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GST Composition Scheme: Simplifying Compliance for Small Businesses

26/7/2024, 4:30:05 pm , Written by Tasmiya Naaz

AICAN

The GST Composition Scheme is a simplified taxation scheme designed to help small taxpayers comply with GST regulations. It offers a reduced tax burden and easier compliance requirements, making it an attractive option for small businesses and MSMEs. In this article, we'll explore the conditions for availing the scheme, its eligibility criteria, benefits, and limitations.

What is the GST Composition Scheme?

The GST Composition Scheme is a simplified tax scheme under the Goods and Services Tax (GST) regime in India. It allows small businesses to pay a fixed percentage of their annual turnover as tax, rather than the regular GST rates. This scheme aims to reduce the compliance burden on small taxpayers.

Conditions for Availing Composition Scheme

To opt for the GST Composition Scheme, a taxpayer must meet certain conditions:

  • Turnover Limit: The aggregate turnover of the business should be below Rs. 1.5 crore. For the North-Eastern states and Himachal Pradesh, the limit is Rs. 75 lakh.
  • Nature of Business: Manufacturers of ice cream, pan masala, or tobacco, and businesses making inter-state supplies cannot opt for this scheme.
  • Input Tax Credit: Composition dealers are not eligible to claim input tax credit.
  • Transaction Type: Casual taxable persons and non-resident taxable persons are also excluded.
  • GSTIN Registration: Businesses must be registered under GST to opt for this scheme.
  • Notices and Invoices: The taxpayer must display 'composition taxable person' at their business premises and on every bill of supply.

Eligibility Criteria

The GST Composition Scheme is available to:

  • Manufacturers and traders: with a turnover below Rs. 1.5 crore.
  • Service Providers: As per the CGST (Amendment) Act, 2018, manufacturers and traders can now supply services to an extent of ten percent of turnover or Rs. 5 lakhs, whichever is higher.
  • Multiple Business Segments: If a taxpayer has multiple business segments under the same PAN, they must register all such businesses under the scheme collectively or opt out of the scheme.

How to Opt for the Composition Scheme

Taxpayers can opt for the GST Composition Scheme at the beginning of every financial year. Here are the steps:

  • Log in to the GST portal using your GSTIN and password.
  • Navigate to the 'Services' tab and select 'Registration'.
  • Choose 'Application to opt for Composition Levy'.
  • Fill out the application form with the necessary details and submit it.
  • Confirmation: After submission, you will receive an approval order from the GST authorities.

Compliance Requirements

Composition dealers must adhere to certain compliance requirements:

  • Billing: Dealers must issue a Bill of Supply instead of a tax invoice and mention 'composition taxable person' on every bill.
  • Display: The phrase 'composition taxable person' must be displayed prominently at their place of business.
  • GST Payment: Tax is to be paid on supplies made, reverse charge transactions, and purchases from unregistered dealers.

Returns to be Filed

Composition dealers are required to file:

  • Quarterly Statement CMP-08: By the 18th of the month after the end of the quarter.
  • Annual Return GSTR-4: By the 30th of April of the next financial year from FY 2019-20 onwards.
  • Annual Return GSTR-9A: For FY 2017-18 and FY 2018-19.

Advantages of Composition Scheme

The scheme offers several benefits, including:

  • Lesser Compliance: Reduced frequency of returns and simplified record-keeping.
  • Limited Tax Liability: Tax rates are lower than the standard GST rates.
  • High Liquidity: Businesses can maintain better cash flow due to lower tax rates.
  • Ease of Accounting: Simplified bookkeeping and accounting processes.
  • Predictable Taxation: Fixed rate of tax based on turnover provides predictability.

Disadvantages of Composition Scheme

While beneficial, the scheme has some limitations:

  • Limited Territory: Dealers are barred from making inter-state transactions.
  • No Input Tax Credit: Composition dealers cannot claim input tax credit.
  • Supply Restrictions: Dealers cannot supply non-taxable goods under GST such as alcohol, and goods through e-commerce portals.
  • Limited Growth: The turnover threshold restricts business expansion.
  • Higher Tax Rate on Services: Services provided beyond the allowed limit are taxed at higher rates.

Detailed Records and Audits

Composition dealers must maintain detailed records of:

  • Sales and Purchases: Accurate records of all sales and purchases.
  • Stock Register: Inventory records of goods.
  • Tax Paid: Documentation of taxes paid under the scheme.

How to Calculate Turnover for GST Composition Scheme

To calculate turnover for the GST Composition Scheme:

  • Aggregate Turnover: Sum of all taxable supplies (excluding the value of inward supplies on which tax is payable on reverse charge basis), exempt supplies, exports of goods or services, and inter-state supplies.
  • Exclude: Taxes paid under GST, inward supplies liable to reverse charge, and non-GST supplies.

Who Cannot Opt for Composition Scheme?

Certain taxpayers are ineligible for the scheme:

  • Manufacturers of Ice Cream, Pan Masala, or Tobacco.
  • Inter-state Suppliers: Businesses making inter-state supplies.
  • Casual Taxable Persons or Non-Resident Taxable Persons.
  • E-commerce Operators: Those supplying goods through e-commerce platforms.

GST Rates for Composition Dealers

The GST rates under the Composition Scheme are:

  • Manufacturers: 1% of turnover.
  • Traders: 1% of turnover of taxable supplies of goods.
  • Service Providers: 6% of turnover for eligible service providers.

Conclusion

The GST Composition Scheme is an excellent option for small taxpayers looking to simplify their GST compliance. With lower tax rates and reduced paperwork, it helps businesses maintain better liquidity and focus on growth.

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If you're interested in learning more about GST and its impact on MSMEs, explore our collection of blog posts and stay updated with the latest industry trends and tips.

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