Composition Scheme under GST

Composition Scheme Under GST

GST has brought many compliance requirements with its implementation like return filing, payment of GST on monthly basis etc. Small dealers who operate at relatively lower scale and margins find it difficult to comply with many regulations as dedicated resources and manpower is required for the purpose. In order to provide relief to such small taxpayers, the Government has come up with the concept of "Composition Levy" (aka Composition scheme) under GST. Any dealer registering under GST has two options i.e. Registration as Regular Dealer or under Composition scheme. By opting for composition scheme, the dealer can avail relief from many compliance requirements.

Who can opt for Composition Scheme?

Eligibility to opt for composition scheme is determined on the basis of aggregate annual turnover of a business entity. Any business entity with aggregate annual turnover up to 1.5 crore can opt for composition scheme. In special category states, this limit is 1 crore.

Sr. No. Category of State State Name Annual Aggregate Turnover Limit

Special Category States

Arunachal Pradesh
Jammu & Kashmir
Himachal Pradesh
1 Crore 
 2 General Category States  All Other States  1.5 Crore 

What is Aggregate Turnover?

“Aggregate turnover” means the aggregate value of:

  1. All taxable and non-taxable Supplies
  2. Exempt supplies and
  3. Exports of goods and/or services
  4. Interstate supplies of a person having the Same PAN

to be computed on all India bases and excludes taxes, if any, charged under The CGST Act, SGST Act and the IGST Act, as the case may be;

Note: Explanation – Aggregate turnover does not include the value of supplies on which tax is Levied on reverse charge basis and the value of inward supplies.

Who cannot opt for Composition Scheme?

A business entity is not eligible to opt for composition scheme in following cases:

A. Where the business is engaged in the supply of following goods:

  1. Ice cream and other edible ice, whether or not containing cocoa;
  2. Pan Masala;
  3. Tobacco and manufactured tobacco substitutes.

B. Where the business is engaged in the supply of any type of services except services covered under clause (b) of paragraph 6 of Schedule II.

C. Casual Taxable person or a Non Resident Taxable Person cannot opt for composition scheme.

Rules for Composition Scheme:

  1. In normal case, a service provider cannot opt for composition scheme. However, a trader or manufacturer can opt for composition scheme if they also supply service with annual value not exceeding 5 lakh rupees.
  2. While computing Tax under composition scheme only taxable turnover shall be considered, no need to consider exempt supply.
  3. A composition dealer cannot effect Interstate outward supply or supply to SEZ units.
  4. A composition dealer cannot avail input tax credit for the inward supply of goods or services.
  5. A composition dealer cannot charge any GST on outward supply of goods or services. Hence, the buyer who purchases goods or services from composition dealer will not be able to avail any ITC for such inward supplies.
  6. A composition dealer can only issue "Bill of Supply" (in place of "Tax Invoice").
  7. A composition dealer cannot engage in e-commerce business.
  8. A composition dealer cannot supply services except Food & Drink Service.
  9. A composition dealer must mention the words "Composition Taxable Person" on every notice and sign boards.
  10. A composition dealer must mention the words " Composition Taxable Person, not Eligible to Collect Tax".
  11. If composition scheme is availed for one GST registration, all other GST registrations having the same PAN must also opt for composition scheme. Likewise, if one of the GST Registration opts out of composition scheme, all other GST registrations with the same PAN shall be ineligible for composition scheme.

Registration under Composition Scheme:

A dealer eligible and willing to opt for composition scheme needs to register itself with GST. GST registration process for composition scheme can be enumerated from two scenarios as follows:

1. Fresh Registration: A dealer seeking fresh registration under GST and opts for composition scheme needs to apply for the same in Part B of REG - 01.

2. Migration from Regular Dealer to Composition Scheme: If a dealer is already registered with GST as Regular Dealer and wishes to switch to composition scheme needs to apply for the same in the form GST CMP - 02. The application must be made prior to completion of financial year. Such dealer must also provide details of stock held by him at the time of applying for composition scheme in the form ITC - 03. ITC - 03 must be submitted within 180 days from the commencement of Financial Year.
Note: If a regular dealer has taken ITC for the input held by it in stock and opts for composition scheme shall pay an amount by debiting Electronic Credit / Cash Ledger.

Applicable rate of GST for Composition Scheme:

Sr. No. Category of Registered Person Rate of tax (CGST + SGST)
1 Traders & Manufacturers (other than manufacturers of such goods as may be notified by the Government) 1% of turnover
2 Restaurant & Catering Services 5% of turnover

Returns for Composition:

Composition dealer needs to file GSTR - 4 on 18th day of the month following the quarter. Also, an annual return GSTR - 9A needs to be filed on or before 31st December of the next financial year.

Renewal of registration under Composition scheme:

  • Registration under composition scheme is valid perpetually. This means there is no need to renew or reapply for registration again.
  • However, registration is valid only until all the conditions pertaining to composition scheme are fulfilled. If any of the conditions is not satisfied, the registration under composition scheme ceases and the dealer must intimate about the same in GST CMP - 04 within 7 days of occurrence of such events.

Input Tax Credit:

  • Where any registered person who has availed of ITC opts for composition scheme shall pay an amount by way of debit in the electronic credit/ cash ledger equivalent to the credit of in respect of inputs held in stock in from GST ITC-3.
  • Such amount must be equivalent to the ITC of inputs held in stock, inputs contained in semi-finished and finished goods held in stock and capital goods on the day immediately preceding the day of exercising such option.
  • A composition tax payer who ceases that scheme can claim ITC on input goods and capital goods after reducing the tax paid on such capital goods by 5 per cent per quarter of a year or part thereof from the invoice date in form GST ITC-01.
  • Every composition dealer who ceases to satisfy any of the conditions or rules for composition scheme must furnish a statement in GST ITC - 01 containing details of inventory of raw material, semi-finished goods as well as finished goods held in stock within 30 days.

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