Introduction

The composition scheme under Goods and Services Tax is a simplified tax compliance mechanism designed for small businesses. It allows eligible taxpayers to pay tax at a fixed percentage of their turnover instead of the standard GST rates. The primary objective of this scheme is to reduce the burden of tax compliance, accounting, and recordkeeping for micro and small enterprises. Businesses that opt for the composition scheme are required to file fewer returns and are exempt from maintaining detailed records and issuing tax invoices with GST. However, they are not allowed to collect tax from customers or claim input tax credit. The scheme is suitable for traders, manufacturers, and restaurant owners who operate within specified turnover limits and have minimal inter-state activity.

Eligibility for the composition scheme

To qualify for the composition scheme, a business must have an aggregate turnover of less than one and a half crore rupees in the preceding financial year. In special category states, this limit is reduced to seventy-five lakh rupees. The scheme is available to suppliers of goods, certain service providers, and restaurant operators not serving alcohol.

Restricted activities under the scheme

Businesses that engage in inter-state supplies, supply through e-commerce operators, or deal in non-taxable goods and services are not eligible for the composition scheme. Also, businesses that supply goods such as ice cream, pan masala, or tobacco cannot opt into the scheme. These restrictions ensure the scheme is used only by low-risk, localized businesses.

Tax rates applicable

Under the composition scheme, different tax rates apply based on the nature of business. Manufacturers generally pay one percent of turnover, traders pay a similar rate split between CGST and SGST, and restaurants pay five percent. The rates are fixed and calculated on gross turnover, not on value addition.

Compliance requirements

Composition dealers are required to file returns quarterly using Form CMP-08 and an annual return in Form GSTR-4. These forms are simpler than the regular GSTR-1 and GSTR-3B and require consolidated data rather than invoice-level reporting. Payment of tax is also made quarterly.

Prohibition on input tax credit

Businesses registered under the composition scheme are not allowed to claim input tax credit on purchases. This means that the GST paid on raw materials and services becomes a cost to the business, which may affect pricing and margins. The scheme is therefore more beneficial where input tax is minimal.

Invoice format and communication

A composition dealer cannot issue tax invoices. Instead, they must issue a bill of supply clearly stating that tax has not been charged. All promotional material, signboards, and invoices must mention that the business is a composition taxpayer. This informs customers about the nature of the supply and maintains transparency.

Opting in and out of the scheme

Businesses must opt for the composition scheme at the beginning of the financial year through Form GST CMP-02. If a taxpayer exceeds the turnover threshold or becomes ineligible due to a change in operations, they must switch to the regular scheme and comply with standard GST provisions from that point onward.

Advantages and limitations

The scheme offers simplicity, reduced compliance cost, and ease of operation. However, it comes with the trade-off of not being able to claim credits or serve larger clients who require GST invoices. For small, localized businesses with limited input purchases, the composition scheme is a practical alternative to regular registration.

Conclusion

The composition scheme is a valuable tool for small businesses seeking to reduce their GST compliance burden. It offers a straightforward taxation model with predictable liabilities and reduced paperwork. While it limits the scope of operations and input credit claims, it simplifies accounting and is ideal for traders and manufacturers operating within state boundaries. Businesses must carefully assess their turnover, client base, and growth potential before opting into the scheme to ensure it aligns with their financial strategy.

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