The Composition scheme under the GST is an easy, low procedure and compliance friendly tax scheme for small and medium enterprises -both providing goods and services. Under the scheme, firms under a threshold limit of turnover can pay a fixed percentage of their turnover as tax. They need to fill only reduced number of returns compared to normal tax payers under GST.

Why Composition Scheme?

Composition Scheme is a simple and easy scheme for small and medium businesses. What is unique about the scheme is that it reduces the compliance burden/effort and cost of small firms. The SMEs may face difficulties in submitting frequent returns and to undergo complex procedures of the tax network. Here, the composition scheme allows them to get rid of the usual compliance difficulties related to GST.

What are the benefits of composition scheme?

The scheme clearly gives benefits to the SMEs. Their compliance burden has been reduced. Similarly, the administrative cost of engaging with thousands of small firms has been curtailed from the angel of tax administration. This will give relief to the GST Network as well. Following are the main benefits of the Composition Scheme.

Benefits under Composition Scheme

  1. Low tax rate: 1% for traders and manufacturers, 5% for restaurants, 6% for service providers and those who provide both goods and services.
  2. Low compliance cost and procedurarl bottlenecks: once in a quarter return filing.

What are the main features of the Composition Scheme?

The composition scheme understandably gives several benefits to SMEs. Following are the important ones.

  • Scheme for traders and manufcturers: For traders and manufctureres with low turnover up to Rs. 1.5 crores; they need to pay just 1% GST.
  • Scheme for service providers and firms who provides both goods and services: Here, the limit is Rs 50 lakh.  Rate for service providers and firmst who provide both goods and services under the composition scheme is 6% (3% GST and 3% SGST).
  • For restaurants upto Rs 1.5 crore turnover, the rate will be 5%.
  • Less number of tax returns: A tax payer under the Composition Scheme under GST will be required to file summarized returns only on a quarterly basis. On the other hand, for others, they must file three monthly returns. In total, the normal GST payer must submit 37 returns.
  • Scheme is available for only intra-state suppliers: The Composition Scheme is available only for intra-state supplies. This means that dealers engaged in inter-state supplies cannot opt for the scheme.
  • No input scheme facility is available: A Composition scheme firm is not allowed to avail input tax credit of GST.
  • No requirement for detailed records keeping: A firm under composition scheme is not required to maintain detailed records as in the case of a normal taxpayer.
  • Ecommerce firms can’t opt for the Composition Scheme.
  1. Reduced Compliance Burden for SMEs

For a normal GST payer, he has to file 37 tax returns in an year. But for a Composition Scheme firm, only four tax filing is needed in an year. This indeed reduces the tax compliance burden of the small businesses.  Besides, the Composition Scheme firm need not keep detailed books of accounts on a daily basis and supporting documents.

  1. Reduced tax liabilitys

As per the latest regulation (effective from April 1, 2019), small businesses -traders and manufctures with a  turnover limit of up to Rs 1.5 crore can pay just 1% tax and will have fewer procedural formalities.

The 1 per cent tax became and the 1.5 crore limit became effective from April 1, 2019 for manufacturers and traders and restaurant services. The previous limit was Rs 1 crore. The composition scheme limit remains at Rs 75 lakhs for N.E states & Uttarakhand.

Composition scheme from April 1, 2019
Turnover limit Applicable sector/entities Applicable tax rate
Rs 1.5 crore Manufactures and traders (goods). 1%
Rs 1.5 crore Restaurants (not serving alcohol). 5%

Rs 50 lakh

Service providers and both goods and services providing firms. 6%

Composition scheme for service providers

Initially, there was no composition scheme for service providers except restaurants. Now, it has been extended to them as well. Here, for the service providers and suppliers of both goods and services up to a turnover of Rs 50 lakh, they are eligible to opt for the GST composition scheme by paying a tax of 6 per cent. Service providers otherwise have to give higher rates of 12 and 18 per cent for most services under GST.

In the case of services, businesses with inter-State supplies, manufacturers of ice cream, pan masala and tobacco, and e-commerce players cannot opt for the composition scheme.

  1. No cash block under input tax credit: High Liquidity

For normal taxpayers, some of his funds will be blocked as Input Tax Credit and this can be drawn back only after the supplier files his return.  In the case of the Composition Scheme, there is no input tax credit and no blocking of funds.

  1. Transitional Provisions

A taxpayer opted for Composite Scheme can migrate to the status of a normal GST firm.

Amidst these benefits, some of the disadvantages of the Composition Scheme also to be noted. It is that first, the input tax credit facility is not available for the Composition Scheme firm. Similarly, he can’t engage in inter-state trade.

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