To support the development of small businesses, the Indian Government introduced the GST composition scheme which enabled eligible taxpayers to pay GST with lesser compliance and at lower rates.
Keep reading to learn more about this scheme, its tax rates, eligibility, application procedure, and more.
What Does the GST Composition Scheme Mean?
The GST composition scheme is a tax-paying mechanism that is eligible for businesses having an annual turnover below ₹1.5 crore.
It aims to effectively reduce the compliance costs and tax burdens of small businesses, by allowing them to pay GST at fixed rates instead of the value addition that occurs at each stage of their supply chain. Explore details of how small businesses are eligible for GST Loan.
It also reduces compliance hassles for taxpayers by exempting them from filing detailed quarterly and monthly reports. Instead, they can just file Form GSTR-4 for their quarterly returns and Form GSTR-9A for their annual returns.
A Closer Look at the GST Composition Scheme’s Tax Rates
The applicable composition GST scheme tax rates are as follows:
| Type of Business | CSGT | SGST | Total GST |
| Goods traders and manufacturers | 0.5% | 0.5% | 1% |
| Restaurants (that do not serve alcohol) | 2.5% | 2.5% | 5% |
| Others (like service providers) | 3% | 3% | 6% |
The total GST under the composition scheme applies to the taxpayer’s annual turnover within a state or union territory.
This includes the taxable and exempt supplies and excludes the inward supplies value of goods and services obtained from registered and unregistered entities, along with the unregistered supplies that come under reverse charge.
GST Composition Scheme – Eligibility
- Annual turnover in the previous financial year is below ₹1.5 crore. This threshold is set at ₹75 lakh for taxpayers in Himachal Pradesh and North-Eastern states.
- For service providers (except restaurants) the annual turnover limit is ₹50 lakh.
- Must not be involved in the manufacture of pan masala, tobacco products, and ice cream.
- Must not be a casual taxable person or a non-resident.
- Must not be involved in the supply of goods and services which are non-taxable and do not come under GST.
- Must not manufacture notified goods that are listed under the CGST Act’s Section 10(2)(e).
- Must not be involved in inter-state goods and services supply.
- In case the taxpayer has several business verticals under the same PAN card, they need to apply for the GST composition scheme for all the entities. Opting for the composition scheme for one vertical and the regular mechanism for the rest is not applicable.
How to Apply Online for the GST Composition Scheme?
Here are the steps you can follow to apply for the GST composition scheme online:
Step 1 – Navigate to the GST Login portal and go to the ‘Services’ tab.
Step 2 – Click on ‘Registration’ and then on ‘Application’ to opt for GST Composition Levy.
Step 3 – Enter the financial year, registered person category, and other details.
Step 4 – Click on the checkbox to comply with the provisions of the scheme.
Step 5 – Verify all your details and provide your electronic verification code (EVC) or digital signature certificate (DSC) to submit the form.
Step 6 – Check your registered email ID or mobile number for the acknowledgement message and reference number.
Your application will be reviewed by the GST officer and you will receive an acceptance/rejection update within the next 15 days. You can check your application status by visiting the GST portal.
If your application is approved, you will receive a GST CMP-02 form, indicating that you need to pay tax under the GST composition mechanism. Download this form from the portal as proof of registration under this scheme.
What are the Different Forms Under The GST Composition Scheme?
Following are the various forms that will come in handy when applying for the composition scheme in GST:
| Form No. | Utility |
| GSTR-4 | Filing quarterly returns under the composition scheme. |
| GSTR-9A | Filing annual returns under the composition scheme. |
| GST CMP-01 | Notification to choose the composition mechanism by a taxpayer who has been granted provisional registration under GST. |
| GST CMP-02 | Notification to choose the composition mechanism by a taxpayer having GST registration. |
| GST CMP-03 | Notification of stock of goods details that was held on the day before the date of option exercise. |
| GST CMP-04 | Notification of the taxpayer’s withdrawal from the GST composition scheme. |
| GST CMP-05 | Notice intimating the denial of the taxpayer’s option to pay tax under the GST composition scheme. |
| GST CMP-06 | Reply to the denial of tax payment under the GST composition scheme. |
| GST CMP-07 | Order for accepting or rejecting the reply to the denial notice. |
| GST ITC-03 | Declaration of input tax credit payment amount on the stock of goods held on the composition scheme withdrawal date. |
Application Rules For The GST Composition Scheme
Here are some rules that taxpayers must follow in order to apply for tax payment under the GST composition scheme:
| Taxpayers willing to opt for this scheme need to file Form GST CMP-02 before the financial year begins. |
| Individuals having provisional registration under the GST scheme and opting for the GST composition scheme need to file Form GST CMP-01 within 30 days of the designated date. |
| Taxpayers need to pay an amount equaling the input tax credit on stock of goods held on the immediate preceding day of the GST composition option exercise date. Its calculation needs to be done in the prescribed manner and individuals need to file Form GST ITC-03 within 60 days of the relevant financial year’s commencement. |
| Taxpayers opting for this scheme need to mention the term “composition taxable person” on all their issued supply bills and on every notice or signboard that is displayed at their place of business. |
| They need to submit quarterly returns via Form GSTR-4 on the 18th of the following month after the quarter ends. |
| Annual returns need to be filed by taxpayers via Form GSTR-9A by 31st December after the financial year ends. |
| Returns need to contain turnover details, payable tax, tax payment, and other relevant details. |
| Tax due needs to be paid along with the returns, and it is payable via the electronic cash ledger or electronic credit ledger (in case available). |
| Taxpayers opting for this scheme do not need to maintain all details in their book of accounts as in case of normal taxpayers. However, they must maintain details regarding goods production, stock of goods, inward and outward supplies, payable tax, tax paid, and other essential details. |
Takeaway
To conclude, businesses that plan to opt for the GST composition scheme must remember that they cannot switch back to the normal scheme for the entire financial year. It is only applicable in case their turnover exceeds the prescribed limit.
Thus, they need to assess both the pros and cons of opting for this scheme before making a final decision.
FAQs
What is the difference between regular GST system and GST composition scheme?
Under the regular GST tax system, the registered taxpayer collects and pays GST on the value of the goods and services supplied. Under the Composite GST scheme, taxpayers with businesses having a turnover of less than Rs. 1.5 crores can pay tax at a lower rate.
Can businesses go back to the regular GST scheme and opt out of composition GST?
No, businesses are not allowed to opt out of the composition scheme in the same fiscal year. However, they can do so for the next financial year by visiting the GST portal.
How many types of GST are there?
There are four type of GST that businesses charge depending on whether a transaction is inter-state (between two states) or intra-state (within the same state). Based on this, there are four types of GST –
- Central Goods and Service Tax (CGST)
- State Goods and Service Tax (SGST)
- Union Territory Goods and Service Tax (UGST)
- Integrated Goods and Service Tax (IGST)
What Is Reverse Mechanism in GST?
In case of certain transactions, the responsibility of paying GST to the government falls on the buyer. This system is known as reverse charge mechanism in GST or RCM.