Learn everything about the composition scheme in India

What is the composition scheme?

It is a scheme under GST for small businesses belonging to the unorganized sector with aggregate turnover less than Rs. 1.5 crore (less than 75 lakhs for North Eastern states). The business owners registered under this scheme are called compounding vendors/dealers, and these vendors pay tax at a lesser rate. Also, they have fewer returns to file compared to normal taxpayers. 

As per the 32nd GST Council Meeting, a new composition scheme is being put together. This is meant for those suppliers who are either providing independent services or a combination of both goods and services, and have a turnover of up to Rs 50 lakhs in the preceding financial year. The tax rate for this scheme is at 6% (3% CGST + 3% SGST).

Features of Composition Scheme:{#composition-scheme-features} 

Here are some important features of composition scheme:

• Manufacturers of goods, dealers, and restaurant owners (applicable only to restaurants that do not serve alcohol) can opt for composition scheme.

• A compounding dealer cannot collect tax or claim input tax credit for the supplies delivered to their clients. Due to this reason, bills of supply are issued for sales transactions, instead of tax invoices.   

• Business owners registered under this scheme pay tax at a much lesser rate compared to normal business owners. The tax paid by the compounding vendors will be equal to at least 1% of the business’s annual turnover.  

• The composition rates are different based on the type of business.

  • For traders and manufacturers it’s 1%.
  • For restaurant sector it’s 5%.  

• The registered business owner under Composition Scheme will have to file one return each quarter by 18th of the month following that quarter.  

• If a business owner has 5 different businesses under the same PAN, he must register all the businesses under Composition Scheme or opt out of the scheme.

• For transactions under the reverse charge mechanism, the compounding dealers will be taxed at the normal GST rate.

• A compounding dealer is permitted to supply services, excluding restaurant services, that are worth under 10% of the turnover for the preceding financial year or Rs. 5 lakhs, whichever is higher.

Eligibility criteria{#composition-scheme-eligibility} 

As of the 1st of April, 2019, the limit to be eligible for the composition scheme has been increased to Rs 1.5 crore (less than 75 lakhs for North Eastern states) and the business is required to sell goods only within their own state.

The following individuals cannot opt for Composition Scheme:

• Suppliers who provide services 
• Supplier who supply exempt goods
• Suppliers involved in inter-state transactions
• E-commerce operators/aggregators
• Casual taxable person or a non-resident taxable person
• Manufacturers of ice-cream, pan masala and tobacco & tobacco substitute 

How do I sign up for the Composition Scheme?

When a business owner wishes to apply for composition scheme, they should file the application with the tax department at the beginning of the financial year (1st April). The sign-up process is PAN-based, so business owners are advised to keep their PAN cards ready. The registration process is divided into 3 categories:

For businesses registered under pre-GST regime:

• If the business is already registered under the previous tax regime, the business owner will be provided with a provisional certificate during their GST registration.   
• They should file FORM GST CMP-01 through the GSTN portal on or before 30 days from July 1, 2017. If the filing is delayed, the business owner will not be allowed to collect tax or issue bills of supply.    
• Once this is done, the business owner should furnish details regarding the stock held by them before they opted for composition scheme in FORM GST CMP-03 within 60 days. Details regarding purchases made from unregistered vendors should also be included in this form. After filing FORM GST CMP-03, the business owner should not collect any tax from the appointed day but, they can issue bill of supply for supplies made after that day.

For businesses that are registering for the first time

In this case, the business owner should file FORM GST REG-01. In Part B of the form, under  Section 10, select “Registration as composite business owner” option .

For businesses registered under GST

When a business transitions from the normal tax scheme to the composition scheme, it must pay an amount equal to its available input tax credit. The input tax credit will be calculated based on the amount of input materials, semi-finished and finished goods held in stock.

To register for composition scheme, the business owner should file FORM GST CMP-02, and furnish details of ITC related to inputs, semi-finished/finished goods (within 60 days from the beginning of the financial year) held in stock, in FORM GST ITC-3.

Documents required in Composition Scheme

Bill of supply: Composition vendors cannot collect tax, therefore cannot claim ITC on the supplies made by them. That’s why a bill of supply is issued instead of a tax invoice. Click to learn more about bill of supply. 

What are the returns associated with Composition Scheme?

• Businesses that have registered for the composition scheme will need to file GSTR-4, an annual return specifically designed for them. The return for a particular quarter should be filed on or before the 18th of the month following that quarter.  Example, if you are filing the GSTR-4 for the July-September quarter, you have to file it before the 18th of October.

• Besides GSTR-4, businesses should also furnish GSTR-9A (consolidated annual return for compounding vendors) as part of the compliance process.

• Additionally, taxpayers that are listed under the Composition Scheme also need to file a new form, GST CMP-8, a simplified statement for payment of self-assessed tax, by the 18th of the month after the end of a quarter. This means that business would have to file the returns for the April-June quarter in July. Taxpayers can fill in details of their inward and outward supplies applicable to reverse-charge, tax and interest payable, and tax and interest paid. The due date for the period of April-June 2019 has been extended to the 31st July 2019.

What happens when a business opts out of the composition scheme?

A business owner availing composition scheme can opt out of the scheme, and instead choose the normal tax scheme with benefit of ITC. The credit will be calculated based on input, semi-finished and finished goods held in stock.

Note: You can switch between a normal vendor or compounding vendor only once during a particular financial year.

Disqualification and Penalty

If tax authorities believe that a business is wrongfully enrolled or not eligible, they may disqualify the business from the composition scheme or demand a penalty equal to the tax amount owed. In case of late filing of GSTR-4, the business owner will be fined Rs. 100 per day to a maximum amount of Rs. 5,000/-. Also, not furnishing returns for 3 consecutive tax periods may result in cancellation of registration by the tax authorities.