Composition Scheme Under GST: Rules, Application and More

The composition scheme provides small firms with a flat GST tax rate and relatively less compliance activity. Therefore, it is crucial for businesses to understand what a composition scheme under GST is.

Regardless, to know about the composition scheme under GST, continue reading!

The composition scheme in GST is a practical method of paying taxes that is offered particularly to small enterprises. Due to its primary advantages, it differs from the standard form of GST filing.

The business does not have to deal with complex paperwork and compliance, and its tax liability is also smaller. However, a small firm must adhere to a fixed tax rate that fluctuates between 1% and 6% of its annual revenue as part of the composite plan. In this regard, small business owners often benefit from this facility's relief.

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A business must follow the following GST composition guidelines:

• Goods cannot be supplied between states.
• One cannot claim an input tax credit.
• No products exempt from GST may be supplied.
• If a taxable person operates several business divisions under the same PAN, that business person must collectively decide whether or not to use the composition system.
• The tax must be paid at standard GST rates for transactions made using the Reverse Charge Mechanism.
• Every bill of supply that businessmen issue must clearly include the phrase "composition taxable person" in accordance with the GST composition scheme bill format.
• Every notice or signboard at the business location must prominently carry the words "composition taxable person."
• A taxpayer who is also supplying goods may provide services valued up to ₹ 5 Lakh under this programme.

If your annual turnover is within the allowed ranges, you, as a taxpayer, may choose to use the GST composition plan. However, you must remember that the GST composition scheme limit takes into account the total revenue of all companies registered under a certain PAN.

The composite plan is often available to small traders, manufacturers, and service providers, including:

• Food-service unit
• Machine Operator
• Shopkeeper
• Manufacturing/Trade sector unit
• Small manufacturing unit
• Vegetable and fruit vendor
• Truck operator
• Repair shop
• Artisan and more

However, a few registered categories cannot avail GST under composition scheme. They include service supplies apart from restaurant service suppliers; goods suppliers of products which are not taxed under UTGST/SGST/CGST Act.

However, those who provide supply of services can opt for this composition scheme if aggregate turnover in preceding financial year does not exceed ₹50 lakhs as per section 10(2A) of the Act.

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It only takes a few steps for eligible taxpayers to choose the composition scheme. Eligible taxpayers must submit a GST CMP-02 form to the government. The steps for the same are discussed below.

Step 1: The eligible taxpayers must log in to the government's GST portal.

Step 2: Then, at the start of the fiscal year, the eligible taxpayer must inform the IRS of his or her intent to register for the GST composition scheme.

Depending on the company sector, different composition scheme limits apply to the GST composition scheme.

• Traders and Manufacturers - When a business is first registered, its annual turnover cannot exceed ₹ 1.5 Crore. The preceding fiscal year's turnover cannot exceed ₹ 1.5 Crore if the business is already registered.
• Service Providers - If a business is just getting started, its annual turnover cannot exceed ₹ 50 lakh.
• All terms listed above apply to restaurants that do not serve alcohol.

The business must adhere to the standard GST system if the turnover exceeds the allotted limit.

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The following are some key advantages of the GST composition scheme:

• Truncated Tax Payments: The obligation for taxpayers has decreased as a result of the new tax rate structure.
• Inflated Liquidity: From a financial standpoint, the fixed rate's capacity to lower tax liabilities results in a company having better levels of liquidity. As a result, you can better manage cash flow with additional liquidity, which will support operations without interruption.
• Lesser Compliance Requirements: Taxpayers need to file lesser returns and avoid the requirement to provide tax invoices due to the reduced compliance that must be followed in maintaining books of record.

Despite all the benefits of GST composition, you should also understand a few drawbacks of it.

1. Zero Input Tax Credit

Businesses that transact exclusively with other businesses are not eligible for an input tax credit. As a result, the purchaser of such goods will also not receive any tax-paid credit, which will cause price distortion and cascading.

When purchasing from a person registered under a composition scheme, a normal taxpayer buyer will not receive any credit, resulting in a loss of business. As a result, such buyers may eventually refrain from making purchases from a taxpayer under the system.

2. Restricted Reach of Business

Due to the fact that interstate transactions are not covered by GST composition, businesses are spatially constrained. Additionally, they are unable to take advantage of e-commerce platforms' capacity to supply goods via the internet.

3. Zero Collection of Tax

The arrangement prohibits taxpayers from recovering composition tax from their customers because they are unable to issue a tax invoice.

Your business's turnover is subject to a set tax rate after you register for GST composition. In this regard, the following are the current rates:

• Manufacturers and traders for goods pay 1% GST, which is split into 0.5% CGST and 0.5% SGST.
• Restaurants that don't provide alcohol must pay 5% GST, which is split into 2.5% CGST and 2.5% SGST.
• Also, there is a 6% GST for service providers, broken down into 3% CGST and 3% SGST.

The taxes you pay, which include taxes on supplies made and on reverse charges, come from your own resources because you don't charge any to customers.

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The composite GST model significantly lessens the burden of submitting taxes. With it, you simply need to file CMP-08 quarterly and GSTR-4 once a year. However, every quarter's end requires the filing of CMP-08 by the 18th day of the following month.

Hence, you can easily apply for the composition scheme under GST, and it takes a few steps to complete the procedure. Also, you should note that since it was introduced as a benefit for small enterprises, the GST Composition Scheme has come with a number of strict conditions in case it is disregarded or abused.