the overall tax liability will be significantly less than normal producers and manufacturers. This can help small businesses in competing better with larger entities that have a significant advantage because of using input credits allowed under the GST regime
  4. Lesser Paperwork: With lesser invoices and returns required, the paperwork associated with filing taxes also reduces drastically. This means they will have more options regarding where business resources should be allocated, as well as increased efficiency when compiling information at fast-paced operations. 

What Are the Disadvantages of the Composition Scheme Under GST?

The GST Composition Scheme has several disadvantages:

Disadvantages of the Composition Scheme

  1. Loss For Government: The business has to pay tax at a lower rate of 1% – 3% which is much lower than what would be charged under the normal GST rates ranging from 7%-28%. This can lead to an overall loss in revenue for state governments.
  2. Restricted Input Credit Benefits: The Composition Scheme does not allow taxpayers to avail credit on Input Tax Paid on the purchases made by them for their business. This increases the overall cost of doing business by making businesses bear the entire burden of taxation.
  3. No Inter-State Supply Allowed: Under the composition scheme, taxpayers are not allowed to indulge in any inter-state supply of goods and services. In this case, businesses don’t have access to customers beyond a particular state or territory.
  4. Compliance Requirements: Businesses registered under the Composition Scheme have fewer compliances as compared to the regular taxpayers but there is still some compliance required such as filing income tax returns, submitting quarterly returns, etc which adds extra work and can prove troublesome for small businesses.
  5. Penalty in case of Default/Non-Compliance: If businesses fail in paying taxes or filing returns on time, they can incur penalty charges and other costs as mentioned under various provisions of GST Act, 2017 making it difficult for them to sustain over a long period of time in spite of all the advantages it offers.
  6. No Credit Facility: One downside of opting into this scheme is that business operators do not get any input tax credit facility – meaning they cannot claim taxes back from suppliers or vendors regardless of whether they have paid them off appropriately, making cash flows much harder to manage at times when revenue streams run dry for some periods of times.

Having difficulty managing cash flow, Read our blog post on: How to Improve Cash Flow.

What is the Eligibility Criteria for the GST Composition Scheme?

Any business owners registered under the scheme or a taxpayer having an annual turnover of up to Rs. 1.5 crore is eligible to opt for the Composition GST Scheme. Further, only those businesses that deal in goods are eligible. The GST Composition Scheme is not open to services and other businesses.

Who is not Eligible for the composition scheme?

Any registered taxpayer having an annual turnover of more than Rs. 1.5 crore, manufacturers of ice cream, pan masala, or tobacco, persons making inter-state supplies, casual taxable persons, non-resident taxable persons, suppliers of non-taxable goods under the GST law and businesses supplying goods through an e-commerce operator are not eligible for composition scheme under GST.

What Requirements Need To Be Fulfilled To Use the Composition Scheme?

Any taxpayer opting for the GST Composition Scheme is required to adhere to certain conditions and restrictions. These include not making inter-state supply of goods and services, not deducting and collecting TDS, and not collecting tax through e-way bills.

What is the rate under the GST for a Composition Dealer??

For business professionals who wish to benefit from GST, the composition scheme offers GST rates of between 1%-5%, depending on the goods and services being provided. With this scheme, you can enjoy reduced taxation, with no need for complex returns filing.

Wrapping Up

In summary, the GST Composition Scheme is a beneficial solution for small businesses that want to save money and reduce paperwork. It helps minimize the burden of compliance with GST regulations, enjoy lower GST rates, a higher tax threshold and more. With the proper understanding of the rules, rates, limits and benefits involved, businesses can realize maximum returns from this scheme. 

However, businesses must remember that the rules and regulations associated with this scheme may change at any time and thus, staying up-to-date with the latest developments is essential. For busy business owners and entrepreneurs, it can be a great idea to hire a professional tax consultant who can help them make the most of the GST Composition Scheme.

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