Tax Rates under Composition Scheme

The GST Composition Scheme

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The GST Composition Scheme

The GST Composition Scheme in India is a simplified tax mechanism under the Goods and Services Tax (GST) regime, designed for small businesses to reduce compliance burdens and tax liability. It allows eligible taxpayers to pay GST at a flat rate on their turnover, with minimal record-keeping and fewer return filings. Below is a detailed explanation of the Composition Scheme, including eligibility, tax rates, conditions, benefits, limitations, and the registration process, tailored for businesses in India.

What is the Composition Scheme?

  • The Composition Scheme is an optional GST compliance option for small businesses with a turnover below a specified threshold.
  • Instead of paying GST at standard rates (5%, 12%, 18%, or 28%) and claiming Input Tax Credit (ITC), businesses pay a fixed percentage of their turnover as tax.
  • It simplifies GST compliance by reducing the need for detailed invoicing and extensive record-keeping.

Eligibility for Composition Scheme

As per the Central Goods and Services Tax (CGST) Act, 2017, and recent updates (up to June 2025), the following businesses can opt for the Composition Scheme:
Turnover Threshold:
  • Annual aggregate turnover in the preceding financial year must not exceed:
  • ₹1.5 crore for most states.
  • ₹75 lakh for special category states (Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh).
  • Note: Turnover includes all taxable, exempt, and export supplies but excludes reverse charge mechanism (RCM) taxes and value of inward supplies.

Eligible Entities:

  • Manufacturers of goods.
  • Traders (wholesale or retail).
  • Restaurants not serving alcohol (e.g., small eateries, food stalls).
  • Service providers (since 2019, with a turnover limit of ₹50 lakh and a 6% tax rate).

 

Ineligible Entities:

Businesses engaged in:

  • Interstate supplies (supplying goods/services outside the state of registration).
  • E-commerce sales through platforms like Amazon or Flipkart (e.g., online sellers under Section 24 of CGST Act).
  • Supply of non-taxable goods (e.g., alcohol, petrol).
  • Manufacture of notified goods (e.g., ice cream, pan masala, tobacco, aerated water).
  • Casual taxable persons or non-resident taxable persons.
  • Input Service Distributors (ISDs).
  • Businesses registered under the reverse charge mechanism for certain supplies.
Other Conditions:
  • The taxpayer must not be a part of a supply chain involving ineligible goods.
  • All businesses under the same PAN must opt for the Composition Scheme (no partial opting).

Tax Rates under Composition Scheme

The tax rates (effective as of June 2025) are applied on the total turnover, paid as Central GST (CGST) + State GST (SGST) or Integrated GST (IGST) for intra-state supplies:

Tax Rates under Composition Scheme

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How to Opt for the Composition Scheme

New GST Registration:
  • During GST registration on the GST Portal (www.gst.gov.in) (www.gst.gov.in), select the Composition Levy option in Form GST REG-01 (Part B).
  • File Form GST CMP-01 to confirm opting for the scheme.

Existing GST-Registered Businesses:

  • Opt-in by filing Form GST CMP-02 before the start of the financial year (by April 30).
  • The option applies for the entire financial year unless voluntarily withdrawn.
Switching from Regular to Composition:
  • File Form GST CMP-02 on the GST Portal.
  • Reverse any ITC availed by filing Form GST ITC-03 within 60 days.
Intimation:
  • Businesses must file Form GST CMP-01 (for new registrants) or Form GST CMP-02 (for existing taxpayers) to opt-in.
  • Display “Composition Taxable Person” on all signboards, invoices, and premises.

Conditions for Composition Scheme

  • No Input Tax Credit (ITC): Businesses cannot claim ITC on purchases, even if suppliers charge GST.
  • No Interstate Supplies: Only intra-state supplies are allowed.
  • Tax Collection Restriction: Cannot collect GST from customers; tax is paid from the business’s pocket.
  • Bill of Supply: Issue a Bill of Supply instead of a tax invoice, clearly stating “Composition Taxable Person, not eligible to collect tax.”
  • Reverse Charge Mechanism (RCM): Pay GST under RCM for applicable inward supplies (e.g., purchases from unregistered suppliers or services like legal fees).
  • Quarterly Returns: File Form GSTR-4 annually (by April 30 of the next financial year) and pay taxes quarterly via Form GST CMP-08 (by the 18th of the month following the quarter).
  • Stock Details: Submit details of opening stock when opting in/out using Form GST ITC-01 or ITC-03.
Benefits of Composition Scheme
  1. Lower Tax Rates: Fixed rates (1%–6%) compared to standard GST rates (up to 28%).
  2. Simplified Compliance:
    • Quarterly tax payments via Form GST CMP-08.
    • Single annual return (GSTR-4) instead of monthly GSTR-1 and GSTR-3B.
  3. Reduced Record-Keeping: Minimal documentation; no need to maintain detailed purchase/sales ledgers.
  4. Cost-Effective: Ideal for businesses with low margins or B2C transactions, as no ITC is passed on.
  5. Cash Flow Advantage: Fixed tax liability simplifies budgeting.
Limitations of Composition Scheme
  1. No ITC: Cannot claim credit for GST paid on inputs, increasing costs for businesses with high input taxes.
  2. Restricted Market:
    • Cannot make interstate supplies, limiting business expansion.
    • Ineligible for e-commerce platforms, restricting online sales.
  3. No Tax Collection: Cannot charge GST on invoices, reducing transparency for B2B clients who prefer ITC.
  4. Compliance Risks:
    • Violating conditions (e.g., exceeding turnover or making interstate supplies) leads to penalties and reversion to the regular scheme.
    • Must monitor turnover to ensure it stays within limits.
  5. Not Suitable for All: Businesses with high input costs or B2B clients may find the regular scheme more beneficial.
Penalties for Non-Compliance
  • Violation of Conditions: If a business exceeds the turnover limit, makes interstate supplies, or fails to comply, it must:
    • Switch to the regular GST scheme.
    • Pay the differential tax (regular rate minus composition tax) with interest (18% per annum).
  • Penalty: Up to ₹10,000 or 10% of tax due (whichever is higher) for non-compliance, plus potential prosecution for deliberate evasion.
  • Cancellation of Registration: Possible if found ineligible or non-compliant.
How to Exit the Composition Scheme
  1. Voluntary Exit:
    • File Form GST CMP-04 on the GST Portal to switch to the regular scheme.
    • Applicable from the date specified or the start of the next quarter.
  2. Mandatory Exit:
    • If turnover exceeds ₹1.5 crore (or ₹75 lakh in special category states) or the business becomes ineligible (e.g., starts interstate supplies).
    • File Form GST CMP-04 within 7 days of the event.
  3. Post-Exit:
    • File Form GST ITC-01 to claim ITC on closing stock.
    • Comply with regular GST filings (GSTR-1, GSTR-3B).
Key Forms for Composition Scheme

Key Forms for Composition Scheme

Recent Updates (as of June 2025)
  • Aadhaar Authentication: Mandatory for GST registration, including composition scheme applicants, to avoid physical verification.
  • Service Providers: Since 2019, service providers with turnover up to ₹50 lakh can opt for a 6% rate, expanding the scheme’s scope.
  • CBIC Clarifications: Stricter monitoring of ineligible goods (e.g., ice cream, tobacco) and emphasis on compliance with RCM payments.
  • Turnover Monitoring: Businesses must track turnover to avoid automatic disqualification if limits are breached.
Conclusion
The Composition Scheme is ideal for small businesses with intra-state operations, low margins, and minimal input tax credits. It offers simplicity and cost savings but restricts growth and ITC benefits. Businesses should assess their turnover, supply chain, and market before opting in. For registration or compliance, visit the GST Portal  (www.gst.gov.in) or consult a GST practitioner.