If you are a small business and are finding it hard to comply with the GST regulations and pay high taxes, don’t worry. The Government of India has brought a solution through the GST Composition Scheme. However, this scheme also has limitations and conditions that businesses should be aware of.
How can small businesses decide whether to opt for the GST Composition Scheme? What are the scheme’s advantages and disadvantages? How can they apply for this scheme and comply with its rules? This guide aims to answer some of these questions.
What is the GST Composition Scheme?
The GST Composition Scheme is a tax-paying mechanism offered to small businesses registered under GST. It exempts small businesses from high tax amounts by allowing them to pay taxes at a fixed turnover rate and avoid tedious GST formalities.
The scheme is optional, but it benefits businesses having an annual aggregate turnover of Rs. 1.5 crore (maximum). This scheme applies only to manufacturers of goods, dealers, and restaurants that do not serve alcohol.
Service providers can also opt for a similar scheme with a turnover limit of Rs. 50 lakhs.
Benefits of the GST Composition Scheme
The Composition Scheme under GST offers the following benefits:
Reduced Tax Payments
Under this scheme, businesses can pay GST at a fixed and lower turnover rate that ranges from 0.5% to 6%. The turnover rate varies depending on the type of business. It helps lower their tax liability while increasing their market competitiveness.
Lower Compliance Requirements
The scheme reduces the paperwork and compliance burden for businesses. They only need to file one quarterly return (GSTR-4) and one annual return (GSTR-9A) instead of three monthly and one annual return. They also do not need to issue tax invoices or maintain detailed records of their transactions.
The scheme helps businesses to save cash flow and improve their profitability by paying less tax and avoiding input tax credits. They can also pass on the benefit of lower taxes to their customers and attract more sales.
Simplified Tax Regime
The scheme simplifies the tax calculation and payment process for businesses. They do not need to worry about different tax rates, exemptions, deductions, or reverse charge mechanisms. They can pay a single tax on their turnover and comply with GST regulations easily.
Eligibility Criteria for the GST Composition Scheme
The GST Composition Scheme has the following eligibility criteria:
- The business must register itself under GST.
- The business must have an annual aggregate turnover of up to Rs. 1.5 crore for goods or Rs. 50 lakhs for services.
- The business cannot engage in inter-state supplies of goods and services
- The business cannot supply goods through e-commerce platforms
- The business cannot supply exempted goods and services
- The business cannot be an ice cream, tobacco, or pan masala manufacturer.
Conditions and Restrictions to Avail GST Composition Scheme
The conditions and restrictions that companies should follow when applying for the Composition Scheme under GST are:
No Inter-State Supply
The business cannot engage in any inter-state supply of goods and services. It can only operate in the registered state or union territory.
No Exempted Supply
The business cannot supply goods or services that the GST exempts. Additionally, it cannot conduct business through e-commerce platforms.
No Input Tax Credit
The business cannot claim an input tax credit on its purchases. It also cannot collect GST from its customers. It has to pay GST at a fixed turnover rate and issue a bill of supply instead of a tax invoice.
No TDS Deduction
The business cannot deduct or collect tax at source under Section 51 of the CGST Act.
No Casual or Non-Residential Registrations
The business cannot be a casual or non-resident taxable person. It has to be a regular registered person under GST.
Same PAN for All Businesses
The business has to opt for the GST Composition Scheme for all its registered companies under the same PAN. It cannot opt for the scheme for only one or some of its businesses.
How to Make an Application for the GST Composition Scheme
To opt for the GST composition scheme, you must file a GST CMP-02 form with the Government. Follow the given steps to apply for the GST Composition Scheme:
- Log in to the official GST portal with valid credentials.
- Navigate to Services, then to Registration, and then to Composition Levy Application.
- Fill out the form GST CMP-02 with the required details, such as business category, composition tax rate, and state or union territory.
- Submit the form with a digital signature or EVC (electronic verification code)
- File the form GST CMP-03 within 60 days of opting for the scheme. This form includes information about the business’s inventory and inward shipments of goods from unregistered sources as of the day before the scheme’s opt-in date.
- Receive an acknowledgement in form GST CMP-04 from the tax authorities confirming the acceptance or rejection of the application.
Disadvantages of the GST Composition Scheme
While the GST Composition Scheme has its advantages, it also has disadvantages. Some of the disadvantages of the GST Composition Scheme are as follows:
- The business cannot collect taxes from its customers. It also must pay tax from its income at a fixed turnover rate.
- The business should not supply interstate goods and services. This scheme prevents the company from expanding into other states.
- The company cannot supply goods and services not subject to GST. It significantly reduces the range of items and services the business can sell.
Small businesses that want to remain confined to the state where they registered may benefit from the GST Composition Scheme. However, the GST Composition Scheme may not help businesses that want to expand to other states and use e-commerce platforms to increase sales. This scheme has advantages and disadvantages, and a company must weigh the pros and cons of this scheme before opting for it.
1. What is the GST Composition Scheme?
The GST Composition Scheme is a tax-paying mechanism under which small businesses are exempt from paying high taxes provided they do not supply goods and services outside their registered state, among other conditions. Under this scheme, small businesses have to pay taxes at fixed turnover rates.
2. What are the businesses that cannot opt for the GST Composition Scheme?
You cannot opt for this scheme if you have a multi-state business or are a pan masala, ice cream, or tobacco manufacturer.
3. What is the condition required for a business to be considered a small business under the GST Composition Scheme?
This scheme considers a business small business if it has an annual aggregate turnover of less than Rs. 1.5 crore on goods or Rs. 50 lakhs on services.
4. How does a business opt for GST Composition Scheme?
To opt for the GST Composition Scheme for a business, you should go to the official GST portal and fill out the GST CMP-02 form.