The GST composition scheme is an effective tax-paying mechanism, which is specially offered to small businesses. It is distinct from the normal form of GST filing owing to the main benefits that it carries. The first is that the business does not have to undertake complex paperwork and compliance, and the second is the lower tax liability. As part of the composite scheme, a small business has to pay a fixed tax rate that ranges between 1% and 6% of the turnover. This facility brings great respite to small business owners.
The composition scheme carries a list of important features that include:
The composition scheme can be availed by manufacturers of goods, dealers and restaurant owners who do not serve alcohol.
Business owners registered under the scheme pay a relatively lower tax percentage as compared with business owners under the regular GST scheme. The tax paid through the composition scheme is 1% of the annual turnover.
The composition rates vary based on the types of business. While manufacturers typically pay about 1%, the restaurant sector pays 5%.
In case a business owner has several different businesses registered under a single PAN, he/she has to register all the businesses under the scheme. If not, he/she must opt out of the scheme.
The business owner has to file a single return each quarter by the 18th of the month following the given quarter.
When transactions are made under the reverse charge mechanism, the dealer will have to pay tax as per the normal GST rate.
The GST authorities permit a range of manufacturers, service businesses and traders to register under GST. However, the following parties are excluded:
Non-resident taxable persons or casual taxable persons
Businesses that purchase goods from unregistered suppliers or manufacturers
Supplies that undertake the supply of services and goods
Supplies that undertake the supply of goods that are exempted from the GST Act
Manufacturers that produce tobacco, pan masala and other such products
Manufacturers of ice cream and other edible types of ice
Businesses that sell through e-commerce websites that collect tax at source
The GST composition scheme limit varies depending on the business sector.
Manufacturers and Traders – When a business is newly registered, the turnover cannot exceed ₹ 1.5 Crore in a given financial year. If it's an existing registered business, the turnover cannot exceed ₹ 1.5 Crore over the previous financial year.
Restaurants (Not serving alcohol) – The above-stated terms are applicable.
Service Providers – If the business is newly registered, the turnover cannot exceed ₹ 50 Lakh in a given financial year.
In case the turnover exceeds the given limit, the business will have to comply with the regular GST mechanism.
A business owner can opt for the GST composition scheme as long as the annual turnover falls within the specified limit. The scheme can be availed by:
Shopkeepers
Small manufacturing unit
Foodservice unit
Service sector unit
Truck operator
Repair store
Machine operator
Artisan
Fruit and vegetable vendors and more
Under the GST composition scheme, the tax rate is applicable on the business turnover. At present, the following rates are applicable:
Manufacturers and Traders – 1% GST
Restaurants (Not serving alcohol) – 5% GST
Service Providers – 6% GST
CGST |
CGST |
SGST |
Total GST |
Manufacturers and traders of goods |
0.5% |
0.5% |
1% |
Restaurants (not serving alcohol) |
2.5% |
2.5% |
5% |
Other service providers |
3% |
3% |
6% |
The composition scheme carries the following advantages and disadvantages:
Advantages |
Disadvantages |
Lower compliance limits |
Limitation on business territory |
Lower tax liability |
Non availability of Input Tax Credit |
Lower tax rate brings higher liquidity |
Non-taxable goods cannot be submitted through an e-commerce portal |