GST Composition Scheme: Everything You Need to Know

Introduction 

The Goods and Services Tax (GST) is a revolutionary tax reform that has transformed India’s taxation system since its implementation in 2017. Among its several provisions, the GST Composition Scheme stands out as a boon for small businesses. Designed to simplify tax compliance and reduce the financial burden on small and medium enterprises (SMEs), this scheme has helped over 20 lakh businesses in India streamline their tax liabilities.

If you are a small business owner or tax practitioner, this blog provides everything you need to know about the GST Composition Scheme. From its purpose and eligibility criteria to its benefits and challenges, we cover every detail with real-world examples and practical insights.

What is the GST Composition Scheme?

The GST Composition Scheme is a simplified tax-paying mechanism under the GST law. It allows small taxpayers to pay GST at a fixed rate on their turnover instead of the normal GST rates, thereby reducing their compliance burden.

Key Highlights:

1. Eligibility: Available to businesses with an annual turnover of up to ₹1.5 crore (₹75 lakh for special category states).
2. Tax Rates:

• Manufacturers and traders: 1% of turnover.
• Restaurants (not serving alcohol): 5% of turnover.
• Service providers: 6% of turnover (introduced in 2019 for specific service providers with a turnover of up to ₹50 lakh).

3. Simplified Returns: Businesses under this scheme file CMP-08 (quarterly) and GSTR-4 (annual) instead of regular monthly returns.
4. No Input Tax Credit (ITC): Composition taxpayers cannot claim ITC on purchases.

Purpose and Importance of the GST Composition Scheme

The primary goal of the Composition Scheme is to make GST compliance easier for small businesses that lack the resources to handle complex tax filings.

Why is the Scheme Important?

1. Ease of Doing Business: Reduces paperwork and eliminates the need for detailed record-keeping.
2. Lower Tax Burden: Helps small businesses save on taxes by applying reduced rates.
3. Encourages Formalization: Incentivizes small businesses to register under GST and join the formal economy.
4. Cost Savings: Eliminates the need for hiring tax professionals, which can be a significant expense for small enterprises.

Eligibility for the GST Composition Scheme

To avail of the benefits of the scheme, businesses must meet specific criteria:

1. Turnover Limit: The aggregate turnover in the previous financial year must not exceed ₹1.5 crore (₹75 lakh for special category states like Arunachal Pradesh, Nagaland, etc.).
2. Business Type: Applicable to:

• Manufacturers of goods.
• Traders of goods.
• Restaurants (not serving alcohol).
• Selected service providers with turnover up to ₹50 lakh.

3. Exclusions:

• Businesses involved in interstate supply of goods.
• Suppliers of exempt goods.
• E-commerce operators.
• Non-resident taxable persons.

By 2025, approximately 40% of small businesses in India fall within the eligibility criteria for the Composition Scheme.

Exemptions Under the GST Composition Scheme

Certain businesses and activities are excluded from the Composition Scheme, including:

1. Manufacturers of Notified Goods: Businesses manufacturing items like ice cream, pan masala, or tobacco.
2. Service Providers: Except for eligible service providers (turnover up to ₹50 lakh), others cannot opt for this scheme.
3. Interstate Suppliers: Businesses engaged in interstate trade are not eligible.
4. E-Commerce Participants: Those supplying goods via online platforms are excluded.

Key Requirements of the GST Composition Scheme

Taxpayers under the Composition Scheme must adhere to specific compliance requirements:

1. Registration: Opt for the scheme while registering for GST or at the beginning of the financial year.
2. Invoices: Issue a bill of supply instead of a tax invoice (as no GST is charged to customers).
3. Tax Payment: Pay tax on total turnover and file returns on time.
4. Returns Filing:

• Form CMP-08: Quarterly statement to pay tax.
• Form GSTR-4: Annual return to summarize yearly transactions.

Responsibilities of Taxpayers Under the GST Composition Scheme

Being part of the Composition Scheme comes with responsibilities:

1. No Input Tax Credit (ITC): Cannot claim ITC on purchases.
2. Display of Information: Must display the words “Composition Taxable Person” prominently on invoices and at the business premises.
3. Limited Scope of Business: Restriction on interstate trade and certain goods/services.

Benefits of the GST Composition Scheme

The Composition Scheme is a win-win for small businesses. Here are its major benefits:

1. Reduced Compliance Burden: Filing quarterly instead of monthly returns significantly reduces paperwork.
2. Lower Tax Rates: Fixed rates (1%, 5%, or 6%) lead to significant tax savings.
3. Increased Focus on Business: Owners can focus on operations rather than spending time on complex tax calculations.
4. Encourages Participation: Simplified rules attract more small businesses to register under GST, boosting overall compliance.

Example:

A trader in Uttar Pradesh with an annual turnover of ₹50 lakh pays ₹50,000 as GST (at 1%) under the Composition Scheme, compared to ₹9 lakh (at 18%) under the regular scheme.

Challenges and Common Issues in the GST Composition Scheme

Despite its benefits, the scheme has limitations that taxpayers must consider:

1. No ITC Benefits: Businesses lose out on input tax credits, making the scheme less attractive for those with high input costs.
2. Restriction on Scope: Limited to intra-state trade, excluding businesses with interstate transactions.
3. Tax Burden on Purchases: Purchases from regular taxpayers attract GST, which cannot be reclaimed.
4. Compliance Penalties: Late filing or non-compliance can result in penalties, defeating the purpose of the scheme.

2025 Data:

• 26% of small businesses expressed concerns about the lack of ITC benefits.
• Over ₹500 crore in penalties were imposed due to non-compliance in FY 2024-25.

Format and Structure of Returns Under the Composition Scheme

Taxpayers need to file the following forms:

1. CMP-02: To opt for the Composition Scheme at the beginning of the financial year.
2. CMP-08: Quarterly form for tax payment.
3. GSTR-4: Annual return to summarize all transactions.

Filing Timeline:

• CMP-08: Due by the 18th of the month following the quarter.
• GSTR-4: Due by the 30th of April of the following financial year.

Conclusion

The GST Composition Scheme is a vital tool for small businesses to simplify tax compliance and reduce financial burdens. While it has limitations like the loss of input tax credits and restrictions on scope, its benefits far outweigh the drawbacks for businesses with low turnovers and local operations. As the Indian economy evolves, the Composition Scheme remains a cornerstone of GST, ensuring that small enterprises thrive in a competitive market.

By understanding the eligibility criteria, responsibilities, and compliance requirements, small business owners can make an informed decision about whether the scheme suits their needs. With over ₹12 lakh crore in GST collections projected for 2025, the Composition Scheme will continue to play a crucial role in India’s taxation landscape.

Frequently Asked Questions (FAQs)

Q1: Can a Composition taxpayer switch to the regular GST scheme?
A: Yes, a taxpayer can switch to the regular scheme by filing Form GST CMP-04.

Q2: Can a business with multiple branches under different GSTINs opt for the Composition Scheme?
A: Yes, provided all branches operate within the same state and meet the turnover criteria.

Q3: Are Composition taxpayers required to pay GST on reverse charge?
A: Yes, Composition taxpayers must pay GST on specified reverse charge transactions.

Q4: Can service providers opt for the Composition Scheme?
A: Only service providers with turnover up to ₹50 lakh can opt, at a tax rate of 6%.

Q5: What happens if a Composition taxpayer’s turnover exceeds ₹1.5 crore during the year?
A: The taxpayer must switch to the regular GST scheme and pay tax as per normal rates. For small businesses navigating the complexities of taxation, the GST Composition Scheme is a beacon of simplicity and relief. Whether you’re a trader, manufacturer, or small service provider, this scheme could be the key to smoother operations and better compliance.