A Quick view on Composition Scheme under GST

Subodh Jain | Last updated: 09 September 2020

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Quick Summary

The GST Composition Scheme offers a simplified tax process for small businesses with an annual turnover below Rs. 1.5 crore. Eligible businesses, including manufacturers, dealers, and certain restaurant owners, can pay GST at a fixed, lower rate instead of managing complex formalities. While opting in means foregoing input tax credits and issuing bills of supply, it significantly reduces the tax burden and compliance effort.

Composition Scheme is a simple and easy scheme under GST for taxpayers. 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*.

Features of Composition Scheme:

Here are some important features of composition scheme:

GST Composition Scheme: Simple Tax for Small Businesses

Manufacturers of goods, dealers, and restaurant owners (applicable only to restaurants that do not serve alcohol) can opt for composition scheme.
A compounding dealer cannot collect tax or claim input tax credit for the supplies delivered to their clients. Due to this reason, bills of supply are issued for sales transactions, instead of tax invoices.
Business owners registered under this scheme pay tax at a much lesser rate compared to normal business owners. The tax paid by the compounding vendors will be equal to at least 1% of the business's annual turnover.
The composition rates are different based on the type of business.
For traders and manufacturers, its 1%. (CGST 0.5% + SGST 0.5%)
For restaurant sector its 5%. (CGST 2.5% + SGST 2.5%)
The registered business owner under Composition Scheme will have to file one return each quarter by 18th of the month following that quarter.
If a business owner has 5 different businesses under the same PAN, he must register all the businesses under Composition Scheme or opt out of the scheme.
For transactions under the reverse charge mechanism, the compounding dealers will be taxed at the normal GST rate.
A compounding dealer is permitted to supply services, excluding restaurant services, that are worth under 10% of the turnover for the preceding financial year or Rs. 5 lakhs, whichever is higher.

Disqualification and Penalty

If tax authorities believe that a business is wrongfully enrolled or not eligible, they may disqualify the business from the composition scheme or demand a penalty equal to the tax amount owed. In case of late filing of GSTR-4, the business owner will be fined Rs. 100 per day to a maximum amount of Rs. 5,000/-. Also, not furnishing returns for 3 consecutive tax periods may result in cancellation of registration by the tax authorities.