What is the GST Composition Scheme? Check Benefits, Rules & Limits

Every country's financial system works according to a framework, and one of the recent implementations in India was the Goods and Services Tax (GST) Composition Scheme. It was introduced for taxpayers and business owners to reduce compliance costs and make the process quick and hassle-free.

Let’s start by understanding what the GST composition is. This blog will help you learn about the benefits, rules, and limitations of the scheme in GST.
 

What is the GST Composition Scheme?

The GST composition scheme implies a tax-paying framework introduced by the Government of India for small businesses. The annual turnover of a business should be less than Rs 1.5 crore. So what does it mean for your business? The scheme allows eligible businesses to pay a fixed percentage of the turnover at a reduced rate of 1 to 6% (depending on the type of business).

Read More: What is GST (Goods & Services Tax)? Meaning & Types of GST Returns 

GST Composition Scheme Rules 

According to the GST Act, manufacturers, service providers, and traders can all register under the GST composition scheme. The following individuals, however, are not eligible to register under the GST composition scheme:  
 

• Any person or company selling products online through an e-commerce portal that collects tax at the source.

   

• Non-resident or irregular taxpayers.

   

• Ice cream producers or other edible ice, with or without cocoa as an ingredient.

   

• Manufacturers of tobacco, pan masala, and similar alternatives.

   

• Organisations or individuals who have bought products from unregistered providers.

   

• Vendors engaged in selling items exempt from taxation under the GST Act.

   

• Vendors who offer goods and services.

 

What is the GST composition scheme limit?

The GST composition scheme turnover limit is detailed below –
 

• Manufacturer and Trader

  If you have recently registered your business, your turnover for the current financial year must not exceed Rs 1.5 crore. The same limit applies to existing businesses for the previous financial year. However, if you are from Himachal Pradesh or a Northeastern state, your turnover should not exceed Rs 75 lakhs.
   

• Restaurant business

  The turnover limit for restaurant owners who do not serve alcohol is the same as it is for traders and manufacturers, i.e. it should be less than Rs. 1.5 crores in the previous financial year.
   

• Service providers

  If you have recently registered your service-providing business, your annual turnover for the current financial year must not exceed Rs 50 lakhs.
   

Different Tax Rates Under Composition Scheme

 
The GST rates applicable under the composition scheme vary depending on the nature of the taxpayer's business. Here is the table specifying the details.
 

Potential Benefits of the GST Composition Scheme 

Here are some of the benefits of the scheme under GST composition:
 

1. Reduced tax liability

Following the implementation of the GST composition scheme rules, small business owners may experience a downfall in their tax obligations.  
 

2. Lower compliance requirements

Taxpayers might avoid the requirement to present tax invoices by following less stringent compliance requirements for keeping records and making tax payments.  
 

3. Greater liquidity 

The business is exposed to more liquidity due to reduced tax liability via fixed rate. Greater liquidity, in turn, aids the company in maintaining its cash flow, enabling it to run operations without interruption.  

Who is Eligible for the GST Composition Scheme?

If your yearly turnover is less than or equal to Rs 1.5 crores, and you are related to any of the below-mentioned business segments, then you are eligible for the GST composition scheme:
   
Eligible taxpayers can always use a GST calculator to calculate their taxes easily.

Who does not Qualify for the GST Composition Scheme?

You cannot choose this scheme if you fall into any of the following categories.
   

Impact of GST on Personal Loans 

Several individuals may also wonder if an expensive interest rate is applicable as GST on Personal Loan. Well, a tax applies to your Personal Loan, but with a loan from Hero FinCorp, you can take advantage of the reasonable EMIs after calculating the levied tax. 

Notably, with the GST implementation, Personal Loans have become more affordable and accessible.  Earlier, several taxes were applied on Personal Loans, but now there is one (GST) that makes it one of the best financial tools.
 

What are the benefits of choosing a GST composition scheme?

Choosing a GST composition scheme has a slew of advantages. Some of them are –
 

• When you choose this scheme, you are not required to go through any strict compliance. In terms of return filing, you must file four quarterly returns in GSTR 4 and one annual return in GSTR 9A. Furthermore, there is no obligation to keep detailed records.

 

• As previously stated, the GST composition scheme allows you to benefit from lower tax rates. Just a reminder that if you are a trader or manufacturer, the rate will be 1% of your annual turnover. On the other hand, individuals involved in the restaurant business who do not serve alcohol face a 5% tax rate on turnover.

 

• Lower tax rates aid in improving the business's liquidity position. You can invest the money you have saved in any business opportunity that comes your way.

What are the Drawbacks of the GST Composition Scheme?

Here are the drawbacks of the GST composition scheme that business owners must be aware of: 

• No input Tax Credit: B2B businesses are not allowed a credit of input tax paid from the output liability. Such goods' buyers will not receive any credit on tax paid, which might cause price distortion and cascading. By purchasing from someone registered under a composition scheme, a buyer who is a regular taxpayer will not receive any credit, which may result in a loss of business. 

 

• No Tax Collection: Taxpayers under the composition scheme are unable to recover composition tax from their customers because there is no way to raise a tax invoice. 

 

• Limited Business Growth and Reach: Interstate transactions are not covered by the GST composition scheme. Also, they are unable to take advantage of e-commerce platforms' capacity to supply goods online.

 

• You are not permitted to sell non-taxable items such as alcohol. Furthermore, you are prohibited from supplying goods through any e-commerce portal.

 

• After opting for this scheme, you are not permitted to collect tax from anyone who purchases goods from you. You are also not allowed to issue the tax invoice.

 
Also Read: Proper Guide to Tax Benefits on Personal Loan
 

What returns you must file if you have chosen a GST composition scheme?

The deadlines for various return filings in different forms are listed below.
   

How to Apply for a GST Composition Scheme?

In order to be eligible for this scheme, you must first file a GST CMP-02 with the government. You can do this by visiting the GST portal. However, keep in mind that you must notify the relevant authority at the start of the fiscal year that you wish to apply for a composition scheme. 
 
Steps involved in the CMP-02 filling –
 

• Step 1: Go to the GST portal.

 

• Step 2: Navigate to the 'Service' tab, and from there, tap on 'Registration' and then click on the 'Application to Opt for composition Levy’. 

 

• Step 3: Go through the 'Composition Declaration' carefully, then tick on the checkbox.

 

• Step 4: Next, from the drop-down menu, select the 'Name of Authorised Signatory' and choose the 'Place' before clicking on the 'Save' tab.

 

• Step 5: The new screen will show various methods for submitting returns. You may select any of them. If you are an LLC, you are required to submit your application through the DSC.

 
Once you have completed all the preceding steps, a softcopy of the acknowledgment receipt will be sent to your registered email address. You must submit GST CMP-03 within 90 days of filing CMP-02.
 

To conclude

 
GST filings come with their own merits and demerits. Make sure you file your return correctly because there is no revision option on the portal. Remember that if you file late under the composition scheme, you must pay a penalty of Rs 200 per day, up to a maximum of Rs 5,000.

The GST composition scheme is a streamlined tax system for small firms with an annual turnover of less than Rs 1.5 crore. The plan has many advantages small businesses can benefit from, such as simpler compliance, fewer tax payments, and greater cash flow. Businesses must also abide by several limitations and requirements to benefit from the advantages.

The GST composition scheme may be favourable for small businesses looking to simplify tax compliance and reduce their tax liability. To ensure it is in accordance with their financial and operational goals, firms must carefully weigh the scheme's advantages and disadvantages.