The goods & services tax system can be overwhelming to a new and small business in India. To ease tax compliance, the government introduced the GST Composition Scheme, a special provision under which certain businesses pay tax at a fixed rate based on their turnover, rather than submitting monthly returns. This plan also reduces paperwork, compliance expenses, and the overall workload of the administration, making it popular with small and medium-sized enterprises (SMEs).
What is the GST Composition Scheme?
The goods and services tax composition scheme applies to businesses with an annual turnover of not more than rupees 1.5 crore and rupees 75 lakh in special category states. These businesses are not subject to payment of tax on individual transactions. They need to pay a small percentage of their total turnover as tax.
The primary objective ensure that the small traders and service providers meet the GST requirements without being confused by the frequent filing of returns or the complicated tax calculations. Companies registered under this scheme do not charge or even receive the Input Tax credit (ITC) from their customers.
Who Can Opt for the GST Composition Scheme?
This simplified goods & services tax model is only applicable to some forms of businesses. Here’s who can apply:
- Companies that produce goods and merchants in India.
- Alcohol free restaurants.
- Service providers whose turnover is less than Rs 50 lakh, according to the new amendments.
The businesses that are not eligible include–
- Companies involved in the interstate supply of products.
- E-commerce operators.
- The producers of non-taxable goods (such as petroleum, alcohol, or tobacco).
Such selective eligibility ensures that the GST Composition Scheme focuses on supporting small businesses that contribute to the economy.
Tax Rates Under the Composition Scheme
The rate of Goods and Services Tax in this scheme is dependent on the nature of the business. As of the latest revision-
- Manufacturers and merchants – 1% of the turnover.
- Restaurants – 5% of turnover.
- Other service providers – 6% of turnover.
These common rates assist in easing compliance because business owners do not need to separately monitor CGST, SGST, and IGST elements. It is a simple system that is not focused on complexity, but on convenience.
Benefits of the GST Composition Scheme
The composition scheme provides many advantages to small enterprises that attempt to remain within its own framework and remain competitive.
- Simplified Tax Filing
The businesses that choose this scheme are only required to submit returns quarterly, as compared to the regular taxpayers, who are expected to submit monthly GST returns. This saves time in administration and also minimizes the chances of filing mistakes.
- Reduced Compliance Burden
Business owners can easily deal with taxes without the need to employ specific accountants because of the simplified GST portal procedures with minimal documentation. This assists in saving operational costs and fosters compliance.
- Lower Tax Liability
The fixed percentage turnover taxation ensures that SMEs have better management of cash flows and are not subjected to high taxation rates that would otherwise limit the growth of the business.
- Greater Focus on Business Growth
The entrepreneurs will not need to spend hours on the paperwork; instead, they can work on the client base, supply chain optimization, and consider such digital finance options as invoice discounting or Freight Bill Discounting.
Limitations of the GST Composition Scheme
Although the composition scheme has good benefits, it also has its own disadvantages that should be reviewed by businesses before committing to the scheme.
- No Input Tax Credit
The first drawback is that the businesses have no right to claim the Input Tax Credit, and therefore, they cannot deduct the amount of tax paid on purchases. This may add a little in the form of expense in purchasing the items from registered suppliers.
- Restriction on Interstate Sales
The scheme does not allow businesses to deal with interstate trade or e-commerce transactions. This restriction limits the growth prospects of those intending to expand outside a locality.
- Not Suitable for Growing Businesses
When a business surpasses the turnover limit of Rs 1.5 crore, it is required to change to the regular GST registration, which comes with additional complicated compliance. This change may be time-consuming.
- Limited Credibility in the B2B Market
Composition dealers are unable to issue tax invoices, so B2B buyers might be more inclined to buy a regular taxpayer to recover ITC, and this can have an impact on business relations.
How to Register for the GST Composition Scheme?
This scheme is easily applied by the business entities under the official GST portal by choosing the option of Opt for Composition when registering GST or by filling form CMP-02.
Here is the list of important documents required-
- PAN card and Aadhaar of the business owner.
- Registration certificate of business.
- Bank information and address evidence.
Upon approval, the taxpayer would be identified as a composition dealer in the GST Network system and would be allowed to begin submitting quarterly returns in Form CMP-08.
When to Choose the GST Composition Scheme
The composition scheme is most effective among small traders, local restaurants, and small-scale manufacturers with limited interstate business. If your business–
- Operates in one state,
- Has an average turnover per year, and
- Has no business in confined merchandise,
Then the plan provides an effective means of remaining in compliance and lessening the financial pressure.
However, there are more advantages to a regular GST registration in case your business is in more than one state, exports goods, or even when you are on an online marketplace.
Choosing Simplicity Without Compromising Compliance
The goods & services tax composition plan creates a balance between the compliance and simplicity of small business owners. It minimizes paperwork and provides predictable tax payments while also facilitating smooth operations. One should always consider its drawbacks particularly when it comes to ITC claims and interstate restrictions, before making a decision. The composition scheme could enable businesses to be compliant with proper financial planning and prioritize business growth.
Credlix also knows that working capital management is very important to small and developing businesses. Our invoice discounting and Freight Bill Discounting, along with export financing solutions, allow the firms to release cash tied up in debtors, which will ensure their operations run smoothly and the business expands. You can find better technology-driven business finance solutions that take the extra burden out of business finance and make it fast, whether you are preparing your GST compliance or seeking smarter financial tools.
Frequently Asked Questions
Q1: Is it possible to charge customers GST through a business on the Composition Scheme?
No. The scheme does not allow businesses that are registered in the scheme to collect the Goods and Services tax on behalf of the customers. They are also not allowed to issue tax invoices.
Q2: What are the results when the turnover is higher than one crore in a year?
By the time the threshold limit has been exceeded, the business should switch to the standard GST scheme and begin making monthly returns.
Q3: Do the service providers have the option to opt for the Composition Scheme?
Yes, with certain conditions, service providers that have an annual turnover of less than ₹50 Lakh can also make such an option.
