GST Composition Scheme | Composition Scheme Under GST Comprehensive Guide

GST Composition Scheme: In accordance with the GST law, a taxpayer generally pays tax under standard rates, i.e., 5%, 12%, 18%, 28%, and avails cenvat capital goods, credit on inputs, and input services. After the cenvat paid in cash to the government has been claimed, then the balance tax becomes payable. Using this process, all the procedural agreements have to be adhered to.

Under the composition scheme, there is a provision under GST to register to decrease the burden of legal formalities and compliance. This composition scheme is almost comparable to the composition schemes prevailing in the previous vat regime in almost all states. It makes procedural compliance very easy as it provides the taxpayer to pay tax at a flat rate without claiming input credit.

Under Composition Scheme – Individuals Who Are Eligible To Register

Only somebody who deals in goods can opt for such a scheme. Manufacturers can also opt for a scheme of composition, although manufacturers of pan masala, tobacco, and ice cream are not qualified for this scheme. For service providers, there is a separate composition scheme. However, restaurants can opt for the composition scheme under this section if they do not serve alcohol.
Individuals are only eligible under this scheme whose Aggregate Turnover in the preceding financial year doesn’t exceed Rs. 1.5 crore. For individuals in the state of Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh, Arunachal Pradesh, and Assam, this limit will be Rs. 75 lakhs.
Aggregate turnover, or in other terms, means the aggregate value of all non-taxable and taxable supplies, export of goods and/or services of an individual, and exempt supplies having the same PAN. GST is not incorporated in the aggregate turnover. So if any individual inducts two firms and the coupled turnover is more than the above-mentioned limit, then the individual can not take the composition scheme.
If an individual’s turnover surpasses the above-mentioned limits in a financial year, then from such day, the individual ceases to be in the composition scheme and requires to pay tax under the normal scheme from the before-mentioned day.
If any individual wishes to opt for the composition scheme, then all of their firms should opt for the composition scheme. It is not permitted that some of the individual firms are in a composition scheme, and some are not. If one of the firms of an individual becomes ineligible for the composition scheme, then all other firms of that individual also become ineligible.
An individual should not make inter-state sales of goods. Such an individual is only permitted to make intra-state sales, i.e., in the same union or state territory in which the firm is registered.
An individual should not make sales through an e-commerce portal like Flipkart or Amazon.
A casual taxable individual and a non-resident taxable individual can not register under the composition scheme.

GST Payment And Return

Individuals in the composition scheme are needed to file quarterly returns and, on a quarterly basis, also need to pay GST. All other normal dealers are obligated to file monthly returns and also tender a monthly payment.

The due date is 18 days from the end of the quarter for return filing and further for GST payment. In Form GSTR-4, such quarterly return is required to be filed, and the details will be made available in Form GSTR-4A of input supplies.

A yearly return is also to be filed on or before 31st December after the end of the financial year, as mentioned in Form GSTR-9A.

The process to file GST return by composition dealer.

Under Composition Scheme – Rates of GST

Particulars – CGST + SGST = Total

Manufacturers – 0.5% + 0.5% = 1%
Restaurants not serving alcohol – 2.5% + 2.5% = 5%
All other traders – 0.5% + 0.5% = 1%

Procedure to Apply For Composition Scheme

Procedure To Opt

Any individual has to opt for such an option given in Part B of Form GST REG-01, registering directly under GST, and desires to opt for a composition scheme.

Any individual who aspires to opt composition scheme after the registration and before the commencement of the financial year has to be file Form GST CMP-02 for which the individual desires to opt. And also, as per Form GST ITC-03, the individual also has to file within sixty days from the commencement of the appropriate financial year. Such intimations should not be registered only once in all financial years but also at the time of opting.

The goods held in stock by that individual at the start of the financial year should not be procured from an unregistered person, and then if such purchases were made, tax is to be paid on such stock.

The Effective Date For The Composition Levy

The intimation is filed in Form GST CMP-02, as the effective date for the composition levy will be the beginning of the financial year. In the matter of an individual opts for a composition scheme at the course of registration, only the operative date will be the date of registration. Such an individual should also take due care that if their registration is not accepted under the composition scheme, then at full rate for the sales already made, they may be liable to pay tax.

Opting Out From The Composition Scheme

Any individual who doesn’t satisfy any requirement for eligibility under this scheme has to publish tax invoices and pay tax at standard rates from the day such condition ceases to be accomplished. As per Form GST CMP-04, the individual is also obligated to file an intimation for withdrawal from the scheme within seven days of such date.

The person has to file Form GST CMP-04 before the date of such withdrawal, who wants to withdraw from such a scheme voluntarily.

Every individual who has filed GST CMP-04 or under GST CMP-07 has been allotted an order for withdrawal of scheme has to furnish GST ITC-01 containing details of the inputs contained in semi-finished or finished goods and stock of inputs which are held in stock by that individual on the specific date on which the option is denied or withdrawn, within 30 days, as mentioned in FORM GST CMP-07, from the date of order passed or from the date from which the option is withdrawn, as the situation may be.

An intimation sent to any union or state territory or withdrawal of option by the officer shall be deemed to be a withdrawal or intimation regarding all other places of business registered on the same PAN.

Withdrawal Of Scheme for An Individual By Proper Officer

Under section 10, it that the GST officer has reasons to believe that the registered individual was ineligible to pay tax or has contravened the provisions of the Act or these rules, the individual may issue a notice to such person in FORM GST CMP-05 to confirm such notice caused within fifteen days of the receipt and under composition scheme state as to why the option to pay tax should not be dismissed.

The accused individual has to reply to the notice in Form GST CMP-06. In accordance to FORM GST CMP-07, the proper officer has to issue an order within thirty days of receipt of such reply, either denying the option to pay tax under section 10 or accepting the response from the date of the event concerning such infringement or the date of the option, as the situation may be.

Under Composition Scheme – Restrictions On Registered Individuals

Such an individual can not make inter-state sales.
Such an individual can not make sales of exempted goods.
Such individuals shall not be entitled to an input tax credit. Total tax payable = Turnover multiplied by Rate of Composition.
Such an individual also breaks the chain of input credit, so it also cannot pass the input tax credit. In other terms, the dealer also can not take the input tax credit if another dealer purchases goods/services from a composition dealer. So composition scheme is not fitting for B2B and wholesalers businesses.
Such an individual in the issued invoice can not charge composition tax separately.
Such an individual can not make sales through an e-commerce portal like Amazon or Flipkart.
Such an individual under reverse charge is liable to pay tax on purchases of goods or services from un-registered individuals and on import of services. Such tax is be estimated using the normal GST rates, and SGST and CGST will apply even if the purchase is from an external state.
Such an individual should state the words “taxable composition individual, on supplies not eligible to collect tax” at the top of the issued bill of supply by that individual.
Such individuals shall mention the words “composition taxable person” on every signboard or notice displayed at a prominent place at their principal place of business and the place of business or every additional place.
Using our GSTIN validator and search, one can find the registration status and registration date of any registered individual with GSTIN.

Under Composition Scheme – Benefits Of Registration

Less Compliance

Composite dealer has to make quarterly payment and file quarterly returns while normal dealers have to make monthly payments and file monthly returns. A substantial level of record-keeping work also decreases.

Less Expense To The Customer

If the individual has a high margin, then the cost to the final customer also decreases if that person opts for a composition scheme.

Example – Composite Dealer or Normal Dealer Purchase Price 50-50 GST @ 18% on purchase 9-9 Cost 50 59 Margin 50-50 Sale Price (Without GST) 100-109 GST @ 18%-18 Composition Fees 1.10 (109*1%/.99) Cost to customer 118-110.10 Composition Fees is estimated at 1%. Composition fees can not be separately imposed by the dealer from the customer. In the above example, both dealers appreciate a margin of Rs. 50, but in the matter of sales made by the composite dealer, the final cost is 9.33% less to the customer.

In Composition Scheme – Drawbacks Of Registration

Such a person cannot make sales through an E-commerce operator: As explained above, the individual registered in this scheme cannot make sales through an e-commerce operator like Amazon, Flipkart, etc. So, for those making online sales or planning in the near future, the composition scheme will not be available.
It does not fit for wholesalers.: Such individuals cannot pass the input tax credit, and any other dealer would not like to purchase from such an individual. If any dealer desires to purchase goods from such an individual, then it would increase costs due to the amount charged to double taxation.
Cannot secure sales outside the state: Such an individual cannot make sales outside the state or union territory in which they are registered. This reduces the scope of the business.
Heavy penalty: Suppose the individual is not qualified to register under the composition scheme but proceeds to continue to do so, then at standard rates. In that case, the officer may ask to deposit tax and penalty equal to the tax. If the individual makes a mistake in following the eligibility criteria, then that individual may be liable for a very hefty penalty.

In Case Of A Wrongful Claim – Penalty Charged

Suppose the officer finds that the individual is not eligible to pay tax under this scheme and continues paying tax under this scheme. In that case, the individual is liable to pay the penalty equivalent to the tax payable and also tax at the standard GST rate. A proper officer must issue a notice in Form GST CMP-05 to such defaulting individual to show cause within fifteen days of receiving such information as to why under the composition scheme, the option to pay tax should not be denied. According to Form GST CMP-06, the person has to reply, and under Form GST CMP-07 within 30 days of such reply, a proper officer has to be issued.

GST Forms

Form No. — Description

GST CMP-01 – Presentation to pay tax under section 10 (composition levy) (Only for individuals registered under the existing law migrating on the appointed day)
GST CMP-02 – Presentation to pay tax under section 10 (composition levy) (For individuals registered under the Act)
GST CMP-03 – Presentation of details of stock on the date of opting for composition levy (Only for individuals registered under the existing law migrating on the appointed day)
GST CMP-04 – Application/Presentation for withdrawal from composition Levy
GST CMP-05 – Under section 10, notice for denial of option to pay tax.
GST CMP-06 – Reply to the show cause notice.
GST CMP-07 – Order for rejection/acceptance of reply to show cause notice