What is Composition Scheme in GST?

India’s introduction of the Goods and Services Tax (GST) simplified indirect taxation through a unified tax regime that encompasses several central and state taxes. However, from a supplier’s perspective, complying with GST can be challenging for small businesses due to the complexity of returns, tax calculations and frequent filings.

To ease this process, the government introduced the composition scheme in GST, which offers a simplified alternative for eligible taxpayers.

In this blog, we will explore what the composition scheme in GST is, its eligibility criteria, benefits, drawbacks and compliance requirements – everything you need to know to make an informed decision.

What is the Composition Scheme in GST?

Under GST, the Composition Scheme is a unique program designed to benefit smaller, less complex taxpayers, thereby reducing their compliance burden. Instead of filing multiple returns for taxation purposes and maintaining extensive transaction records, businesses became responsible for remitting a small, fixed percentage of their turnover as tax and filing returns every quarter.

This scheme is governed under Section 10 of the CGST Act, 2017. It is intended for small traders, manufacturers, and restaurants that do not serve alcohol, allowing them to pay GST at a lower and fixed rate without availing input tax credit (ITC).

Who Can Opt for the Composition Scheme in GST?

The scheme is open to the following categories, subject to turnover limits:

Manufacturers and Traders – Up to ₹1.5 crore annual turnover (₹75 lakh in some northeastern states)
Restaurants (not serving alcohol) – Same turnover limit as above
Service Providers – Up to ₹50 lakh turnover under a special notification

It is important to note that a taxpayer opting for the Composition Scheme in GST must meet the following conditions:

The taxpayer cannot supply goods or services outside the state (interstate supply).
E-commerce sellers can not avail themselves of this scheme.
The taxpayer cannot claim the input tax credit.
Tax invoices cannot be issued; instead, a bill of supply must be issued.
All businesses registered under the same PAN must opt into the scheme together.

GST Composition Scheme Forms

Form Number/Name	Purpose of Form
GST CMP – 01	Notifying tax payments made under the composition scheme for provisionally registered taxpayers
GST CMP – 02	Applying for inclusion under the composition scheme for individuals or businesses not yet registered
GST CMP – 03	Providing details of stock and inward supplies received from suppliers who are not registered under GST
GST CMP – 04	Voluntarily opting out of the GST composition scheme
GST CMP – 05	Receiving a notice for breaching the rules under the GST Act
GST CMP – 06	Submitting a response to a show-cause notice issued using Form GST CMP-05
GST CMP – 07	Receiving an official order that either accepts or rejects your response, issued through Form GST CMP-06
GST REG – 01	Getting registered under the GST composition scheme
GST ITC – 01	Declaring input goods sourced from composition scheme taxpayers, including raw materials, semi-finished, and finished goods

Tax Rates under the Composition Scheme

Category	Tax-Rate
Traders/Dealers and Manufacturers	1% GST, divided as 0.5% CGST and 0.5% SGST
For Restaurants not serving alcohol	5% GST, divided as 2.5% CGST and 2.5% SGST
For service providers	6% GST, divided at 3% CGST and 3% SGST

These rates are significantly lower than regular GST rates, making the Composition Scheme in GST highly attractive for small businesses.

Benefits of the Composition Scheme in GST

Simplified Compliance: Quarterly returns instead of monthly; fewer forms and less paperwork.
Lower Tax Liability: A fixed rate of tax reduces the financial burden.
Ease of Business: Focus more on operations and less on tax administration.
Better Cash Flow: Since there’s no input tax credit adjustment, cash flow is more predictable.

Drawbacks of the Composition Scheme

No Input Tax Credit (ITC): Businesses can not claim ITC on purchases, which may increase costs.
Limited Market Reach: Interstate sales are not allowed.
Mandatory Bill of Supply: You cannot issue tax invoices, which may deter larger buyers who want Input Tax Credit (ITC).
Visibility: GST Composition Dealers must mention “Composition Taxable Person” on all signage and bills.

Obligations Under the Composition Scheme in GST

A composition-taxable person cannot collect tax from customers and is not eligible to claim the input tax credit.
A registered person opting for the composition scheme must submit an electronic intimation on the GST common portal before the start of the financial year.
A composition taxpayer is required to pay tax quarterly and file a single annual return.

Conclusion

The Composition Scheme in GST is a valuable option for small businesses looking to minimise their compliance burden and tax expenses. It has its limitations, as you do not have access to ITC, and you can only sell in restricted territories. Consider your business needs, customer base, and growth objectives before selecting the Composition Scheme.