Composition Scheme

What it means

The composition scheme is an optional GST scheme for small businesses. Instead of charging GST on each invoice and claiming input tax credit, they pay a small fixed percentage of their turnover as tax. It means less paperwork and fewer returns. In return, the business gives up some flexibility.

How it works

• Eligibility: aggregate turnover up to ₹1.5 crore in the previous year for manufacturers, traders and restaurants (₹75 lakh in some special category states). Service providers can opt in up to ₹50 lakh.

• Tax rates on turnover: 1% for manufacturers and traders, 5% for restaurants not serving alcohol, 6% for service providers. Each rate is split equally between CGST and SGST.

• Returns: quarterly payment in CMP-08 by the 18th of the month after the quarter, and one annual return in GSTR-4 by 30 April

• To opt in: file CMP-02 before the start of the financial year

• Issue a bill of supply, not a tax invoice, and write “composition taxable person” on it and on your signboard.

Restrictions: no input tax credit, no GST collected from customers, no inter-state outward supplies, and no supplying of certain items such as ice cream, pan masala and tobacco. Tax under reverse charge must still be paid separately.

Example

Sunil runs a hardware shop in Pune with yearly sales of ₹90,00,000, mostly to local retail customers.

• Under composition: 1% of ₹90,00,000 = ₹90,000 tax for the year, paid quarterly (about ₹22,500 a quarter)

• Under the regular scheme: suppose his output GST is ₹16,20,000 at 18% on ₹90,00,000, and his input tax credit on purchases is ₹14,40,000. Net GST = ₹1,80,000.

Composition saves him about ₹90,000 in cash and a lot of compliance work. However, because he cannot charge GST, the scheme does not suit him if his customers are businesses that want to claim credit.

Key points to remember

• The tax is paid from your own pocket, since you cannot collect it from customers.

• If turnover crosses the limit during the year, you must leave the scheme (file CMP-04) and move to regular GST.

• Composition is for the whole PAN. All your registrations must opt in together.

• Late CMP-08 or GSTR-4 filing attracts late fees and interest.

• B2B suppliers usually lose customers under composition because buyers get no credit.