GST Composition Scheme & Related Changes

With GST registration, small taxpayers can pay tax under either the regular scheme or composition scheme.

What is GST Composition Scheme? 

It is a tax paying scheme for a registered person under GST – it  provides an option of  paying  tax at a fixed rate on supplies in spite of having a different actual rate on such supplies. 

Who can opt for this scheme? 

Registered person having aggregate turnover up to ₹1.5 crores in the financial year. Earlier the limit was ₹1 crore. 

The limit is ₹75 lakhs in case of Special Category States [Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Uttarakhand].

** Aggregate turnover: Aggregate of taxable supplies (includes Inter-State supplies) of all States under same PAN + Exempt supplies (except interest income) + Export of goods or services or both – Inward supplies on which reverse charge applies – Taxes under GST law, compensation cess. 

Note 1: Value of supply of Exempt services including services by way of extending deposits, loans or advances where the consideration is interest or discount, shall be excluded, i.e., interest income shall be excluded from aggregate turnover.

Note 2: As per new provisions inserted in the GST law, a trader/manufacturer registered under Composition scheme is allowed to supply services up to a value not exceeding 10% of the turnover in preceding financial year or ₹5 lakhs, whichever is higher.

Other Important Conditions to be fulfilled by registered person for opting this scheme:

1. Not a casual taxable person; 

2. Not a non-resident taxable person; 

3. Not a manufacturer of specified goods- Ice cream, pan masala and tobacco (trading of these goods is not restricted); 

4. Not engaged in supply of goods through e-commerce operator; 

5. Not engaged in supply of non-taxable goods like Alcoholic liquor for human consumption, etc.; 

6. Not engaged in supply of services, other than restaurant services (after amendment it is allowed); 

7. Not engaged in Inter-State outward supplies, including supplies to SEZ unit/developer (this condition applies to taxable as well as exempt supplies); 

8. Goods held in Stock must have not been purchased in the course of Inter-State trade or commerce; 

9. Goods held in Stock must have not been purchased from non-registered dealers and if purchased, tax must have been paid under reverse charge mechanism; 

10. Pays tax on inward supplies; 

11. Mentions the words “Composition taxable person, not eligible to collect tax on supplies” at the top of Bill of Supply issued; 

12. Mentions the words “Composition taxable person” on every notice or signboard at his principal as well as additional place of business. 

What is the rate of tax under Composition scheme? 

Category of Registered Person	Rate of tax
Manufacturer (other than that of Ice cream, Pan masala and Tobacco)	0.5% CGST + 0.5% SGST = 1% of the turnover
Food/Restaurant service provider	2.5% CGST + 2.5% SGST = 5% of the turnover
service provider	3% CGST + 3% SGST = 6% of the turnover

Important points to be noted by a Composition taxpayer: 

1. He cannot collect any GST or Cess applicable on outward supplies effected by him. Hence, in this case, recipient of supply will not be able to claim input tax credit. 

2. He is not eligible to claim input tax credit of tax paid by him on inward supplies including inward supplies on which he pays tax under reverse charge mechanism. 

3. He has to issue Bill of Supply instead of tax invoice, without mentioning tax amount on it. 

4. He cannot opt for composition scheme for one business vertical and regular scheme for other business vertical. Composition scheme applies to all business verticals under same PAN. 

5. He cannot opt for composition scheme for one class of goods and regular scheme for other classes of goods or services.  

6. He can opt for composition scheme if he is engaged in making Inter-State Inward supplies. Restriction is only for Inter-State Outward supplies. 

7. Once, he becomes ineligible for the Scheme, he can take Input tax credit for goods held in stock on the day immediately preceding the date from which he becomes liable to pay tax under the regular scheme. 

8. SPECIAL CASE: We know that a registered Composition scheme taxpayer cannot collect tax on the outward supplies. In case he supplies goods on MRP (Maximum Retail Price), special care is required to be taken because MRP includes output tax, and if he sells on MRP, then it leads to violation of the condition of non-collection of tax. If this happens, he would become ineligible for the composition scheme and would be liable to pay additional tax under regular scheme. In this case, he will not be able to avail Input tax credit within the time permitted.  

When can a registered person apply for GST Composition Scheme? 

(i) At the time of obtaining registration under GST law– Here, scheme is effective from the date of registration.

(ii) At the time of migration from the earlier laws– here,  scheme is effective from the date of registration. 

(iii) Before the commencement of the financial year in which he wants to opt for the scheme– Here,  scheme is effective from the beginning of the upcoming financial year. 

What are the consequences of payment of GST under Composition Scheme in case a registered person is not eligible for the same? 

Pay additional tax as required under regular scheme + Pay penalty (Sec.73 and 74, relating to demand under fraud and non-fraud cases applies here). 

When does the option to avail Composition scheme lapse or the permission granted cancels? 

(i) The day on which the turnover exceeds the threshold limit, OR 

 (ii) The registered person fails to satisfy the conditions mentioned for Composition scheme, OR 

(iii) Proper officer has reason to believe that the person is not eligible for the Scheme.  

Can a registered composition scheme taxpayer re-enter the scheme if he withdraws from it? No, he cannot re-enter the scheme until the expiry of the financial year. Further, he is required to:–

(i) File an intimation for withdrawal from the scheme, within 7 days of the non-compliance of conditions specified, OR 

(ii) File an intimation for withdrawal from the scheme, anytime during the financial year before the effective date of withdrawal, in case of wilful withdrawal.

A major change related to Composition scheme w.e.f 1 April, 2019 

Now, a service provider can also opt for Composition scheme. Earlier only service providers providing restaurant services were eligible to opt for the scheme. But, the benefit of this has been extended to small service providers whose aggregate turnover is up to ₹50 lakhs. All other conditions applicable to other taxpayers eligible for composition scheme apply to these service providers also.  Moreover, the benefits available to other taxpayers under composition scheme are also available to these service providers. They are required to pay tax at the rate of 6% ( 3% CGST + 3% SGST)

Major compliance requirement for Composition Scheme Taxpayers: 

They are required to furnish a statement for every quarter in Form GST CMP-08 after paying the tax for the relevant quarter by 18^th of the next month ending the Quarter. And, they are required to file an annual return in Form GSTR-4 on or before 30^th April following the end of financial year. 

To conclude, small taxpayers have an option to choose between GST composition scheme and a regular one.