Decoding the GST Composition Scheme for Small Businesses

Considering the GST Composition Scheme for your small business? This guide explains eligibility, benefits, and drawbacks to help you decide if it's the right fit.

CA Raj Kumar - Avatar Image Written by CA Raj Kumar - Updated on June 13, 2024. Estimated Reading Time: 7 minutes.
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Decoding the GST Composition Scheme for Small Businesses

The Goods and Services Tax (GST) is a major tax reform in India that has fundamentally changed the way businesses operate. Understanding GST and its implications is crucial for all businesses. But for small business owners who are just starting out, navigating the complexities of GST can be a challenging task. Unlike larger businesses that can hire experts to ensure compliance, small businesses often lack the resources to do the same. This is where the GST composition scheme comes into play. It offers a simplified way for small businesses to pay GST, with fewer rules and less paperwork. If you are eligible, the composition scheme can save you time and money and help your business grow.

Eligibility and the Benefits

Who can join the composition scheme? [Covered by Section 10 of the CGST Act]

  1. Small Businesses: The scheme is primarily for small businesses with lower turnovers. It simplifies tax compliance and eases the tax burden for such businesses.
  2. Turnover Limit: To be eligible for the Composition Scheme, a business’s annual turnover must be less than ₹1.50 crore (₹15 million) in the previous financial year. However, for the businesses registered in the following states, the limit is reduced to ₹75 lakh (₹7.5 million). [Notification No. 14/2019]
    • Arunachal Pradesh
    • Manipur
    • Meghalaya
    • Mizoram
    • Nagaland
    • Sikkim
    • Tripura, and
    • Uttrakhand

    Also, the manufacturer of the following goods cannot opt for the composition scheme even if their turnover is below the threshold limit.

    Sl. No. Tariff item Description
    1. 2105 00 00 Ice cream and other edible ice, whether or not containing cocoa,.
    2. 2106 90 20 Pan masala.
    3. 24 All goods, i.e., tobacco and manufactured tobacco substitutes.
    2A 2202 10 10 Aerated water [added later by Notification No. 43/2019]
    4* 6815 Fly ash bricks or fly ash aggregate with 90 percent or more fly ash content; fly ash blocks
    5* 6901 00 10 Bricks of fossil meals or similar siliceous earths
    6* 6904 10 00 Building Bricks
    7* 6905 10 00 Earthen or roofing tiles.

    * SI. Nos. 4 to 7 were added by Notification No. 4/2022, and separate special composition schemes were made for them. They cannot avail of the composition scheme under Section 10, and instead they can opt to pay GST at a reduced rate if they do not avail of ITC. If they choose not to take input credit, they can pay now at the rate of 6% as notified via [Notification No. 02/2022-Central Tax (Rate)].

  3. Types of Businesses: A wide range of businesses can opt for the Composition Scheme, including traders, manufacturers, and restaurants. Earlier, service providers were excluded from the scheme, except for those engaged in restaurant services. But now service providers can also join the scheme and have to pay at the rate of 6% if their turnover is below ₹50 lakhs. [Notification No. 2/2019-Central Tax (Rate)]. However, once the threshold for service provided crosses ₹50 lakhs, they will have to pay the normal GST rate.

Who is barred from applying under the composition scheme? [Restricted by Section 10 of the CGST Act]

  1. Businesses whose turnover crosses the threshold limit.
  2. Businesses engaged in inter-state supplies.
  3. Manufacturers specified as mentioned earlier, like pan masala, ice cream manufacturers, etc.
  4. Those making supplies through electronic commerce operators.
  5. A casual taxable person or a non-resident taxable person:

Process to Opt-in and Opt-Out of the Composition Scheme

A business can opt at any time before the start of the financial year by applying with Form CMP-02. Also, the business can opt out at any time during the financial year by filing CMP-04. On opting out of the composition scheme during the year, the businesses have to comply as a composition scheme business until the date of opt-out. For example, if a business opts out on February 10, it has to file CMP-08 for the period from January 1 to February 10. For transactions after February 10th, it has to file monthly returns like normal businesses.

What are the benefits?

  1. Simplified Tax Compliance: Businesses under the Composition Scheme are required to file a quarterly CMP-08 statement and an annual GSTR-4 return. This significantly reduces the paperwork and hassle involved in tax compliance. The due dates for CMP-08 are the 18th of the month, immediately after the end of the last quarter, and for the annual return, the due date is April 30th for the financial year ended in March.
  2. Lower Tax Rates: The tax rates under the composition scheme are lower than those under the regular GST scheme.
    Type of Business Rate Applicable
    1. Manufacturer and Trader of Goods 1%
    2. Restaurants not serving alcohol 5%
    3. A service provider whose turnover is below ₹50 lakhs and opts for a reduced rate 6%
    4. Manufacturer of bricks, earthen roofing tiles, and fly ash blocks 6%
  3. Reduced Paperwork: They do not have to maintain detailed records. Also, instead of issuing a tax invoice, they will have to issue a bill of supply.
  4. Improved Cash Flow: Taxes under the Composition Scheme are paid on a quarterly basis. This helps businesses manage their cash flow better, as they do not need to make monthly tax payments.
  5. Selling at a lower price: Composition scheme businesses are not allowed to charge GST. Hence, they can sell at a lower rate to customers than normal businesses.

What are the compliance requirements?

  1. Filing GSTR-4 and CMP-08: Businesses under the Composition Scheme need to file GSTR-4 annually by April 30th for the preceding financial year. This is a simplified return designed specifically for these businesses. Also, they have to furnish Form CMP-08 on a quarterly basis by the 18th of the month, immediately after the end of the quarter. For example, at the end of the January–March quarter, the due date will be April 18th.
  2. Issue a Bill of Supply and No Tax Invoice: After opting for the composition scheme, businesses cannot issue tax invoices. They will have to issue a bill of supply.
  3. No Input Tax Credit: One of the main limitations of the Composition Scheme is that businesses cannot claim input tax credit on their purchases. This means that they cannot reduce their tax liability by the amount of GST paid on their inputs.
  4. Restriction on Interstate Supplies: Businesses under the Composition Scheme cannot make interstate supplies. This restriction is important to consider if your business involves significant interstate transactions.
  5. Quarterly Tax Payment: Taxes must be paid on a quarterly basis, aligning with the filing of Form CMP-08. This helps in managing cash flows more effectively.

Comparison with the Regular GST Scheme

Which is right for you?

The choice between the composition scheme and the regular GST scheme depends on the nature and needs of your business. Here’s a comparison to help you decide:

Feature Composition Scheme Regular GST Scheme
Compliance Simpler More complex
Tax Rates Lower Higher
Input Tax Credit Not allowed Allowed
Interstate Sales Not Allowed Allowed
  1. Compliance Complexity: The Composition Scheme offers a simpler compliance process with fewer returns to file and less stringent record-keeping requirements. In contrast, the regular GST scheme involves filing multiple returns and maintaining detailed records.
  2. Tax Rates and Financial Impact: Tax rates under the composition scheme are lower. It can benefit businesses with lower profit margins. However, the regular GST scheme’s higher rates might be offset by the ability to claim input tax credit, potentially reducing the overall tax burden.
  3. Input Tax Credit: The regular GST scheme allows businesses to claim input tax credit, reducing their tax liability by the amount of GST paid on purchases. The Composition Scheme does not offer this benefit, which could be a significant factor for businesses with substantial input costs.
  4. Operational Flexibility: Businesses under the regular GST scheme can engage in interstate sales with no restrictions. This provides greater operational flexibility. But businesses under the composition scheme cannot make interstate supplies. Businesses under the composition scheme can only make intra-state supplies (i.e., supplies within the state boundaries). Also note that a composition scheme business cannot operate out of the scheme in any other state with the same PAN. All the businesses with the same PAN will have to either opt in or opt out of the scheme. The turnover and other eligibility criteria are based on an all-India basis for all the businesses registered under the same PAN. So a sole proprietor cannot register a branch on his PAN for the composition scheme and carry out business as a normal GST business with another firm registered on his PAN from any other state.

Conclusion

The GST Composition Scheme can be a valuable tool for small businesses. It simplifies tax compliance, reduces costs, and improves cash flow. However, it’s crucial to weigh your options carefully and consider your business’s needs before making a decision. Although the composition scheme reduces the tax rate, it also disallows the use of input credit. Consulting with a tax professional can provide personalized advice and guidance. Remember, choosing the right GST scheme can make a significant difference in your business’s success. Choose wisely, and watch your business grow!


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CA Raj Kumar Post Author Avatar
CA Raj Kumar

I love blogging and studying taxation. I write articles related to Tax laws and common issues in handling taxation in India. Often, common but small mistakes make things complicated. I write and share them to save precious time of others.


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