What is GST Composition Scheme: Eligibility, Tax Rate & Features

Who Cannot Apply For GST Composition Scheme?

As per current composition scheme rules, some taxpayers are not qualified for this scheme. Taxpayers are not currently allowed to apply for GST Composition Scheme include:

• Individuals or businesses supplying goods and services through an e-commerce platform that collects tax at the source as per Section 52

• Those involved in supplying goods that are not taxable/exempt under GST Act

• Non-resident taxable persons and casual taxable persons

• Businesses or individuals involved in the inter-state supply of goods

• Manufacturers of ice cream and other edible ice products with/without added cocoa

• Manufacturers of tobacco products, substitutes, or pan masala

• Businesses or individuals who have purchased goods and services from an unregistered supplier. However, composition scheme enrolment is allowed if the GST is paid on these goods on a reverse charge basis

• Suppliers whose annual turnover has exceeded the threshold limit in the previous financial year

• Suppliers engaged in providing services other than restaurant service

Benefits of the GST Composition Scheme

For qualified individuals and businesses, the GST composition scheme has various benefits to lessen the burden of the tax return process. The numerous advantages of the GST composition scheme include the following:

• Taxpayers qualifying for the composition scheme have reduced GST compliance requirements, making it ideal for small businesses with fewer resources at its disposal

• Small business owners benefit from reduced tax liabilities with the composition scheme structure that imposes lower composition levy

• Small businesses can maintain higher level of liquidity because of lower tax rates.

• The GST composition scheme reduces costs related to bookkeeping, returns, and issuing invoices, etc. for eligible entities

Limitations of the GST Composition Scheme

Despite its numerous advantages, there are some limitations that those who opt for the GST composition scheme need to consider. Key limitations of the scheme include: 

Collection of Tax Not Allowed

As per current rules of the GST composition scheme, the taxpayer cannot recover composition tax from their customers due to restrictions on raising a tax invoice.

No Input Tax Credit

Another downside of the GST composition scheme is limitations on input tax credits. Small businesses that qualify for the composition scheme are not allowed claim input tax credit on any supplies or services that they avail during the course of their business.

E-Commerce Businesses Not Allowed

Those who are registered under GST composition scheme cannot operate an e-commerce business or supply goods/services to customers through an e-commerce platform. This factor significantly can reduce customer bases for some taxpayers.

Restricted Geographic Reach

Composition-registered businesses are restricted to specific geographic regions because the scheme does not cover inter-state transactions. This limitation restricts these small businesses to intra-state supplies that limits business operations.

Main Features of the GST Composition Scheme

Some of the key features of the composition scheme and composition levy under Goods and Services Tax include the following:

• Lower tax rates of 1% to 5% than regular GST rates

• Tax liability linked to the turnover of the registered entity for applicable financial year

• licable rate of composition levy depends on type of business

• Quarterly return filing under composition scheme instead of monthly filing under regular GST scheme

• In the case of multiple businesses registered under single PAN, all businesses need to be registered under composition scheme. Otherwise all the businesses have to opt out

• Composition scheme registered entities cannot raise tax invoice they have to raise bill of supply instead

• Normal rate of GST will apply in case transactions are made under the reverse charge mechanism

• Input tax credit is not allowed to the composite dealer.

GST Composition Scheme FAQs

Q. How Can I Opt for the Composition Scheme under GST?

A. Opting for the GST composition scheme requires individuals to apply for the scheme with tax authorities. The procedure differs depending on whether you’re a new or existing taxpayer registered under GST:  

• New taxpayers: New Taxpayers registering under the GST Act must file an option to pay the composition amount in the ‘Application for New Registration’ portion of Form GST REG-01.

• Existing taxpayers: Taxpayers already registered as regular taxpayers under the GST Act must apply to opt for the composition levy through Form GST-CMP-02, available on the GST Portal. This form must be completed and submitted before the commencement of the relevant financial year

Q. How are GST Payments Made by a Composition Dealer?

A. Composition dealers make GST payments out of pocket for the supplies made. These payments include the following:

• GST on supplies made

• Tax on reverse charges

• Tax on purchases from unregistered dealers

Q. What are the Eligible Reasons to Withdraw From the GST Composition Scheme?

A. Taxpayers can withdraw from the GST composition scheme under various circumstances. Some of the common reasons why composition dealers may withdraw from composition levy are:

• Voluntary withdrawal by the taxpayer

• If the threshold limit specified in Section 10 of the CGST Act is exceeded

• If the taxpayer is engaged in supplying goods that not covered under GST Act

• If the registered entity is engaged in inter-state supply

• In case supply of goods is carried out via an e-commerce operator who collects taxes at source as per Section 52

• Taxpayer is engaged in the manufacturing of notified goods, such as pan masala

Q. Can I Apply for the Composition Scheme if I’m Registered as a Regular Taxpayer?

A. Yes. Regular taxpayers can opt for the composition levy through the GST Portal. Log in to the GST Portal and access the taxpayer’s interface. Select the ‘Services’ tab, then click on ‘Registration’ and ‘Application to Opt for Composition Levy.’ Follow the specific instructions to fill out the form and submit the document for approval.

Q. Can I save my GST Composition Scheme Registration Application?

A. Yes. After you start the process of registering for GST composition scheme application on the GST portal, you can save the application online. Subsequently you can complete this saved application and submit it online within 15 days of initiating the registration process.