GST Composition Scheme - Limits, Rules, Rates, Bill Format, Benefits and Limitations

GST or good and services tax is one indirect tax for the whole nation. It has replaced many indirect taxes in India. It is a multi-stage, destination-based tax which is levied upon each value addition. 

GST applies to every business, and therefore this tax increased the revenue of the government. Both CGST and SGST are used on a good while buying, and there are no more VAT, Excise duty, or any other indirect tax charged here. It is easier for big organizations; however, the small businesses and start-ups might face a little difficulty while registering themselves. For the convenience for small and medium businesses (SMEs) and start-ups, The Government of India has launched the GST composition scheme.

We have discussed some crucial information regarding this scheme down below.

Composition Scheme Limit

The composition scheme initially introduced the limit of INR 1 crore, i.e., for businesses that have a yearly turnover of less than INR 1 crore can choose registration for this composition scheme. As the northeastern and hill states have smaller tax bases, the GST Composition Scheme limit for them was kept at INR 75 lakhs.

Then, later on, in the 32nd GST Council Meeting held in January 2019, the limit for states was increased to INR 1.5 crore for those businesses or individuals who have an annual turnover of INR 1.5 Crore. Then again, for the North Eastern States, a lower limit will be set.

GST Composition Scheme Rules

The registration for GST Composition Scheme is entirely optional. Businesses having more than 1.5 crores yearly turnover can apply for this voluntarily. However, if the annual turnover limit exceeds, then they are bound to register themselves under the regular GST scheme. There are specific rules for registering, and some of them are:

• This scheme is not for service providers; only the businesses that deal with the supply of goods can opt for this. However, this excludes the restaurants.

• Businesses who deal with the intra-state supply of goods are qualified only. No domestic procurement of goods is allowed.

• If a person has multiple businesses with the same PAN, he will register for them separately.

• Dealers are barred from collecting Input Tax Credit, and they are not allowed to take composition tax either.

• If a particular person is ineligible for this composition scheme, he will have to pay the TAX + Interest penalty, which will be equal to the amount of tax and liability.

Persons who can't apply for this scheme-

• Non-resident taxable person

• E-commerce dealers are not allowed to apply for this scheme. For example: If m/s X is selling their products on Flipkart or Amazon, they are barred from this scheme.

• A person who supplies non-taxable goods

• Supplier of pan masala, ice-cream, and tobacco

Composition Scheme GST Rate

The GST rate under the composition scheme varies by the types of business and services provided by the registered person/business. This scheme features an equal amount of SGST/UGST and CGST. Which implies 1% GST = 0.5% + 0.5%, SGST/UGST6% GST= 3% SGST/UGST + 3% CGST.

The composition of the GST rates is different based on the annual turnover of the person/business entity. The traders and other suppliers are suitable for 1% of the turnover for composition scheme registration, 2% for the manufacturers, 5% for restaurant services, and 6% for businesses that provide mixed services. The levied GST rate on mixed services by firms is a recent addition after the 32nd GST council meeting.

GST Composition Scheme Return 

Currently, for returns under this GST scheme, people/businesses will have to file them quarterly "the 18th of the month succeeding the last month of the previous quarter" on the official GST website. The companies/individuals will have to file the returns using the GSTR-4 Form. 

Composition Scheme Forms under GST

GST CMP-01: To be filled by registered business/entity for intimation of paying tax under this scheme.

GST CMP-02: To be filled by an unregistered person/business for choosing this scheme.

GST CMP-03: To offer details of stock inward by unregistered person/entity.

GST CMP-04: For withdrawing from GST composition scheme

GST CMP-05: To show the reason for a notice issued by appropriate tax officer of GST Act Rules

GST CMP-06: To show reason notice issued in Form GST CMP-05

GST CMP-07: To order acceptance or rejection of reply given in Form CMP-06

GST REG-01: For registering under composition scheme

GSTITC-01: For details of input available with the registered supplier in the form of raw materials, semi-finished and finished goods

GST Composition Scheme Bill Format

The businesses/individuals that are registered under this scheme are not permitted to issue any GST invoices. And that is why the dealers will have to issue Bill of Supply in case of outward goods/services. Any business/individual is supposed to submit the Bill of Supply including the following documents-

• Name, Address, and GSTIN

• A consecutive serial number which is unique for every financial year

• Issue Date

• If the person is registered, then the GSTIN, Name, Address of the recipient.

• Accounting code for services or HSN code

• A detailed description of the goods and services

• The total value of the services and goods after applying any discounts

• Signature of the supplier or his official representative

• GST Payments by Composition Registered Business/Individual

Businesses or entities that are registered under the GST composition scheme are not permitted to ask for credit of taxes, and that is why these supplies have to pay for GST from their own money. The dealers who will make tax payment for GST consists of well-received from unregistered dealers, fees on lieu of goods supplied by reverse charge mechanism, and tax acquired by the import of services and products.

Benefits of GST Composition Scheme Registration

Reduced Compliance

Usually, under the GST act, a business or taxpayer has to file three returns monthly and one yearly return that means 37 profits in a year or there will be charged penalty, which can be too much for a small business. So under the composition scheme, the SMEs, manufacturers, individuals, and other small businesses will have only to submit a return every quarter, which will reduce their compliance burden.

Reduced Tax Liability

Another plus point of this scheme is the rates-.

For Manufacturers = 0.50 %( CGST) + 0.50(SGST) = 1% 

For suppliers of food other than alcoholic liquor = 2.5% (CGST) + 2.5% (SGST) = 5% 

For other supplier = 0.50% (CGST) + 0.50% (SGST) = 1% 

 Higher Liquidity

The tax rates are lower, so there will be higher liquidity. The most parts of the working capital of the taxpayers will be blocked as Input Tax Credit, and he can only access it if the supplier has filed for the return. And that is why the supplier has to pay the tax at standard rates. However, in the composition scheme, the Dealer doesn't have to worry about that.

Limitations of the GST Composition Scheme Registration

No Credits of Input Tax

Any business or entity registered under this scheme won't be allowed to obtain the credit of Input Tax Credit on any kind of purchase along with the buyer of those goods.

No Inter-state Business

Another major problem with this scheme is that the taxpayer won't is ne able to deal with any interstate business and import-export of goods and services. He is only allowed to do intrastate deals.

 Paying from their pocket

The dealers are not allowed to charge tax from the buyer, so he has to pay for the GST from his own money. He can't even issue a tax invoice

Official Website

You can find the link for the official website here- https://www.gst.gov.in/.

Frequently Asked Questions

Q. Who can choose this Composition Scheme?

The Businesses or entities such as Manufacturers of goods, Dealers, and Restaurants can go for this composition scheme that has an annual turnover of INR 1.5 crore.

Q. What is the tax rate?

The tax rate For Manufacturers is 1%, for suppliers of food other than alcoholic liquor is 5% and for another supplier 6%.

Q. Do I need to pay tax if I am purchasing goods from an unregistered dealer?

No, you don't have to pay for taxes here.

Q. Should I pay IGST on interstate purchases?

No, the IGST should not be paid the composition dealer. The Dealer is supposed to pay tax under reverse charge, import of service, or purchase. Only an unregistered dealer has to pay CGST and SGST.

Q. How do I calculate the Tax amount?

The Dealer is bound to pay tax at an exact rate on the total sales. And he has to pay the fee under reverse charge on individual purchases. Total GST Payable =

Tax on supplies 

+ Tax on B2B transactions where Reverse Charge is allowed

+ Tax on B2B purchases from unregistered suppliers 

+ Tax on Import of Service

Q. Does the Composition Dealer is bound to maintain detailed records?

No, a dealer registered under composition scheme is not needed to maintain detailed records.

Q. Can Composition Dealers benefit from Input Tax Credit?

No, a Composition Dealer is not granted to avail input tax credit of GST on purchases.

Q. Can the Dealer issue Tax Invoices?

No, he cannot; however he can issue a bill of supply. 

Q. Can the Dealer collect tax from customers?

No, the Dealer is barred from collecting tax from customers.

Q. I have many branches do I have applied to each of them separately?

You can avoid doing that only if the branches are under the same PAN.