All you wanted to know about composition scheme

Satya Sontanam | Updated on April 08, 2019

From the next financial year (April 1, 2019), tax payers under the composition scheme of the GST can look forward to more relaxed rules with an increased turnover limit for the applicability, inclusion of service providers and reduced tax rates. In the last GST Council meeting, the scheme was also made applicable to the real estate sector with respect to under-construction, ready and affordable homes.

What is it?

The composition scheme is an alternative method of tax levy under GST designed to simplify compliance and reduce compliance costs for small taxpayers. The main feature of this scheme is that the business or person who has opted to pay tax under this scheme can pay tax at a flat percentage of turnover every quarter, instead of paying tax at normal rate every month.

The composition scheme is applicable to manufacturers or traders whose taxable business turnover is up to ₹1.5 crore (₹75 lakh in case of North-Eastern States). A service provider can opt for the scheme if his taxable turnover is up to ₹50 lakh. But there are strings attached. Businesses with inter-State supplies, manufacturers of ice cream, pan masala and tobacco, and e-commerce players cannot opt for the composition scheme.

The applicable tax rates under the composition scheme are 1 per cent (0.5 per cent Central GST and 0.5 per cent State GST) of turnover in case of manufacturers and traders, 5 per cent in the case of restaurants (not serving alcohol) and 6 per cent for other service providers. The tax is to be paid from tax payer’s own pocket without charging it to the customer. The words “composition taxable person, not eligible to collect tax on supplies” should be mentioned at the top of every bill issued by him.

To be eligible for the composition scheme, the registered tax payer must provide a declaration on the GST portal before the beginning of each financial year and not anytime during the year.

Why is it important?

There are over 63 million Micro, Small and Medium Enterprises (MSMEs) in the country that created 110 million jobs and contributed about 29 per cent of the country’s economic output, as per the National Sample Survey (NSS) 73rd round conducted during 2015-16.

The composition scheme effectively acknowledges the importance of the MSME sector, by granting relief to it on GST filings, procedures and tax rates. As on October 1, 2018, there were 17,65,684 composition dealers amounting to about 16 per cent of registered tax payers under GST. The number is expected to go up with the recent increase in the threshold from ₹1 crore to ₹1.5 crore and the inclusion of service providers.

Under the composition scheme, the taxpayer can skip monthly returns and furnish only one return i.e. GSTR-4 on a quarterly basis by 18th of the month following end of the quarter and an annual return in GSTR-9A by December 31 of the next financial year. A dealer registered under the composition scheme is also not required to maintain detailed records.

The drawbacks of this scheme are that the taxpayer cannot be involved in inter-State transactions, imports or exports. Also, the buyer transacting with a seller registered under composition scheme will not get the benefit of input tax credit, which impact the former’s sales.

Why should I care?

If you are a customer using goods or services and note on the invoice that the seller opted for composition scheme, then you must avoid paying GST on such transactions. There were reports that some taxpayers registered under composition scheme collected GST from customers, without intending to deposit it with the government.


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Published on April 08, 2019

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