GST Composition Scheme - Rules, Eligibility, Merits & Demerits

What is the meaning of Composition Scheme under GST?

Composition scheme is an alternative taxation levy under GST. It is an optional scheme introduced to benefit the small taxpayers. This will save them from the hustle of lengthy tax compliances like maintenance of detailed records, the filing of multiple returns monthly etc. Also, the procedures in terms of the issue of invoices etc are very minimal and simplified.

Under this scheme, a registered taxpayer would be required to pay tax(GST) on their turnover based on the prescribed percentage. The tax rate is comparatively lower than those prescribed for normal taxpayers.

Is there any threshold limit to opt for composition scheme?

Yes, a supplier having turnover upto Rs 1 Cr in the preceding financial year can opt for the composition tax levy in the current year. For notified categories of states, the limit is Rs 75 lakhs.

Who can opt for composition scheme|What is the eligibility criteria?

The person having a turnover above Rs 1 crore (in general) or above Rs. 75 lakh (for notified states) cannot opt for composition scheme. Apart from this, the following categories of suppliers cannot avail the benefit of composition

  • A person making interstate supplies
  • A person making the supply of services except for those supplying food and beverages like hotels,  outdoor catering etc
  • Supplier selling through E-Commerce  operator
  • A manufacturer of following notified goods such as Ice cream, Pan Masala,  tobacco etc
    Goods Tariff Item / Chapter
    Ice cream including other ice (with or without cocoa) 2105 00 00
    Pan Masala 2106 90 20
    Tobacco and its manufactured substitutes 24
  • A person Not taxable under CGST/ SGST/ UTGST Act.
  • Casual Taxable Person or Non-Resident Taxable Person
  • Person purchasing goods from unregistered supplier except in case it has already paid GST on such supply under Reverse Charge.

What are the GST tax rates under the composition scheme?

In Goods and Service Tax varied composition rates have been prescribed for different suppliers. The following are the tax rates under composition scheme as amended by Notification Number 1/2018 – Central tax

  Manufacturer Trader Food and beverages suppliers (except alcoholic liquor) Tax rate to be charged on Turnover of
CGST 0.5% 0.5% 2.5% State
SGST / UTGST 0.5% 0.5% 2.5% Taxable Supplies in State
Aggregate Tax 1% 1% 5% State

How a composite dealer can be distinguished from a normal taxpayer?

A composite supplier has a different and reduced set of compliance when compared with the normal taxpayer. The same can be better understood through a comparison as under

  Composite Supplier Normal Supplier
Rate of GST A lower tax of rate up to the maximum of 5% has been prescribed. A higher rate of tax upto 28% has been notified in this case.
Input Tax Credit Cannot take benefit of ITC on inward supply (purchases) ITC can be availed to set off the output tax liability
Pass on the credit and incidence of the tax The composite supplier cannot pass on the credit of tax to the recipient. The normal taxpayer can pass on the credit as well as incidence of taxes payable onto the recipient
Annual Return Annual summary of the transaction is to be filed in form GSTR 9A Annual summary of the transaction is to be filed in form GSTR 9
Monthly / Quarterly Returns One quarterly return i.e. GSTR 4 needs to be filed by composition taxpayer Three monthly returns need to be filed by a normal supplier namely GSTR 1, GSTR 2 & GSTR 3/ 3B
Inter-State Supply Cannot make interstate supply Can make interstate supply without restrictions.

What are the disadvantages of composition scheme?

All good things come with a price so does Composition scheme. With its manifold benefits composition has the following disadvantages

  • No Input Tax Credit is available
  • Cannot issue taxable invoices which means the burden of composition tax cannot be passed onto the consumer
  • Cannot give tax credit benefit to others
  • No good shall lie in the stock of composition taxpayer which he purchased before entering into the scheme of composition

In which situations composition levy can be withdrawn?

If a taxpayer falls in any of the below mentioned criteria, it will result in cessation of composition levy for him

  • If the turnover exceeds the threshold of Rs 1 Cr or 75 Lakhs in the preceding financial Year.
  • On making inward supplies (purchases) form an unregistered person and not paying tax under RCM on the same.
  • In case the composite taxpayer starts making the interstate outward supply.
  • Taking registration as CTP (Casual Taxable Person) or NRTP (Non-Resident Taxable Person)
  • Undertakes supply of goods which are outside the purview of GST law.
  • On making supply thorugh e-commerce operator who is required to collect tax at source (TCS u/s 52 of CGST Act, 2017)
  • If the composition taxpayers get engaged in making the supply of notified goods such as

Ice Cream, Pan Masala, Tobacco etc

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.