Composition Scheme Under GST Explained

In this article, we have addressed some of the basic queries around Composition Scheme under Goods and Services Tax Law. 

Latest Updates on composition scheme

6th February 2023
Composition taxable persons and those interested to opt into the scheme for FY 2023-24 can do so by submitting a declaration on the GST portal in Form CMP-02 by 31st March 2023.

5th July 2022
(a) The due date of GSTR-4 for FY 2021-22 is further extended by a late fee waiver up to 28th July 2022 vide Notification 12/2022 dated 5th July 2022. 
(b) The due date of CMP-08 for April-June 2022 is extended up to 31st July 2022 vide Notification 12/2022 dated 5th July 2022. 

26th May 2022
As per the CGST Notification no.7/2022 dated 26th May 2022, the late fee has been waived for the delay in filing GSTR-4 for FY 2021-22, if it is filed between 1st May and 30th June 2022. 

24th February 2022
Composition taxable persons and those interested to opt into the scheme for FY 2022-23 must submit a declaration on the GST portal in Form CMP-02 by 31st March 2022. 

28th May 2021
As per the outcome of the 43rd GST Council meeting and CBIC notification, 
(1) Interest relief has been provided for filing of CMP-08 for Jan-March 2021 quarter as per which, for any delay, interest is not charged until 3rd May, whereas 9% of reduced interest will be charged if filing is done thereafter until 17th June, and 18% later on.
(2) The due date to file GSTR-4 for FY 2020-21 is extended up to 31st July 2021.
(3) The maximum late fee for GSTR-4 that can be charged will be restricted to Rs.500 per return for nil filing and Rs. 2000 for other than nil filing.

1st May 2021
(1) The due date to file GSTR-4 for FY 2020-21 was extended from 30th April 2021 to 31st May 2021.
(2) Form CMP-08 that was due by 18th April 2021 for January-March 2021 has been given a relaxation in the interest charges. No interest for filing on or before 8th May, interest reduced to 9% between 9th May and 23rd May, but charged at 18% thereafter.
(3) The time limit to file ITC-03 by newly opted composition taxable persons for FY 2021-22 is extended up to 31st May 2021.

Here are key questions businesses should know about the composition scheme

1. Who can opt for the composition scheme? Who is eligible for the GST composition scheme?

Businesses with an annual aggregate turnover up to Rs.1.5 crore can opt into the composition scheme. The turnover of all businesses with the same PAN has to be added up to calculate the turnover for the purpose of the composition scheme. 

Only manufacturers of goods, dealers, and restaurants (not serving alcohol) can opt for the composition scheme under Section 10. However, service providers can opt into a similar scheme for composition dealers notified by the CGST (Rate) notification no. 2/2019 dated 7th March 2019 where the total turnover limit is Rs.50 lakh.

Further, the government introduced a separate composition scheme on 31st March 2022 for the manufacturers of bricks, including building bricks, bricks of fossil meals or similar siliceous earths, earthen or roofing tiles, and fly ash bricks and blocks. Those who have opted in can pay a special rate of tax at 6%, without input tax credit.

Please note that the following persons are not eligible to opt into the composition scheme:

• Manufacturers of ice cream, pan masala, or tobacco
• A person making inter-state supplies
• A casual taxable person
• A non-resident taxable person
• A person engaged in the supply of non-taxable goods under the GST law
• A supplier who has exceeded the turnover threshold limit specified for opting into the composition scheme, and
• Businesses which supply goods through an e-commerce operator.

2. What are the benefits of opting in to the composition scheme?

The advantages of the composition scheme are:

• Easier and lesser number of compliances to be followed (returns, maintaining books of record, issuance of invoices, etc.)
• Quarterly payment of taxes
• A limited tax liability
• High liquidity as taxes are at a lower rate

3. What are the disadvantages of the composition scheme?

• A limited territory of business, as the dealer is barred from carrying out inter-state transactions
• No input tax credit is available to composition dealers
• The taxpayer will not be eligible to supply non-taxable goods under GST such as alcohol and goods through an e-commerce portal.

4. How to calculate the aggregate turnover for the composition scheme?

The aggregate turnover is to be computed on all-India basis for a person having the same Permanent Account Number (PAN). It will be the sum of value of all outward supplies falling in these categories:

• Taxable supplies
• Exempt supplies
• Exports of goods or services or both
• Inter-state supplies

However, it excludes the value of inward supplies on which tax is payable on reverse charge basis, and taxes (including cess) that is paid under the GST law.

5. What is the tax rate applicable to a Composition taxable person? 

Please use the chart below to understand the tax rate on turnover in the state as follows:

Composition scheme : Applicable GST Rate

6. What is the effective date for composition levy?

The effective date for taxpayer who opt in to the composition scheme by filing Form GST CMP-02 will be the beginning of the financial year. The effective date for persons who applies for a fresh registration by filling Form GST REG-01 will be the effective date of registration as per sub-rule 2 or 3 of Rule 10 of CGST Rules, 2017.

7. Is liability to pay taxes under Reverse Charge Mechanism covered under the Composition Scheme?

A composition dealer has to pay tax under reverse charge mechanism wherever applicable. The rate applicable to the supplies is the rate at which GST has to be paid. This means that rate under composition scheme should not be used for reverse charge purposes. Also, no input tax credit is available for tax paid under reverse charge for a composition dealer.

8. I am purchasing goods from an unregistered dealer. Do I need to pay tax? 

Tax at normal rates has to be paid on purchases from an unregistered dealer only for the months of July and August 2017. From September 2017 onwards there is no need to pay tax on these purchases, except if the taxpayer is into real estate. The builders are required to pay tax on a reverse charge basis at 18% for any shortfall beyond 80% in the purchases from GST registered vendors. No ITC is available on tax paid under reverse charge.

9. Should I pay IGST on interstate purchases attracting reverse charge?

IGST should not be paid by a composition dealer. The dealer who is required to pay tax under reverse charge, import of service or purchase from an unregistered dealer has to pay only CGST and SGST.

10. How should the tax amount be calculated? 

A composition dealer is required to pay tax at a specific rate on total sales. Also, the dealer has to pay tax under reverse charge on specified purchases, purchase from unregistered dealers and import of services.

This means that Total GST payable = Tax on supplies (net of advance and goods returned) + tax on B2B transactions where reverse charge is applicable + tax on B2B purchases from unregistered suppliers, if applicable + Tax on Import of services.

The rate of tax on transactions under reverse charge, purchase from an unregistered dealer and import of services will be at normal rates, i.e. the rates applicable to the supplies. Rates under the composition scheme are applicable only to sales of a composition dealer.

11. Should a composition dealer maintain detailed records?

No, a dealer registered under composition scheme is not required to maintain detailed records as required by a normal taxpayer.

12. Can composition dealers avail Input Tax Credit?

No, a composition dealer is not allowed to avail input tax credit of GST on purchases.

13. Can a composition dealer issue tax invoices?

A composition dealer has to issue a Bill of Supply. They cannot issue a tax invoice. This is because the tax has to be paid by the dealer out of pocket. A composition dealer is not allowed to recover the GST from the customers.

14. What are the returns to be filed by a composition dealer? 

A composition dealer is required to pay tax on a quarterly basis in a challan-cum-statement, i.e. Form CMP-08.

They are also required to file an annual return in Form GSTR-4.

15. Can a composition dealer collect tax from customers?

No, a composition dealer is not allowed to collect composition tax from the buyer.  

16. Can a dealer involved in interstate supplies opt for the composition scheme?

The composition scheme is available only for dealers doing intra-state supplies. If a dealer is involved in inter-state supplies, then they have to opt out of the scheme. 

17. What were the transition provisions if a business transits from composition scheme under the previous tax regime to regular taxation under GST?

Taxpayers registered under composition scheme under VAT were allowed to take credit for inputs in stock, or in semi-finished goods or in finished goods held on the day before the day of opting out of composition scheme.

18. What are the conditions for availing input credit on stock lying at the time of transition?

Following are the conditions which must be addressed by the taxpayer to avail credit on input at the time of transition from composition scheme to the normal scheme:

• Inputs or goods will be used for making taxable supplies.
• The CENVAT Credit was eligible to be claimed in the previous regime. However, one couldn’t claim it under the composition scheme.
• ITC is eligible for availing under the GST regime.
• The taxpayer has bills of input tax paid on such goods.
• Invoices should not be older than one year from 1st July 2017 (i.e. not dated before 1st July 2016)

19. What is the treatment for input credit availed when transitioning from normal scheme to composition scheme?

When switching from normal scheme to composition scheme, the taxpayer shall be liable to pay an amount equal to the credit of input tax in respect of inputs held in stock on the day immediately preceding the date of such switchover. The balance of input tax credit after payment of such amount, if any, lying in the credit ledger shall lapse.  

20. Can I opt for the composition scheme in one year and opt out in the next year?

Yes, this is possible. You can opt to switch between the composition scheme and the normal scheme based on your turnover. However, you will have to keep in mind that this will affect the way you issue invoices and file your returns. The declaration of change can be submitted on the GST Portal.

21. I have many branches. Will the composition scheme apply to each of them separately? 

Composition scheme is considered to be opted for all businesses that are associated with a PAN.  

22. Is it true that composition dealers can sell a product at a lower price than regular dealers?

Yes. Composition dealers cannot charge GST on their sales in the bill of supply. So the end consumer pays less money than usual.

23. Can I opt-in for the composition scheme anytime during the year?

No. Before the beginning of every financial year, a registered taxpayer is required to provide a declaration on the GST Portal. This cannot be done anytime during the year. Form CMP-02 must be used to opt into the composition scheme (both supplier of goods and service provider)

24. What will happen if I opt out of the composition scheme mid-year? 

When a dealer opts out of the composition scheme all the normal rules are applicable from the day of opting out. For example, a composition dealer opts out of the composition scheme on 15th October 2020. This means that the dealer will have to file two CMP-08 for the quarters of July – September, and October (15 days). The dealer will also have to file GSTR-1 and GSTR-3B for the period of October 2020 (sales from 15th October until end of the month).

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