What is the GST Composition Scheme?
The GST composition scheme is a simple and easy scheme under GST for taxpayers. This scheme is an effective tax-paying mechanism, which is specially offered to small businesses. Under this scheme small taxpayers can get rid of tedious GST formalities and pay GST at a fixed rate of turnover. This scheme can be opted by any taxpayer whose turnover is less than Rs. 1.5 crore.
What are the Features of GST Composition Scheme?
The composition scheme carries a list of important features that include:
- The composition scheme can be availed by manufacturers of goods, dealers and restaurant owners who do not serve alcohol.
- Business owners registered under the scheme pay a relatively lower tax percentage as compared with business owners under the regular GST scheme. The tax paid through the composition scheme is 1% of the annual turnover.
- The composition rates vary based on the types of business. While manufacturers typically pay about 1%, the restaurant sector pays 5%.
- In case a business owner has several different businesses registered under a single PAN, he/she has to register all the businesses under the scheme. If not, he/she must opt out of the scheme.
- The business owner has to file a single return each quarter by the 18th of the month following the given quarter.
- When transactions are made under the reverse charge mechanism, the dealer will have to pay tax as per the normal GST rate.
Who can opt for the Composition scheme?
- All SMEs searching for lower compliance and lower assessments of taxes under GST.
- A GST citizen, whose turnover is underneath Rs 1.5 crore, can settle on the Composition Scheme. (On account of Special Category States, as far as possible is Rs 75 lakh.)
- The Aggregate Turnover of all organizations enlisted under a similar PAN would be taken into the application to calculate turnover.
- Will pay tax at typical rates in case he is subject under the opposite charge mechanism.
- Sellers of intra-state supply of goods (or service of only the restaurant sector).
Who cannot opt for Composition Scheme?
- Service providers
- Inter-state sellers
- E-commerce sellers
- Supplier of non-taxable goods
- Manufacturer of Notified Goods
- All the suppliers of services except those providing restaurant services (not serving alcohol)
- Suppliers of – ice cream, pan masala or tobacco (and its substitutes)
- Casual Taxable Person
- Non-resident Taxable Person
- Supplier of exempted goods or services
What is the GST Composition Scheme Limit?
The GST composition scheme limit varies depending on the business sector.
- Manufacturers and Traders – When a business is newly registered, the turnover cannot exceed ₹ 1.5 Crore in a given financial year. If it’s an existing registered business, the turnover cannot exceed ₹ 1.5 Crore over the previous financial year.
- Restaurants (Not serving alcohol) – The above-stated terms are applicable.
- Service Providers – If the business is newly registered, the turnover cannot exceed ₹ 50 Lakh in a given financial year.
- In case the turnover exceeds the given limit, the business will have to comply with the regular GST mechanism.
What are the conditions for availing Composition Scheme?
The following conditions must be satisfied in order to opt for composition scheme:
- No Input Tax Credit can be claimed by a dealer opting for composition scheme
- The dealer cannot supply goods not taxable under GST such as alcohol.
- The taxpayer has to pay tax at normal rates for transactions under the Reverse Charge Mechanism
- If a taxable person has different segments of businesses (such as textile, electronic accessories, groceries, etc.) under the same PAN, they must register all such businesses under the scheme collectively or opt out of the scheme.
- The taxpayer has to mention the words ‘composition taxable person’ on every notice or signboard displayed prominently at their place of business.
- The taxpayer has to mention the words ‘composition taxable person’ on every bill of supply issued by him.
- As per the CGST (Amendment) Act, 2018, a manufacturer or trader can now also supply services to an extent of ten percent of turnover, or Rs.5 lakhs, whichever is higher. This amendment will be applicable from the 1st of Feb, 2019.
What are the Rates of Tax Under GST Composition Scheme?
Under the GST composition scheme, the tax rate is applicable on the business turnover. At present, the following rates are applicable:
- Manufacturers and Traders – 1% GST, divided as 0.5% CGST and 0.5% SGST
- Restaurants (Not serving alcohol) – 5% GST, divided as 2.5% CGST and 2.5% SGST
- Service Providers – 6% GST, divided as 3% CGST and 3% SGST
What are the advantages of Composition Scheme?
- Lesser compliance (returns, maintaining books of record, issuance of invoices)
- Limited tax liability
- High liquidity as taxes are at a lower rate
What are the disadvantages of Composition Scheme?
- A limited territory of business. The dealer is barred from carrying out inter-state transactions
- No Input Tax Credit available to composition dealers
- The taxpayer will not be eligible to supply non-taxable goods under GST such as alcohol and goods through an e-commerce portal.
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Note: This Post was last updated on February 9, 2023
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