GST Composition Scheme: Eligibility, Tax Rates, Benefits & Filing Guide

Introduction

The GST Composition Scheme is a simplified tax compliance system designed for small businesses to reduce their tax burden and compliance efforts. It allows eligible taxpayers to pay GST at a fixed percentage of their turnover instead of following the complex input-output tax mechanism.

This guide covers eligibility, tax rates, benefits, compliance requirements, returns to be filed, and practical examples to help businesses make an informed decision about opting for this scheme.

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What is the GST Composition Scheme?

The GST Composition Scheme is an optional scheme under GST, where small taxpayers can pay tax at a lower rate and file fewer returns. However, they cannot claim input tax credit (ITC) or collect GST from customers.

For example, a small retailer with a ₹50 lakh turnover can opt for the scheme and pay 1% GST (instead of charging 5% or 18% GST on sales).

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Eligibility Criteria for the Composition Scheme

Businesses must meet the following conditions to qualify for the Composition Scheme:

1. Turnover Limit:

Manufacturers, traders, and restaurants (not serving alcohol) up to ₹1.5 crore (₹75 lakh for North-Eastern and hill states).

Service providers up to ₹50 lakh (except restaurants).

2. Business Type:

Available for manufacturers, traders, and restaurants (except those selling alcoholic liquor).

Available for service providers with a reduced turnover limit.

3. No Interstate Supply:

The business must operate within one state only.

Cannot supply goods/services to other states.

4. No E-Commerce Sales:

Businesses selling through Amazon, Flipkart, etc. cannot opt for the scheme.

5. No Input Tax Credit (ITC):

Cannot claim ITC on purchases.

6. Tax Collection Restriction:

Cannot charge GST separately on invoices.

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GST Composition Scheme Tax Rates

Manufacturers & Traders: 1% GST (0.5% CGST + 0.5% SGST)

Restaurants (without alcohol): 5% GST (2.5% CGST + 2.5% SGST)

Service Providers: 6% GST (3% CGST + 3% SGST)

For example, if a retailer has a turnover of ₹40 lakh, they must pay ₹40,000 as GST (1% of ₹40 lakh), instead of charging GST on each sale.

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Benefits of the GST Composition Scheme

1. Lower Tax Rate:

Helps small businesses reduce their tax burden.

2. Less Compliance:

No need to file multiple returns like regular GST taxpayers.

3. Simplified Record-Keeping:

Fewer books of accounts and documents required.

4. Better Cash Flow:

No requirement to charge GST separately, making pricing more competitive.

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Disadvantages of the Composition Scheme

1. No ITC Claim:

Cannot claim input tax credit on purchases, increasing costs.

2. Limited Business Expansion:

Cannot make interstate sales or sell through e-commerce platforms.

3. No GST Collection from Customers:

The tax must be paid out of pocket, which can affect profit margins.

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GST Return Filing for Composition Taxpayers

Composition taxpayers file fewer returns compared to regular taxpayers.

CMP-02: Intimation to opt for the Composition Scheme.

GSTR-4: Annual return filed by 30th April of the next financial year.

CMP-08: Quarterly payment of tax by the 18th of the next month after the quarter.

For example, if a small trader has ₹10 lakh turnover in a quarter, they must pay ₹10,000 (1%) GST and report it in CMP-08.

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How to Opt for the GST Composition Scheme?

For New Taxpayers:

Select the Composition Scheme while registering for GST on the GST portal.

For Existing Taxpayers:

1. Log in to the GST Portal.

2. Navigate to ‘Services’ > ‘Registration’ > ‘Application to opt for Composition Scheme (CMP-02)’.

3. Submit the declaration before the beginning of the financial year.

Once opted in, businesses must comply with Composition Scheme rules throughout the year.

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Billing Rules Under Composition Scheme

Must issue a bill of supply instead of a tax invoice.

Cannot mention GST separately on the bill.

Must add the ‘Composition Taxable Person’ declaration on invoices.

Example of a Bill of Supply:

XYZ Traders

Bill of Supply

Customer Name: ABC Enterprises

Product: Mobile Accessories

Amount: ₹10,000

GST: Included in the price

Note: “Composition Taxable Person – Not Eligible to Collect GST”

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Exit from the GST Composition Scheme

A business must exit the Composition Scheme if:

Turnover exceeds ₹1.5 crore (₹75 lakh for special category states).

Interstate sales or e-commerce sales are made.

Voluntary withdrawal is required.

To exit, file Form GST CMP-04 and start filing regular GST returns (GSTR-1 & GSTR-3B).

For example, if a restaurant crosses ₹2 crore turnover, it must switch to the regular GST scheme and start collecting 5% or 18% GST on bills.

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Penalties for Non-Compliance

1. Late Filing of GSTR-4 or CMP-08

₹50 per day (₹25 CGST + ₹25 SGST).

₹20 per day for nil returns.

2. Wrong Composition Scheme Usage

Businesses wrongly availing the scheme must pay full GST with interest and penalties.

For example, if a trader with ₹2 crore turnover mistakenly stays in the Composition Scheme, they must pay 18% GST on sales + penalties.

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Should You Opt for the GST Composition Scheme?

Best for: Small retailers, manufacturers, and restaurants with low turnover.

Not suitable for: Businesses making interstate sales, e-commerce sellers, and those needing ITC.

If your business operates locally and wants simple compliance with lower taxes, the Composition Scheme is an excellent choice. However, if you sell across states or need ITC, the regular GST system is better.

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Conclusion

The GST Composition Scheme is a great option for small businesses looking for simplified compliance and lower taxes. However, it comes with restrictions like no ITC, no interstate sales, and no e-commerce participation.

Before opting for the scheme, businesses must evaluate their eligibility, compliance requirements, and long-term business plans. Proper tax planning ensures maximum benefits while staying compliant with GST laws.