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GST Composition Scheme

"Opt for the Composition Scheme to simplify GST compliance with lower tax rates and minimal filings!"

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GST Composition Scheme

A unique taxation option created to lessen the burden of compliance for small taxpayers is the GST Composition Scheme. By enabling qualified companies to pay GST at a set proportion of their turnover rather than using the regular tax structure, it streamlines tax duties. By removing the need for regular monthly filings and meticulous record-keeping, this program seeks to simplify tax compliance and appeals to small enterprises with limited funding. This plan offers financial relief and encourages voluntary compliance because the tax rates are often lower than those for ordinary taxpayers. Businesses can concentrate more on their activities by choosing the Composition Scheme instead of becoming bogged down in the complexities of tax computations and filings.Before choosing to participate, it is crucial to note that companies registered under this plan are not permitted to receive input tax credits or collect GST from clients. The plan is nevertheless a good option for small enterprises looking for a simple tax structure with lower administrative expenses in spite of these drawbacks.

Who Can Eligible for the Composition Scheme?

A small business is defined as one whose total turnover does not exceed:
• Rs. 1.5 Crore for those supplying goods (Rs. 75 lakhs for special category states like Himachal Pradesh and the North-Eastern states of India)
• Rs. 50 Lakh for those providing services.

Who Cannot Avail the Composition Scheme?

• Businesses engaged in interstate sales of goods.
• Suppliers of goods exempt from GST .
• Suppliers utilizing e-commerce platforms.
• Manufacturers of specified goods, including tobacco, ice cream, and pan masala.
• Casual dealers or temporary business operators.
• Non-resident foreign taxpayers operating in India.
• Entities registered as Input Service Distributors (ISD).
• Individuals registered as TDS Deductor/Tax Collector.

Conditions for Availing the Composition Scheme

• You cannot supply goods that are exempt from GST, such as alcohol.
• You are not eligible to claim input tax credits.
• Transactions under reverse charge must be taxed at the regular GST rates.
• You must display "composite taxable person" on all business signs and invoices.
• If you have several businesses operating under a single PAN, they all need to be registered together under the scheme.
• According to the CGST (Amendment) Act of 2018, traders and manufacturers providing services up to ₹ 5 lakh or 10% of turnover (whichever is higher) can take advantage of the scheme.

What is the GST Composition Scheme Limit?

1. For Goods (Traders and Manufacturers)

• The turnover limit is set at ₹1.5 crore for suppliers of goods based on the previous financial year's performance.

2. For Special Category States

• For suppliers of goods in special states such as Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, and Uttarakhand, the turnover limit is ₹75 lakh.

3. For Service Providers

• The turnover limit for service providers is ₹50 lakh, calculated from the preceding financial year.

4. For Mixed Businesses (both goods and services)

• This scheme is applicable if the total turnover for goods does not exceed ₹1.5 crore and for services, it remains within ₹5 lakh or 10% of the total turnover.

Features of the Composition Scheme Under GST

• Tax is determined by turnover, which makes this scheme advantageous for businesses with lower revenues.
• Reduced tax rates allow businesses to keep more liquidity by minimizing outflows.
• Composite dealers are not permitted to issue tax invoices; they must provide bills of supply instead.
• Businesses operating under this scheme are not eligible to claim input tax credit on their purchases.
• Normal GST rates are applicable for transactions that fall under the reverse charge mechanism.
• All businesses sharing a single PAN must register collectively under the composition scheme. If one business opts out, all must follow suit.

GST Composition Scheme Forms:

  • GST CMP-01- To opt into the scheme for provisional GST registration holders transitioning from the VAT regime.
  • GST CMP-02- Notification of intent to opt into the scheme for GST-registered normal taxpayers.
  • GST CMP-03- Submission of stock details and inward supplies from both registered and unregistered persons.
  • GST CMP-04- Notification of withdrawal from the composition scheme.
  • GST CMP-05- Show cause notice issued by a proper officer in cases of rule violations.
  • GST CMP-06- Response to the show cause notice.
  • GST CMP-07- Issuance of an order based on the show cause notice .
  • GST REG-01- Registration under the composition scheme
  • GST ITC-01- Declaration of inputs in stock, semi-finished, and finished goods when exiting the scheme.
  • GST ITC-03- Notification of available input tax credit.

How to Opt for the GST Composition Scheme?

1. New Taxpayers

Choose the composition scheme by indicating it in the Application for New Registration (Form GST REG-01) while registering.

2. Existing Taxpayers

Submit your GST using Form GST CMP-02 on the GST portal. This needs to be completed before the start of the financial year in which you intend to opt for the composition scheme.

GST returns must be filed by a composite dealer

1. CMP-08:

A composition dealer is required to file this quarterly return to remit tax for the supplies made during the quarter. The payment and submission must be completed by the 18th of the month following the end of each quarter.

2. GSTR-4:

This annual return needs to be filed by a composition dealer by April 30th of the following financial year, starting from FY 2019-20. It offers a summary of the transactions, including details of the taxes paid under the composition scheme.

Process of Filing returns under the GST Composition Scheme.

Here’s an easy-to-follow guide to the process:

1. Quarterly Return (CMP-08):

• What to File: Each quarter, you are required to submit Form CMP-08.
• What It Covers: This form is used to pay the tax owed for the supplies made during that quarter.
• Due Date: CMP-08 must be submitted by the 18th of the month after the quarter ends. For example, the return for the quarter ending June 30 should be submitted by July 18.

2. Annual Return (GSTR-4):

• What to File: At the close of the financial year, you need to file Form GSTR-4.
• What It Covers: GSTR-4 is a summary return that combines all quarterly returns (CMP-08) for the entire financial year.
• Due Date: This return is due by April 30 of the following financial year. For instance, for the financial year 2023-24, the return is due by April 30, 2025.

Benefits of Composite Scheme

1. Reduced Tax Liability:

One of the key benefits of the GST composition scheme is the significantly lower tax rates compared to the standard GST rates. For traders and manufacturers, the rate is only 1%, while restaurants (not serving alcohol) pay 5%, and service providers pay 6%. This reduced tax burden allows small businesses to retain more of their earnings, making it easier to manage expenses and invest in growth.

2. Increased Liquidity

With the composition scheme, businesses benefit from fixed tax rates, which help them maintain higher liquidity. This means they have more cash available to cover daily operations and unexpected expenses. Higher liquidity can be transformative for small businesses, enabling them to operate smoothly and seize opportunities without being hindered by cash flow challenges.

3. Minimal Compliance Requirements :

The scheme streamlines the compliance process for businesses. Instead of managing multiple returns and complex record-keeping, those under the composition scheme only need to file a quarterly return (CMP-08) and an annual return (GSTR-4). This reduction in paperwork and administrative burden allows businesses to concentrate more on their core operations rather than getting overwhelmed by tax-related tasks.

4. Exemption from Issuing Tax Invoices:

Composition dealers are not obligated to issue tax invoices; instead, they provide a Bill of Supply. This simplifies the billing process and makes it less cumbersome. By not having to issue detailed tax invoices, businesses can streamline their transactions and minimize the time spent on accounting.

5. Lower Financial Costs:

The scheme also results in lower interest rates on taxes owed, as the fixed rate is less than the regular GST rates. This decrease in financial costs supports overall business sustainability, helping small enterprises manage their finances more effectively.

  • FAQ
1. Can a Composition Dealer Claim Input Tax Credit (ITC)?

A Composition Dealer is not eligible to claim input tax credit (ITC) on their purchases. This scheme aims to simplify the administrative process, but it does not permit the credit for taxes paid on inputs.

No, businesses cannot participate in inter-state sales under the Composition Scheme. If they choose to do so, they will need to opt out of the Composition Scheme and register for regular GST.

If the turnover surpasses the threshold limit within the financial year, the dealer is required to choose regular GST registration and adhere to standard compliance procedures starting from the following financial year.

Composition dealers are not allowed to issue tax invoices. Instead, they must provide a bill of supply, which should clearly state that the business is registered under the Composition Scheme.

A business can choose to withdraw from the scheme voluntarily if it surpasses the turnover limit or for other reasons. However, it will then need to adhere to the standard GST filing requirements and regulations.