The Composition Scheme is an alternative and optional scheme within the Goods and Services Tax (GST) system for small businesses with turnover below a specified threshold. The primary goal of this scheme is to simplify tax procedures, reduce the compliance burden, and lower the overall cost of complying with GST regulations for small taxpayers. Under this scheme, small businesses have the option to streamline their GST-related processes and pay taxes at a fixed rate based on their turnover.
In essence, the Composition Scheme allows small businesses to avoid the complexities and administrative formalities associated with regular GST procedures. Instead of dealing with detailed GST calculations and filings, they can opt for a more straightforward approach by paying a predetermined GST rate based on their turnover. This simplification aims to make it easier for small businesses to focus on their core operations and growth, without the added burden of intricate tax compliance requirements.
Eligibility for Composition Levy Scheme
(1) A taxpayer whose turnover is below Rs 1.5 crore can opt for Composition Scheme. In case of North-Eastern states and Himachal Pradesh, the limit is now Rs. 75 lakhs. A composition dealer can also supply services to an extent of 10% of aggregate turnover (turnover of all business registered with same PAN), or Rs.5 lakhs, whichever is higher.
(2) As per Sec.10 (2A) of CGST Act 2017 [applicable w.e.f April 2019 vide Notification No. 2/2019-Central Tax (Rate) dated 07th March, 2019], in case of Intra State supply of goods or services or both, if a registered taxable person has First supplies of goods or services or both up to an aggregate turnover of Rs.50 lakhs made on or after the 1st day of April in any financial year, he is eligible to pay GST under composition levy. In addition to complying all general conditions attached to composition scheme for eligibility, this person should not be eligible to pay tax under composition scheme under sec.10(1).
This simplified scheme is introduced w.e.f. 1-4-2019 for small service providers (and those who are supplier of goods as well as services exceeding 10% of turnover within the State/Union Territory) whose aggregate turnover during previous FY did not exceed Rs. 50 lakhs.
Explanation: For the purposes of this notification, the expression “first supplies of goods or services or both” shall, for the purposes of determining eligibility of a person to pay tax under this notification, include the supplies from the first day of April of a financial year to the date from which he becomes liable for registration under the said Act but for the purpose of determination of tax payable under this notification shall not include the supplies from the first day of April of a financial year to the date from which he becomes liable for registration under the Act.
One more condition to avail the scheme has been provided where any registered person who has availed of input tax credit opts to pay tax under this notification, he shall pay an amount, by way of debit in the electronic credit or cash ledger, equivalent to the credit of ITC in respect of inputs held in stock and inputs contained in semi-finished or finished goods in stock and on capital goods as if the supply made under this notification attracts the provisions of section 18(4) of the Act and the rules made there-under and after payment of such amount, the balance of input tax credit, if any, lying in his electronic credit ledger shall lapse.
Conditions & Restrictions under Composition Scheme
- The dealer should not be a manufacturer of ice cream & any edible ice, pan masala, tobacco & tobacco substitutes or Aerated water.
- The dealer should not be a person making outward inter-state supplies (Includes export of goods or services).
- He should not be a casual taxable person or a non-resident taxable person. (No restriction on inward inter-state supply)
- He should not be an E-commerce operator or doing business through E-Commerce operators.
- The dealer should not be a supplier of non-taxable goods or services.
- No Input Tax Credit available to dealers opting for composition scheme.
- Pay tax at normal rates for transactions under the Reverse Charge Mechanism.
- If having different segments of businesses (such as textile, electronic accessories, groceries, etc.) under the same PAN, bring all such businesses under the scheme collectively or opt out of the scheme.
- Mention the words ‘composition taxable person’ prominently on every notice or signboard displayed at the place of business.
- Mention the words ‘composition taxable person’ on every invoice.
- The goods held by him in stock on the appointed date must not be purchased from a place outside his state. The goods should therefore not be classified as: Interstate purchase/Imported Goods/Branch situated outside the State/Agents or Principal situated outside the State.
Inclusions & Exclusions of Aggregate Turnover under the Scheme – Sec.2(6)
| Inclusions | Exclusions |
| Value of Exported goods or services | Inward supplies attracting GST under RCM |
| Exempted supplies |
CGST, SGST, IGST, UTGST or Compensation cess (But tax is included with input cost for pricing purpose under composition scheme) |
| Inter-state supplies between persons having same PAN | Interest or discount on deposits, loans or advances |
| Supplies on own account or on behalf of the supplier |
Supplies of goods by a Job-worker after completion of work |
| Supplies on own account or on behalf of the supplier | Outward supply of good or services |
Scope for Raising of Invoice
A composition dealer cannot issue a tax invoice. This is because composition dealers cannot charge tax from their customers. They need to pay tax out of their own pocket. Hence, the dealer has to issue a Bill of Supply.
Tax rate of Composition Scheme under GST
| Type of business | CGST | SGST | TOTAL |
| Manufacturers & Traders of goods | 0.5% | 0.5% | 1% |
| Manufacturers & Traders of goods | 2.5% | 2.5% | 5% |
| Other service providers -Sec.10(2A) w.e.f Apr2019 | 3% | 3% | 6% |
Advantages of Composition Scheme under GST
- Lesser compliance (Lesser frequency of payments/returns, maintaining minimum books of accounts, non-issuance of invoices).
- Limited tax liability.
- High liquidity, as taxes is at a lower rate.
- A dealer registered under composition scheme is not required to maintain detailed records.
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.
Returns to be filed by composition dealers
- A dealer is required to pay tax in a quarterly statement CMP-08 by 18th of the month after the end of the quarter. A return in form GSTR-4 has to be filed annually by 30th April of next financial year.
- GSTR-9A is an annual return to be filed by 31st December of the next financial year.
GST payment to be made by composition dealers
GST Payment has to be made out of pocket for the supplies made. The GST payment to be made by a composition dealer comprises of the following:
- Tax on supplies made.
- Tax on reverse charge.
- Tax on purchase from an unregistered dealer.
Intimation from dealers opting for Composition Scheme
- Persons registered under pre-GST regime (Irrelevant now as this was a transitional provision):
Any person being granted registration on a provisional basis (registered under VAT Act, Service Tax, Central Excise laws, etc.) and who opts for Composition Levy shall electronically file intimation in FORM GST CMP-01, duly signed, before or within 30 days of the appointed date (date from which GST came into effect I.e., 1/7/2017).
- Persons registered under GST and wants switching to Composition Scheme:
Every registered person under GST who opts to pay taxes under Composition Scheme, must follow the following rules: (i) File an intimation in FORM GST CMP- 02 for exercise of option within 30 days of commencement of the relevant financial year. (ii) File a statement in FORM GST ITC- 3 for details of ITC relating to inputs lying in stock, inputs contained in semi-finished or finished goods within 60 days of commencement of the relevant financial year.
- Persons who applied for fresh register under GST to opt scheme:
A person who wishes to register himself as a composition taxpayer from the very beginning shall opt for the scheme in Part-B of FORM GST REG-01 and that shall be deemed to be an intimation for opting under the scheme i.e., no other intimation is required to be filed in such cases after the registration is granted.
Effective date of composition levy
- When Person registered under pre-GST regime & wants switching to composition scheme: Effective date will be the appointed day
- When Person registered under GST and wants switching to Composition Scheme: Effective date of registration under composition levy shall be the date of filing such intimation.
- Persons who applied for fresh register under GST to opt scheme:
(a) Where the application for registration has been submitted within 30 days from the day he becomes liable for GST registration, effective date of registration under composition levy shall be the date of becoming liable for registration.
(b) Where the application for registration is filed after 30 days, effective date of registration under composition levy shall be the date of grant of registration.
Summary (Intimation & effective date):
| Category of Assesses | Intimation form & Due date | Effective date of registration under Composition scheme |
| Persons registered under pre-GST regime | GST CMP 01-within 30 days of appointed date | Appointed date |
| Persons already registered under GST | GST CMP 02- within 30 days of start of FY & GST ITC 3 (ITC availed on stock lying)- within 60 days of start of FY | Date of intimation |
| Persons applying for fresh registration | (a) If submit application within 30 days of becoming liable for registration-Date of becoming liable for registration; (b) Otherwise-Date of grant of registration. |
Aggregate Turnover (Sector wise)
| Category of Assessee | Aggregate turnover in the PY | Aggregate turnover for CY GST calculation |
| Manufacturer | Taxable + Exempted goods & services | Taxable + Exempted goods & services |
| Trader | Taxable + Exempted goods & services | Taxable goods & services |
| Restaurant | Taxable services | Taxable services |
Note: Exempted services does not include interest or discount on loans, advances and deposits.
Validity of Composition Levy
As per Rule 6 of Chapter II of CGST Rules, 2017, option exercised by a person to pay tax on composition basis remain valid as long as he satisfies the conditions.
| Conditions satisfied | Conditions not satisfied | Self-withdrawal | Proper officer has reason to believe taxpayer not eligible for the composition levy |
| Composition levy allowed | Pay tax as per normal rates. Issue tax invoice for taxable supply. Within 7 days file Form GST CMP – 4 as intimation. File Form GST ITC 01(Stock & capital goods balance) within 30 days of violating condition, to take credit of ITC. | Before the date of withdrawal file an application Form GST CMP-4 as intimation within 7 days from the date he ceases to satisfy the conditions | Issue Show Case Notice in Form GST CMP – 05 • Within 15 days taxpayer must file reply in Form GST CMP – 06 • Issue order within 30 day in Form GST CMP – 07 either by accepting or denying the composition levy. |
Filing of Return by dealers under composition scheme
Every registered person paying tax under sec.10 or availing the benefit of Notification No. 02/2019 CT (R) dated 07.03.2019 are required to file Form GSTR-4 on quarterly basis electronically on common portal. Due date of filing GSTR-4 is 18th of the month following the quarter. If the GSTR – 4 is not filed for a given quarter, then the taxpayer cannot file the next quarter’s return either. Penalty for delay in filing form.4 is Rs.100 for CGST & Rs.100 for SGST per day or Rs.5000 for each, whichever is more. Maximum penalty is Rs.5000 each for CGST & SGST. GSTR-4 cannot be revised after filing on the GSTN Portal. Any mistake in the return can be revised in the next month’s return only.
Various Forms under Composition Scheme- Use, Purpose & Due dates
| Form | Purpose | Due date of filing |
| GST CMP-01 | Opting for scheme by provisional registration holder | Within 30 days of the appointed date |
| GST CMP-02 | Intimation of willingness to opt for scheme by registered person | Within 30 days of the commencement of FY |
| GST CMP-03 | Details of stock and inward supplies from unregistered person | Within 90 days of exercise of option |
| GST CMP-04 | Intimation of withdrawal from scheme | Within 7 days of occurring of event. Details of stock and capital goods required to be filed in GST ITC-01 within 30 days of occurring of event |
| GST CMP-05 | SCN on contravention of rules or Act, issued by Proper Officer | On contravention |
| GST CMP-06 | Reply to show cause notice | Within 15 days of receipt of notice |
| GST CMP-07 | Issue of order | Within 30 days of receipt of reply |
| GST CMP-08 | Details of payment of self-assessed tax (w.e.f 1-4-19) | Within 18 days of the month succeeding the quarter |
Penalty Provision under the scheme
As per section 10(5) of the CGST Act, 2017 if a person who has paid tax under composition scheme is found as not being eligible for composition scheme, then such person shall be liable to penalty to an amount equivalent to the tax payable by him under the provisions of the Act i.e., as a normal taxable person and that this penalty shall be in addition to the tax payable by him.
Conclusion
The Composition Levy scheme offers significant advantages to small suppliers and local suppliers operating within a single state. It effectively shields them from various procedural complexities, creating a more straightforward and hassle-free working environment. Even before the introduction of the Goods and Services Tax (GST), state governments had provisions in their Value Added Tax (VAT) laws for the Composition Levy scheme. With the advent of GST, this scheme was continued to protect the interests of small businesses. Therefore, it is strongly recommended for small taxpayers to have a clear understanding of this scheme and determine their eligibility for it. By doing so, they can leverage the benefits it offers, which include simplified compliance procedures and a more conducive business environment.
For more details on this scheme, please follow the link to access the FAQ in the GST portal:-https://tutorial.gst.gov.in/userguide/compositionpoc/optforcomposition.htm
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