What is GST Composition Scheme: Eligibility, Tax Rate & Features

The GST composition scheme may be defined as a simplified scheme of the Goods and Services Tax that is targeted at small taxpayers. The composition scheme under GST allows small taxpayers to skip standard GST formalities and pay goods and service taxes at a fixed rate of GST based on the turnover of the business.

So, the key difference from standard GST is that in the case of the composition scheme, GST payable is calculated based on the turnover of the business and not the specific GST rates of goods/services being supplied.

As per current rules taxpayers can opt for GST composition scheme if their annual turnover is less than Rs. 1.5 crore, however, not every entity can avail the benefits of the composition scheme. The primary benefit of the GST composition scheme is that small businesses won’t have to file as much paperwork and will have a lower tax liability that can significantly reduce the stress of filing GST returns.

As mentioned in the earlier section, the GST composition scheme cannot be availed by all small businesses and taxpayers in India. Since the scheme is designed to benefit small businesses/business owners, the primary eligibility criteria is the annual turnover amount of up to Rs. 1.5 crore.

So a regular taxpayer with annual turnover below the Rs. 1.5 crore limit can be eligible for the composition scheme provided they are not otherwise excluded. In the case of some Indian states, this turnover limit is lower at Rs. 50 lakh. These states include the following:

The applicable rate of tax as per GST composition scheme is also known as composition levy. The applicable rate of composition levy can vary between 1% and 5% which differs based on the type of entity. Below are the applicable GST rates under the composition scheme:

As per current composition scheme rules, some taxpayers are not qualified for this scheme. Taxpayers are not currently allowed to apply for GST Composition Scheme include:

• Individuals or businesses supplying goods and services through an e-commerce platform that collects tax at the source as per Section 52
• Those involved in supplying goods that are not taxable/exempt under GST Act
• Non-resident taxable persons and casual taxable persons
• Businesses or individuals involved in the inter-state supply of goods
• Manufacturers of ice cream and other edible ice products with/without added cocoa
• Manufacturers of tobacco products, substitutes, or pan masala
• Businesses or individuals who have purchased goods and services from an unregistered supplier. However, composition scheme enrolment is allowed if the GST is paid on these goods on a reverse charge basis
• Suppliers whose annual turnover has exceeded the threshold limit in the previous financial year
• Suppliers engaged in providing services other than restaurant service

For qualified individuals and businesses, the GST composition scheme has various benefits to lessen the burden of the tax return process. The numerous advantages of the GST composition scheme include the following:

• Taxpayers qualifying for the composition scheme have reduced GST compliance requirements, making it ideal for small businesses with fewer resources at its disposal
• Small business owners benefit from reduced tax liabilities with the composition scheme structure that imposes lower composition levy
• Small businesses can maintain higher level of liquidity because of lower tax rates.
• The GST composition scheme reduces costs related to bookkeeping, returns, and issuing invoices, etc. for eligible entities

Despite its numerous advantages, there are some limitations that those who opt for the GST composition scheme need to consider. Key limitations of the scheme include:

Some of the key features of the composition scheme and composition levy under Goods and Services Tax include the following:

• Lower tax rates of 1% to 5% than regular GST rates
• Tax liability linked to the turnover of the registered entity for applicable financial year
• licable rate of composition levy depends on type of business
• Quarterly return filing under composition scheme instead of monthly filing under regular GST scheme
• In the case of multiple businesses registered under single PAN, all businesses need to be registered under composition scheme. Otherwise all the businesses have to opt out
• Composition scheme registered entities cannot raise tax invoice they have to raise bill of supply instead
• Normal rate of GST will apply in case transactions are made under the reverse charge mechanism
• Input tax credit is not allowed to the composite dealer.