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The Goods and Services Tax (GST) system offers a simplified option for small taxpayers called the Composition Scheme. For micro, small, and medium enterprises (MSMEs), maintaining detailed invoices and filing multiple returns monthly can be administratively difficult and costly. To reduce the compliance burden, the government introduced the Composition Scheme. Registered taxpayers under this scheme pay tax at a fixed percentage of their turnover and file only one quarterly return. In this article, we explain eligibility, tax rates, and key rules under the Composition Scheme.
Who is Eligible for the Composition Scheme?
Small business owners with an aggregate annual turnover below a specified threshold can opt for this scheme. The current turnover limits are:
- For Goods Traders & Manufacturers: Annual turnover up to ₹1.5 crore in the preceding financial year. For special category North-Eastern states and Himachal Pradesh, the limit is ₹75 lakh.
- For Service Providers: Annual turnover up to ₹50 lakh in the preceding financial year.
However, not all small businesses can opt for the scheme. The following categories are excluded:
- E-commerce operators supplying goods or services through third-party platforms (like Amazon or Flipkart sellers).
- Inter-state suppliers (businesses making sales across state borders).
- Manufacturers of ice cream, pan masala, tobacco, and aerated water.
- Non-resident taxable persons and casual taxable persons.
GST Slabs & Rates under the Composition Scheme
Composition dealers pay tax at nominal rates. Crucially, they are not allowed to collect this tax from their buyers. They must pay it out of their own turnover. The tax rates are as follows:
| Category of Business | CGST Rate | SGST Rate | Total Composition Rate |
|---|---|---|---|
| Manufacturers & Traders of Goods | 0.5% | 0.5% | 1.0% of turnover |
| Restaurants (not serving alcohol) | 2.5% | 2.5% | 5.0% of turnover |
| Other Service Providers | 3.0% | 3.0% | 6.0% of turnover |
Key Rules & Compliance Requirements
Businesses choosing this scheme must adhere to strict guidelines. Failure to comply can result in disqualification and penalties:
- No Input Tax Credit (ITC): Dealers under the Composition Scheme cannot claim credit for taxes paid on business purchases.
- No Tax Collection: Dealers cannot issue a Tax Invoice or charge GST from their customers. Instead, they must issue a "Bill of Supply" on which they must state "composition taxable person, not eligible to collect tax on supplies".
- Quarterly Payments & Returns: Instead of monthly returns, composition dealers pay tax quarterly using Form CMP-08 by the 18th of the month succeeding the quarter. They file a single annual return using Form GSTR-4.
- Mandatory Mention: Dealers must display the words "Composition Taxable Person" on every notice board, sign, and bill of supply at their principal place of business.
Pros and Cons of the Composition Scheme
The advantages of the scheme include lower tax liability, highly simplified tax compliance, and improved liquidity since taxes are paid at lower rates. However, the disadvantages are significant: dealers cannot make inter-state sales, cannot claim input tax credit, and cannot supply goods via e-commerce websites. Therefore, evaluate your business model carefully. If you trade locally with end consumers, the scheme is highly beneficial.