Composition Scheme under GST: An Overview


Composition Scheme under GST:  An Overview

  Laws to ensure greater compliance without the need of maintaining records. This scheme was missing under the Service Tax laws.

To give relief to small taxpayers having only intra-state outward supply ,there is composition scheme under GST (even earlier under state VAT law too there was composition scheme) where registered person  will not become part of credit chain i.e. cannot take ITC on inward supplies and cannot collect tax from customer on outward supplies. GST law has also extended composition scheme to registered persons who is engaged in supply of service (aggregate turnover limit is Rs.50 lakh in case of service other than restaurant service (refer section 10(2A) of CGST Act, 2017 and SGST/UTGST Act, 2017) instead a specified rate or flat rate.

 For availing composition scheme (for goods and restaurant service) aggregate turnover in the preceding financial year did not exceed one crore and fifty lakh rupees (Rs.1.5 crore) for states and union territories not covered below

In case of following states aggregate turnover (for goods and restaurant service) limit shall seventy five lakh (Rs.75 lakh)

(i) Arunachal Pradesh,

(ii) Manipur,

(iii) Meghalaya,

(iv) Mizoram,

(v) Nagaland,

(vi) Sikkim,

(vii) Tripura,

(viii) Uttarakhand

Only manufacturers of goods, dealers, and restaurants (not serving alcohol) can opt for the composition scheme under Section 10. However, service providers can opt into a similar scheme for composition dealers notified by the CGST (Rate) notification no. 2/2019 dated 7th March 2019 where the total turnover limit is Rs.50 lakh.

 Further, the government introduced a separate composition scheme on 31st March 2022 for the manufacturers of bricks, including building bricks, bricks of fossil meals or similar siliceous earths, earthen or roofing tiles, and fly ash bricks and blocks. Those who have opted in can pay a special rate of tax at 6%, without input tax credit.

Following chart explains the rate of tax on turnover applicable for composition dealers:

Type of Business CGST SGST Total
Manufacturers and Traders (Goods) 0.5% 0.5% 1%
Restaurants not serving Alcohol 2.5% 2.5% 5%
Service Providers 3% 3% 6%
Manufacturers of bricks (including building bricks, bricks of fossil meals or similar siliceous earths, earthen or roofing tiles, and fly ash bricks and blocks ) 3% 3% 6%

Please note that the following persons are not eligible to opt into the composition scheme:

Manufacturers of ice cream, pan masala, or tobacco

A person making inter-state supplies

A casual taxable person

A non-resident taxable person

A person engaged in the supply of non-taxable goods under the GST law

A supplier who has exceeded the turnover threshold limit specified for opting into the composition scheme, and

Businesses which supply goods through an e-commerce operator.

: A composition dealer has to pay tax under reverse charge mechanism wherever applicable. The rate applicable to the supplies is the rate at which GST has to be paid. This means that rate under composition scheme should not be used for reverse charge purposes. Also, no input tax credit is available for tax paid under reverse charge for a composition dealer.

GST Payment has to be made out of pocket for the supplies made. The GST payment to be made by a composition dealer comprises of the following:

GST on supplies made.

Tax on reverse charge, and

Tax on purchase from an unregistered dealer.

 A composition dealer has to issue a Bill of Supply. They cannot issue a tax invoice. This is because the tax has to be paid by the dealer out of pocket. A composition dealer is not allowed to recover the GST from the customers.