Composition Scheme

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  • As per the amended CGST rule, all taxpayers will continue to pay monthly dues through a simple challan. As per new provisions, a nil FORM CMP-08 can be filed via SMS.

What is the composition scheme?

It is a scheme under GST for small businesses belonging to the unorganized sector with aggregate turnover less than Rs. 1.5 crore (less than 75 lakhs for North Eastern states). The business owners registered under this scheme are called compounding vendors/dealers, and these vendors pay tax at a lesser rate. Also, they have fewer returns to file compared to normal taxpayers. 

As per the 32nd GST Council Meeting, a new composition scheme is being put together. This is meant for those suppliers who are either providing independent services or a combination of both goods and services, and have a turnover of up to Rs 50 lakhs in the preceding financial year. The tax rate for this scheme is at 6% (3% CGST + 3% SGST).

Features of Composition Scheme:

  Here are some important features of composition scheme:

Eligibility criteria

  As of the 1st of April, 2019, the limit to be eligible for the composition scheme has been increased to Rs 1.5 crore (less than 75 lakhs for North Eastern states) and the business is required to sell goods only within their own state.

The following individuals cannot opt for Composition Scheme:

How do I sign up for the Composition Scheme?

When a business owner wishes to apply for composition scheme, they should file the application with the tax department at the beginning of the financial year (1st April). The sign-up process is PAN-based, so business owners are advised to keep their PAN cards ready. The registration process is divided into 3 categories:

For businesses registered under pre-GST regime:

For businesses that are registering for the first time

In this case, the business owner should file FORM GST REG-01. In Part B of the form, under  Section 10, select “Registration as composite business owner” option .

For businesses registered under GST

When a business transitions from the normal tax scheme to the composition scheme, it must pay an amount equal to its available input tax credit. The input tax credit will be calculated based on the amount of input materials, semi-finished and finished goods held in stock.

To register for composition scheme, the business owner should file FORM GST CMP-02, and furnish details of ITC related to inputs, semi-finished/finished goods (within 60 days from the beginning of the financial year) held in stock, in FORM GST ITC-3.

Documents required in Composition Scheme

Bill of supply: Composition vendors cannot collect tax, therefore cannot claim ITC on the supplies made by them. That’s why a bill of supply is issued instead of a tax invoice. Click to learn more about bill of supply. 

What are the returns associated with Composition Scheme?

What happens when a business opts out of the composition scheme?

A business owner availing composition scheme can opt out of the scheme, and instead choose the normal tax scheme with benefit of ITC. The credit will be calculated based on input, semi-finished and finished goods held in stock.

Note: You can switch between a normal vendor or compounding vendor only once during a particular financial year.

Disqualification and Penalty

If tax authorities believe that a business is wrongfully enrolled or not eligible, they may disqualify the business from the composition scheme or demand a penalty equal to the tax amount owed. In case of late filing of GSTR-4, the business owner will be fined Rs. 100 per day to a maximum amount of Rs. 5,000/-. Also, not furnishing returns for 3 consecutive tax periods may result in cancellation of registration by the tax authorities.

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