Simplified Taxation for Small Businesses: Understanding the Composition Scheme under CGST Act, 2017

Introduction

Under the CGST Act, 2017, businesses are required to obtain GST registration once their aggregate turnover exceeds the prescribed threshold limits – Rs. 40,00,000 for suppliers of goods and Rs. 20,00,000 for providers of services. (It is important to note that lower thresholds apply to certain special category states.)

To ease the compliance burden on small businesses, the Government of India introduced the Composition Scheme. This scheme is available to manufacturers, traders, and service providers whose aggregate turnover in a financial year does not exceed Rs.1,50,00,000/- for goods and Rs.50,00,000/- for services. It allows eligible taxpayers to pay tax at a fixed, lower rate and file simplified returns, making compliance easier and cost-effective.

Why Composition Scheme Introduced?

The primary objective behind the introduction of the Composition Scheme by the Government of India is to simplify the GST compliance process, ease the regulatory burden, and reduce the overall cost of compliance for small taxpayers. Recognizing that regular GST procedures involve multiple filings, detailed record-keeping and periodic payments-which can be time-consuming and costly for small businesses-the scheme offers a more streamlined alternative tailored to their capacity and resources.

Who can opt for the Composition Scheme?

A taxpayer engaged in the supply of goods can opt for the Composition Scheme under GST if their aggregate turnover does not exceed Rs.1,50,00,000/-in a financial year. However, a lower threshold limit of Rs. 75,00,000/- is prescribed for certain special category states, including Arunachal Pradesh, Mizoram, Nagaland, Sikkim, Manipur, Meghalaya, Tripura, and Uttarakhand.

Additionally, taxpayers registered under the Composition Scheme are permitted to provide services up to Rs.5 lakh or 10% of their turnover in the preceding financial year, whichever is higher, without breaching their eligibility for the scheme.

*Aggregate turnover calculated on All India basis of a person having same PAN

**Note: Value of export and inter-state supply is relevant only in cases where aggregate turnover is calculated for the preceding year, as a composition supplier cannot make export and inter-state supplies in the year in which he has opted for the composition scheme.

Ineligibility for the Composition Scheme

It is important to note that not all taxpayers are eligible to opt for the Composition Scheme, even if their turnover is within the prescribed threshold limits. The following categories of persons cannot avail the benefits of the scheme:

If a person engaged in the manufacturing of the following goods during the current or preceding financial year:-

• Fly ash bricks, fly ash aggregate or fly ash blocks
• Bricks of fossil meal and building bricks.
• Earthen or Roofing Tiles
• Ice cream and other edible ice.
• Pan Masala, all tobacco goods and tobacco substitutes.
• Aerated Water.

1. Persons making inter-State outward supplies or exempt supplies.
2. Casual taxable persons and non-resident taxable persons.
3. Persons engaged in services through e-commerce operators are required to collect tax at source (TCS) under Section 52 of the CGST Act.

However, person is eligible to opt composition scheme if he supplies goods through ECO on the following conditions:-

• ECO shall not allow any inter-state supply of goods by said person.
•  ECO shall collect TCS u/s 52 in respect of such supplies.
• ECO shall furnish details of such supply in form GSTR-8

1. Manufacturers or service providers of goods or services that have been specifically notified by the Government, based on the recommendations of the GST Council.
2. If aggregate turnover exceeds applicable limit (i.e. Rs.1.5 crores / Rs.75 lakhs or Rs.50 lakhs) during current financial year. In such a case person shall not be eligible to continue as a composition taxable person from that date.

How can a taxpayer opt for the composition scheme?

To opt for the composition scheme, a taxpayer has to file GST CMP-02 with the government. This can be done online by logging into the GST Portal. This intimation should be given at the beginning of every Financial Year by a dealer wanting to opt for Composition Scheme.

GST Rate for Composition Scheme

GST Returns filed by Composition Dealer

Additional Points

• Composition supplier cannot collect tax, he shall issue bill of supply rather than issuing tax invoice.
• Composition supplier shall mention on bill “composition taxable person not eligible to collect tax on supplies”.
• Composition supplier shall mention “composition taxable person” at every place of business.
• Composition supplier shall pay tax under RCM on supplies taxable under RCM.
• Composition supplier cannot claim input tax credit.
• All registered person having same PAN (means all business of same person) shall opt composition otherwise none of them will be eligible. If one of them becomes ineligible or opt out voluntarily, all of them will become ineligible for the scheme.

Conclusion

The Composition Scheme under the CGST Act, 2017, serves as a significant relief for small taxpayers by offering a simplified tax structure, reduced compliance burden, and lower tax rates. It is particularly beneficial for small manufacturers, traders, and service providers who wish to focus more on business operations and less on complex tax procedures.

However, while the scheme offers clear advantages, taxpayers must carefully assess their eligibility and comply with its conditions-such as not engaging in inter-state sales, not supplying through certain e-commerce platforms (unless conditions are met), and not exceeding turnover limits. Further, composition dealers must adhere to specific invoicing rules, cannot collect tax from customers, and are not entitled to input tax credit.

Choosing to opt for the Composition Scheme should be a well-informed decision, based on the nature of the business, turnover, and compliance capability. Proper understanding and regular review of eligibility criteria are essential to avoid penalties and ensure continued benefits under the scheme.