While the introduction of GST has led a large number of businesses to register under the GST Act 2017, alternative tax registrations such as the composition scheme are also available for the benefit of smaller businesses. The GST composition scheme, however, does feature some key changes when compared to the earlier composition scheme that operated under the earlier VAT regime. The composition scheme under GST is currently applicable to businesses with aggregate turnover of Rs. 1.5 crores or less (lower limit is applicable in case of special category states). In the following sections, we will discuss some key features of the composition scheme under GST.
Composition Scheme Limit
Originally, the composition scheme featured a limit of Rs. 1 crore i.e. only business with an annual turnover of less than Rs. 1 crore could opt for composition levy registration. The GST composition scheme turnover limit for north eastern states and hill states such as Sikkim and Himachal Pradesh was kept lower at Rs. 75 lakhs annually as they have a smaller tax base as compared to other states in India.
At the 32nd GST Council Meeting held on 10th January 2019, the GST composition scheme limit for states was increased to Rs. 1.5 crore i.e. businesses/individuals with annual turnover of up to Rs. 1.5 crore can opt for registration under the GST composition scheme (applicable from 1st April 2019 onwards). A lower limit for GST composition scheme turnover limit will be applicable to the North Eastern States and hill states such as Sikkim or Himachal Pradesh which is yet to be confirmed. This change to the existing composition scheme will come into effect from the 1st April 2019 onwards.
GST Composition Scheme Rules
Under the provisions of the GST Act, a range of businesses in the manufacturing and services sectors including restaurants as well as traders are allowed to register under the composition scheme. However, the GST composition scheme is not applicable to the following persons/entities*:
- Non-resident taxable person or a casual taxable person
- Businesses/persons supplying goods through an e-commerce portal operator that collects tax at source (u/s 52).
- Businesses/persons engaged in inter-state supply of goods
- Manufacturer of ice cream and other edible ice with/without cocoa as additive
- Manufacturer of tobacco products, tobacco substitutes and pan masala
- Businesses/persons who have purchased goods from unregistered supplier (allowed if GST is paid on such goods on reverse charge basis)
- Suppliers involved in the supply of goods that are exempt under GST Act.
*The list is indicative and subject to change.
It should be noted that under existing rules though composition scheme registered entities/individuals are not allowed to engage in interstate supply of goods/services, such businesses are allowed to procure goods/services from suppliers that are allowed to carry out interstate operations under the GST Act. Thus businesses/individuals registered under the composition scheme can purchase goods/services from outside the state but cannot sell goods/services to consumers/businesses outside the state.
Originally services providers other than restaurant services were not allowed to register under the GST composition scheme. This changed in January 2019 when the 32nd GST Council Meeting announced that services sector businesses (apart from restaurant services) would also be allowed to register under the composition scheme.
Composition Scheme GST Rate
Businesses/individuals registered under the composition scheme are required to pay GST at 1% to 6% depending on the type of business activity conducted by the registered person/business entity. The applicable composition scheme GST rate features equal SGST/UGST and CGST split i.e. 1% GST = 0.5% CGST + 0.5% SGST/UGST, 6% GST = 3% SGST/UGST + 3% CGST. The composition levy rates under GST are as follows:
- 1% of the turnover for traders and other suppliers eligible for composition scheme registration
- 2% of the turnover for manufacturers apart from manufacturers of products not eligible for GST composition scheme
- 5% of the turnover for restaurant services
- 6% of the turnover for businesses providing services/mixed services (other than restaurant services). This is applicable from 1st April 2019 onwards.
The composition levy on services sector businesses other than restaurants is a recent addition to this list after the 32nd GST Council Meeting announced the composition scheme for services and mixed services. This composition scheme under GST Act will be applicable from 1st April 2019 onwards. Prior to this announcement, services/mixed services businesses and individuals were not allowed to register under the GST composition scheme.
GST Composition Scheme Return
As per currently applicable GST composition scheme rules, electronic returns on the Official GST Portal will have to be filed quarterly by the registered businesses/individuals by “the 18th of the month succeeding the last month of the previous quarter”. This in effect means that for the quarter that ended in December, the GST composition scheme return will have to be filed online on the 18th of January next month. For composition registered individuals/businesses, the returns have to be filed using the GSTR-4 Form. You can use the GSTR-4 Offline Tool to prepare your returns prior to online submission.
Composition Scheme Forms under GST
The following are some of the key forms that composition scheme registered businesses/individuals are required to fill out for various purposes under current GST rules*:
|Form Number/Name||Purpose of Form|
|GST CMP-01||Intimation for tax payment under composition scheme (for provisionally registered business entity/individual)|
|GST CMP-02||To opt for composition scheme (unregistered entity/persons)|
|GST CMP-03||To provide details of stock/inward supply from unregistered business/person|
|GST CMP-04||To withdraw from GST composition scheme|
|GST CMP-05||Show cause notice issued by appropriate tax official on contravention of GST Act rules|
|GST CMP-06||Reply to show cause notice issued in Form GST CMP-05|
|GST CMP-07||Order indicating acceptance/rejection of show cause notice reply provided in Form GST CMP-06|
|GST REG-01||To register under composition scheme|
|GST ITC-01||Details of inputs available with the composition registered supplier in the form of raw materials, semi-finished and finished goods|
*The list of forms is indicative and other forms may be required in order to apply for/operate under the GST composition scheme.
GST Composition Scheme Bill Format
Businesses/individuals registered under the composition scheme are not allowed to issue tax invoices or GST invoices as they cannot charge GST on outward supplies of goods/services. Thus, a composition dealer has to issue a Bill of Supply in case of outward supply of goods/services. This bill of supply is mandatorily required to feature the words – “Composition Taxable Person, Not Eligible to Collect Tax on Supplies” on it. Key details that need to be included in a Bill of Supply are:
- Supplier name, GST Identification Number (GSTIN) and Address
- Unique serial number termed as bill of supply number
- Date of issue of bill of supply
- Recipient details such as name, address and GSTIN (if registered)
- HSN code of goods being supplied
- Description/quantity of Goods/services (as applicable)
- Total value of supplies (adjusted for applicable discounts)
- Signature/digital signature of the supplier
GST Payments by Composition Registered Business/Individual
Businesses/individuals registered under the GST composition scheme are not allowed to claim input tax credit, hence such suppliers have to make GST payments out of pocket. Some of the key instances where GST payments need to be made by composition scheme registered dealers include:
- Tax payments on goods received from unregistered dealers
- Tax payments in lieu of goods supplied under reverse charge mechanism
- Tax incurred for import of services
Benefits of GST Composition Scheme Registration
- Reduced compliance requirements, hence suitable for small businesses with limited resources
- Limited liability in terms of tax payable in lieu of composition levy
- Higher liquidity for small businesses as tax rates are lower
Limitations of the GST Composition Scheme Registration
- Limited area of operation as composition dealer cannot engage in inter-state sales transactions (outward supplies)
- Unavailability of input tax credit mechanism to offset GST payments
- Composition registered businesses cannot supply goods through an e-commerce portal