Composition Scheme Opt Deadline

April 24, 2023

Introduction

The composition scheme is a simplified tax system the government implements to support small businesses. It was introduced in 2017 under the Goods and Services Tax (GST) regime. It is specially designed for small taxpayers. The regular GST being charged is in two ways: input GST is set off against output GST. Whereas the composition scheme only calculates output GST. No input is taken into account under this scheme. A composition scheme was implemented to allow small businesses to eliminate tedious compliances with regular GST. Under the composition scheme, the taxpayer can pay tax at a fixed turnover rate. The rate is generally from 1% to 6%, depending on the type of business.

Under the composition scheme, businesses with an annual turnover of up to Rs. 1.5 crores (as of September 2021) can opt to pay tax under the composition scheme. On the contrary, taxpayers are exempted from following tedious compliances and filing regular GST returns. Regular taxpayers have to submit 3 monthly GST returns (GSTR-1, GSTR-2, and GSTR-3) and an annual return GSTR-9A. But under the composition scheme, the taxpayer will be liable to submit only one quarterly return (GSTR-4) CMP-08 for each quarter and one annual return (GSTR-9A).

Table of Content

Which businesses can opt for GST Composition Scheme?

Manufacturers and traders of Goods
Restaurants (not serving alcohol)
Service Providers

Which businesses cannot opt for the GST composition Scheme?

The following are the businesses excluded from benefiting from the GST composition scheme:

Shopkeepers,
Fruit and Vegetable Vendors,
Small Manufacturing Units,
and Manufacturers of ice cream, pan masala, and tobacco.
A person engaged in the supply of non-taxable goods under the GST
Truck Operator
Repair Shops
Machine Operators
Artisans
A Foreign taxpayer
A person making inter-state supplies
A person registered as Input Service Distributor (ISD)
A person registered as TDS Collector
Service Sector Units

What is the GST composition scheme limit?

The composition scheme limit under GST varies from business to business. Every small business engaged in manufacturing has a specified limit or eligibility for opting GST composition scheme.

1. For Manufacturers and Traders

If your business is engaged in any manufacturing and trading and you are a newly registered firm, then the turnover limit for your company will be Rs. 1.5 crores in any given financial year. If you are already a registered business under GST, your company turnover shall not increase from Rs. 1.5 crores. While for various northeastern states and uphill regions, the threshold for eligibility is Rs. 75 Lakhs. All the businesses registered under the same PAN should be taken into account for calculating the total turnover.

2. For Restaurants (Not serving alcohol)

All the restaurants not serving alcohol can opt for a composition scheme if the turnover of the specific restaurant is at most Rs. 1.5 crore in any given financial year. This is in case a restaurant is newly registered or registered under the GST regime. Any restaurant must register under the GST regime to claim the composition scheme’s benefits.

3. For Service Providers

For any service-providing business, if the business is newly registered, the turnover of the specific business should not exceed Rs. 50 Lakhs in any given financial year. If the business’s aggregate annual turnover increases from Rs. 50 Lakhs, then he has to shift to the regular taxable system.

What are the tax rates under GST Composition Scheme?

Under the GST composition scheme, the tax rates are applicable on the basis of turnover of the business; however, fixed tax rates for the categories mentioned below:

Type of Business	CGST	SGST	Total GST
Manufacturer/ Trader of Goods	0.5%	0.5%	1%
Restaurants (not serving alcohol)	2.5%	2.5%	5%
Service Providers	3%	3%	6%

What are the pros of opting GST composition Scheme?

GST composition scheme was introduced for small businesses to benefit them from the following points:

I. Reduced Tax Liability

The composition scheme offers a lower tax rate than the regular GST rates, which reduces the business’s tax liability. Though the turnover of such businesses is small, it helps them keep their cash flow running in the market. This is helpful for a business that works on a low-profit margin. The tax rate is fixed under the composition scheme mentioned above, which helps businesses calculate their profits and working capital. Lower tax rates can help business increase their liquidity.

II. Simplified Compliance

The composition scheme helps taxpayers to simplify their records, and they need not maintain detailed records of their sales, purchases, input credits, etc. They also need not file monthly GSTR returns as the businesses registered under the composition scheme have to file quarterly returns, i.e., GSTR 4, and an annual return, i.e., GSTR-9A. They are not liable to enter into various processes involved in the regular GST regime.

III. Increased Cash Flow

Suppose tax rates for any businesses are reduced. In that case, it automatically helps the businesses to manage their cash flow efficiently as less income is paid in taxes, and more income can be diversified elsewhere. This is the most crucial benefit for small businesses as they run with small capital.

IV. Increased Competitiveness

As the composition scheme offers low tax rates, it encourages small businesses to expand their business activities on a large scale, and it will lead to an increase in competition. It will help the market to stabilize in the areas where few sectors are untapped. People can risk this much amount to increase their business. This will especially help in the sectors where big players dominate the market and restrict small businesses from entering such segments. This will help small-scale businesses to grow, eventually bringing balance to the market.

V. Encourages Voluntary Compliance

The composition scheme offers low tax rates, encouraging businesses to pay taxes. Businesses will get relief in high paying taxes, which shall reduce tax evasion and fraud committed to avoid paying huge taxes. It will create a culture of voluntary compliance.

What are the cons of opting composition scheme?

I. Limited Eligibility

The number of businesses eligible for the composition scheme will be reduced as the turnover limit is Rs. 1.5 crores only. Suppose any business exceeding this limit will not be eligible to opt for the scheme. Hence limitations will arise in such cases. This will indeed change the perspective of the taxpayer.

II. Limitation on the business territory

The businesses doing inter-state supplies will not be eligible to opt for this scheme. As a result, this will restrict the area of business to a very small boundary which will restrict business growth and income. Only intra-state supplies will be eligible under this scheme which is a huge drawback for small businesses as the majority of small businesses have their business activities within their state.

III. Non-Availability of Input Tax Credit

Business planning to register under the composition scheme will not be able to claim ITC. If the business does not benefit from ITC, it will have to bear the entire cost of production and raw materials, and no benefit will be availed to them for the same. This shall be huge for small businesses working on minimum capital. They will also not get any other tax benefits.

IV. Limited Sales

Under the composition scheme, businesses done through e-commerce sites shall not be eligible, which creates a restriction in sales for small businesses. Small businesses earn maximum profit from e-commerce sites, inter-state supplies, and exports. Still, all these supplies are restricted under this scheme making a huge loss in sales and restricting the business area. This will lead to a potential decrease in sales as it will attract businesses to work in a restricted area to pay a low rate. Non-taxable goods such as alcohol and other products will not be considered for the scheme. This becomes a major restriction.

V. Limited Product Range

Most businesses are restricted from claiming the benefit of the composition scheme. This will result in the restriction of business. Only selected products and selected markets are open for business. This will restrict businesses from diversifying and expanding their product portfolio and market area.

How can a taxpayer opt for a composition scheme?

Any registered business planning to opt for a composition scheme will have to file GST CMP-02 with the government. The same can be found on the GST portal. A business should file for the same at the beginning of the financial year.

What is the penalty if any business pays tax on the non-eligibility of the composition scheme?

If the taxable person not eligible for opting composition scheme still pays tax as per the rules, then the person will be liable to pay the penalty equal to the amount of tax. The penalty will be imposed under section 73 or 74 if an individual submits incorrect data to claim the benefits of this scheme. This shall lead to serious consequences for the taxpayer and his business.

Deadline for opting for a composition scheme?

As for the deadline for the composition scheme, eligible taxpayers can opt-in at the beginning of each financial year by filing the required form. The deadline to opt for the scheme for the financial year 2023-24 was 31st March 2023. However, the government may announce a new deadline or make changes to the eligibility criteria in the future.

Conclusion

In conclusion, the composition scheme was specially drafted for small businesses with a simple business model and working in a limited scope. This has lifted many small businesses to grow and compete in the market. In India, many small businesses are given various opportunities to grow and flourish. This will make India a self-dependent country. Hence, the business should make efficient use of such schemes promoted by the government to increase the revenue of small businesses and support them to take them to a large scale.

Frequently Asked Questions

1. Do I need to pay tax against the purchase from an unregistered dealer?

Tax at applicable rates must be paid on purchases from an unregistered dealer until August 2017. From September 2017, only taxes will be paid if the taxpayer is into real estate.

2. Does composition scheme dealers issue a tax invoice?

No, the composition scheme dealers do not issue tax invoices. Instead, they issue a Bill of Supply.

3. Can a composition dealer charge GST from customers?

No, any composition scheme dealers are not supposed to charge GST from customers as they are not paying any GST further to the government. The minimal taxes they pay are paid from their own pockets.

4. I am already a registered taxpayer under a regular scheme and want to opt for a composition scheme. How can I opt for the same?

Any taxpayer registered under the regular scheme must file an application in form GST CMP-02 on the GST portal before the new financial year commences.