GST Composition Scheme: Simplifying Tax Compliance for Small Businesses in India

GST Composition Scheme: Simplifying Tax Compliance for Small Businesses in India

The Goods and Services Tax (GST) introduced in India has streamlined the taxation system for businesses of all sizes. However, for small businesses, managing GST compliance can still be a burden. To address this challenge, the government introduced the GST Composition Scheme, a simplified tax payment mechanism offering significant benefits.

The GST Composition Scheme is an optional tax payment method designed for small taxpayers with an annual turnover up to Rs. 1.5 crore (Rs. 75 lakhs for certain states). Businesses registered under this scheme pay GST at a fixed rate on their total turnover instead of the regular GST rates on individual sales and purchases.

Scheme Eligibility

• Turnover Limit: Businesses with an annual turnover below Rs. 1.5 crore (or Rs. 75 lakhs in specific states) can opt for the composition scheme.
• Business Activities: The scheme is applicable to manufacturers, traders, and restaurants (excluding those serving liquor). The turnover limit is Rs. 50 lakhs for service providers.
• PAN-based Turnover: The combined turnover of all businesses registered under the same PAN is considered for eligibility.

Who is Not Eligible?

• Businesses involved in inter-state supplies of goods cannot register under the composition scheme.
• Suppliers selling goods through e-commerce platforms are not eligible.
• Manufacturers of pan masala, tobacco products, and ice-cream are excluded.
• Non-resident taxable persons and casual taxable persons cannot avail the benefits of this scheme.

Conditions for Registration

• Goods under GST: Businesses registering under the scheme cannot deal in supplying goods exempt from GST (e.g., alcohol).
• Input Tax Credit Restriction: Businesses opting for the composition scheme forego claiming input tax credits on purchases.
• Reverse Charge Mechanism: Transactions under reverse charge will be taxed at the regular GST rate.
• Mandatory Display: Businesses under the scheme must mention "composition taxable person" on signages and bills of supply.
• Multiple Businesses under One PAN: If a taxpayer has businesses under different categories (e.g., electronics, textiles, groceries) registered under the same PAN, all businesses must be registered under the composition scheme or none at all.
• Services provided by Manufacturers/Traders: As per the CGST (Amendment) Act of 2018, manufacturers and traders offering services up to Rs. 5 lakh or 10% of their turnover (whichever is higher) can still avail the composition scheme (effective from February 1, 2019).

Registration Process

Eligible businesses can register for the composition scheme by filing Form GST CMP-01 or 02 online through the GST portal. The process involves logging in to the portal, navigating to the "Services" section, selecting "Registration," and then choosing "Application to opt for composition levy." After reviewing the scheme details and filling in the required information, the application can be submitted electronically using a digital signature certificate (DSC), electronic verification code (EVC), or e-signature.

Benefits

• Reduced Tax Rates: The composition scheme offers significantly lower tax rates compared to regular GST. Rates vary based on the business type, with manufacturers and traders enjoying a 1% tax rate, restaurants (excluding those serving liquor) having a 5% rate, and service providers facing a 6% rate.
• Improved Liquidity: Fixed tax rates under the scheme allow businesses to maintain better cash flow and liquidity.
• Simplified Compliance: Businesses can significantly reduce their compliance burden by filing only one quarterly return (GSTR-4) and one annual return (GSTR-9A) instead of multiple regular GST returns.

Drawbacks

• Restriction on Tax Collection: Businesses under the scheme cannot collect tax from their customers on invoices.
• Input Tax Credit Ineligibility: Businesses cannot claim input tax credit on purchases, which can be a disadvantage if they purchase raw materials with high GST rates.
• Geographical Limitations: The scheme does not apply to inter-state supplies.