GST Composition Scheme

GST Composition Scheme

An All-Inclusive Guide to GST Composition Scheme

Goods and Services Tax, or GST, is a crucial modification that reduces several taxes and amalgamates the Indian market. While the larger companies can easily handle the GST compliance segment, it is complex for the smaller firms. Hence, the government developed a GST composition scheme that makes compliance easier for smaller businesses. A primary factor associated with this composition scheme is a company's turnover limit, amendments to which may lead to several advantages and disadvantages. However, two specific benefits of the scheme for smaller firms are low tax liability and less paperwork. Any company or individual eligible to register for the GST composition scheme should submit annual and quarterly returns.

Importance of GST Composition Scheme

As per government data, around 13.8 million micro-enterprises account for 96% of the MSME sector of India as of February 2023. The medium and small enterprises occupy 0.28% and 3%, respectively, extensively contributing to manufacturing, exports, and India's GDP. The GST composition scheme effectively acknowledges this sector's significance by relieving GST procedures, tax rates, and filings for all companies.

Under the GST composition scheme, taxpayers can skip the monthly tax returns and file only one quarterly return or GSTR-4 by the 18th of the month following the quarter's end. They must also file an annual return or GSTR-9A by 31st December of the next fiscal year. Dealers registered under the GST composition scheme do not need to maintain thorough records.

Important Features of the GST Composition Scheme

GST composition scheme features include:

  • The rates of this scheme may vary as per business type. For example, while manufacturers pay just 1%, restaurant owners must pay 5%.
  • Business owners registered under the GST composition scheme must pay lower taxes than those registered under the regular GST scheme.

Applicable Tax Rate for GST Composition Scheme

  • The applicable tax rate for manufacturers, except those producing things that the government may notify, like Pan Masala, Ice Cream, and Tobacco products, is 1% (CGST of 0.5% + SGST of 0.5%)
  • The applicable tax rate for restaurant owners, as per clause (b) of paragraph 6 of Schedule II, is 5% (CGST of 2.5% + SGST of 2.5%)
  • The applicable tax rate for traders and all other types of suppliers subject to composition levy is 1% (CGST of 0.5% + SGST if 0.5%)

Rules of GST Composition Scheme

As per the GST Act, service businesses, traders and manufacturing businesses can register under the GST composition scheme. But the following entities cannot register under the scheme:

  • Casual taxable and non-resident taxable individuals.
  • Businesses or individuals supplying products through e-commerce portals that collect taxes at source.
  • Edible ice and ice-cream manufacturers with or without cocoa as an additive.
  • Manufacturers of tobacco products, pan masala and substitutes.
  • Businesses or individuals who purchase products from unregistered suppliers.
  • Suppliers that supply goods exempt under GST Act.

Which Individuals or Businesses Can Register Under the GST Composition Scheme?

The following individuals or businesses are eligible to register under the GST composition scheme, provided their yearly turnover is within the specified limit of Rs. 1.5 crores.

  • Food service units
  • Shopkeepers
  • Service sector units
  • Small manufacturing units
  • Truck operators
  • Machine operators
  • Repair store owners
  • Artisans
  • Vegetable and fruit vendors

GST Composition Scheme Limitations

A few limitations of the GST composition scheme include the following:

  • Buyers transacting with sellers registered under the GST composition scheme may not get the advantages of the input tax credit, resulting in price cascading, distortion and complete loss of business.
  • Taxpayers registered under the GST composition scheme cannot recover composition tax from the buyers because of their inability to create a tax invoice.
  • Taxpayers registered under the GST composition scheme cannot indulge in inter-state transactions, exports, or imports. They also cannot use the internet to supply goods through different e-commerce portals.
  • Taxpayers should pay taxes at regular rates on all transactions that use the Reverse Charge Mechanism.
  • Dealers cannot sell products not subject to GST, like alcohol.
  • Business owners with several businesses registered under a single Permanent Account Number must register all the businesses under the GST composition scheme.
  • When making transactions under the reverse charge system, dealers should pay taxes as per the general GST rate.
  • As per the CGST (Amendment) Act 20148, merchants and manufacturers can now offer services up to Rs. 5 lakhs or 10% of turnover, whichever is higher.
  • The phrase "Composition Taxable Person" should appear on every supply bill issued by the taxpayer. Also, every notice and sign board displayed at the taxpayer's business place should include this phrase.

Advantages of the GST Composition Scheme

Advantages of the GST composition scheme for eligible business entities include:

  • Taxpayers can now adhere to lesser compliances in maintaining their tax payment records and do not need to present tax invoices.
  • Small businesses have lower tax liability due to fixed rates, which exposes them to higher liquidity. This, in turn, helps businesses maintain their cash flow, thus sustaining operations smoothly.

Understanding the Composition Limit under GST

The composition scheme under GST differs for varied businesses.

  • Newly registered traders and manufacturers' turnover for the current financial year should not exceed Rs. 1.5 crores. And the already registered businesses' turnover should not exceed Rs. 1.5 crores in the previous financial year.
  • Restaurants that do not serve alcohol can register themselves under the scheme only if their yearly turnover is above Rs. 1.5 crores.
  • For newly registered businesses to be eligible for the GST composition scheme, their yearly turnover should not exceed Rs. 50 lakh in the present financial year. For already registered businesses, their turnover should be at most Rs. 50 crores in the previous financial year.

Important Elements of the GST Composition Scheme

Small businesses should provide specific details to register under the GST composition scheme, which include:

  • HSN Code
  • Digital signature
  • Accurate and complete company details
  • Full name and address
  • The exact worth of products and services being sold.

Business owners can also opt out of the GST composition scheme and choose the regular tax plan and ITC advantages. Further, credit shall be determined using semi-finished goods, final goods and stock inputs. However, business owners can switch between compounding and traditional vendors only once during the financial year.

Penalties Related to the GST Composition Scheme

Some penalties associated with the GST composition scheme include:

  • Business owners need to pay a penalty of Rs. 100 per day, up to a maximum of Rs. 5 000 if they do not file the GSTR-4 on time.
  • The tax authorities can exclude businesses from the GST composition scheme or even penalise them with an amount equal to the tax amount they owe if the business does not qualify for the scheme or if they find it to be enrolled unlawfully.
  • Additionally, the tax authorities may cancel the registration of a business that fails to file returns for three consecutive years.

GST Composition Scheme Registration Procedure

Registered or existing taxpayers not under the GST composition scheme can go for it only from the start of the next financial year. They must file tax returns as or before 31st March of the previous year. Dealers also have the flexibility to switch to the regular tax scheme, although they may not be able to return to the GST composition scheme within the same fiscal year. Businesses and individuals registered under the GST composition scheme should fill in GST CMP 08 form to deposit their quarterly payments.


While the new tax reform called GST has led many large businesses to register under GST Act 2017, alternative tax registrations like the GST composition scheme have been beneficial for smaller businesses. This is an easy and simple scheme for small taxpayers enabling them to get rid of complicated GST formalities and pay GST at a fixed turnover rate.

Frequently Asked Questions

How to Convert From Composition to Regular in GST?

An integral part of the GST Law in India, the GST Composition Scheme is a simple tax regime for businesses with a turnover of up to Rs. 1.5 crores per annum. Valued for its less-tax burden and straightforward approach, this scheme helps small-sized businesses adhere to tax compliances effectively. Nevertheless, there may be instances when businesses would like to covert from composition to regular in GST. These include:

  • Supplying exempt goods or services
  • Providing restaurant services other than those specified in clause (b) of para 6 of Schedule II of the GST Act.
  • Going beyond the threshold limit of Rs. 1.5 crores
  • Selling goods through e-commerce platforms
  • Producing notified products, like Pan Masala.
  • Additional reasons like changes in operation and specific requirements of businesses.

Converting from composition to regular in GST requires filling form GST CMP-04; providing stock statement in form GST UTC-01 and paying an amount equal to input tax credit. It’s crucial for businesses to follow prescribed deadlines and procedures to avoid legal consequences and penalties. For further clarifications and queries, you can consult the tax professionals at Manoj Kumar D & Associates. You can also contact the company for all news and updates on legal services & compliance, GST, income tax, professional tax and CFO services.

What is the Difference between Regular GST and Composition GST?

Regular and Composition GST under the GST system in India refer to two varied tax compliance and payment methods for businesses. Regular GST is for well-established businesses with a turnover of up to 20 lakhs and Composition scheme applies to small businesses with an annual turnover of up to Rs. 1.5 crores. Other key points of difference that you must know when opting a transition from composition to regular in GST are as follows:

  • Turnover Limits: In Regular GST, there are two types of turnover limits: 20 lakhs and 40 lakhs. However, Composition GST features three turnover limits: Rs. 1.5 crores, Rs. 75 lakhs and Rs. 50 lakhs.
  • SEZ Business: Businesses under Regular GST can deal in SEZ or Special Economic Zone transactions but those under Composition cannot do such transactions.
  • Export Business: Regular GST allows expert but Composition does not.

There are various other points of difference between Composition and Regular GST schemes making it difficult for individuals to make the right choice. To choose the best GST plan, you can depend on the GST advisory services of Manoj Kumar D & Associates. The company’s team of technically sound CAs and tax consultants is known for providing quality service and the highest standards of customer satisfaction.

What is 6% GST Composition Scheme?

GST introduction has led several large businesses to register under the GST Act of 2017, but several alternative tax registrations, like the 6% GST Composition scheme are also available for the benefit of small businesses. Individuals or businesses registered under this scheme need to pay GST at 1% to 6% based on the type of business activity they are conducting. The 6% GST composition levy rates are:

  • 1% of the turnover for suppliers and traders with composition scheme registration eligibility.
  • 2% of the turnover for manufacturers with ineligibility for GST composition scheme.
  • 5% of total turnover for restaurant businesses.
  • 6% of turnover for those offering mixed services, applicable from 1st April, 2019.

Rates under the 6% GST Composition scheme pertain to dealer sales. Hence, dealers must ensure accurate tax compliance and calculation by consulting experts at Manoj Kumar D & Associates. The company can also advise on converting from composition to regular GST.