Navigating Simplicity: Understanding the GST Composition Scheme in India

The Goods and Services Tax (GST) composition scheme stands as a beacon of simplicity in the complex world of taxation, especially tailored to alleviate the compliance burden for small businesses operating in India. This scheme, defined by specific annual turnovers, offers a streamlined approach to taxation. Let’s delve into the intricacies of the GST composition scheme to comprehend its nuances and benefits.

Eligibility Criteria and Turnover Thresholds

Under the provisions of the GST law, businesses with an annual aggregate turnover of up to ₹1.5 crore (₹75 lakh for special category states) are eligible to opt for the composition scheme. However, for service providers (excluding restaurants), the turnover threshold is set at ₹50 lakh, and they are subject to a 6% GST rate. The composition scheme extends the advantage of paying GST at subsidized rates of 1%, 5%, or 6%, depending on the nature of the business, be it in manufacturing, trading, restaurant services, or brick manufacturing.

Exclusions and Compliance Requirements

While the reduced rates under the composition scheme offer a sigh of relief for eligible businesses, it’s crucial to understand the exclusions. These reduced rates do not apply to transactions falling under the reverse charge mechanism. In such instances, businesses must adhere to the normal GST rates, ranging from 5% to 18%. Moreover, specific goods like ice cream, pan masala, and tobacco are explicitly excluded from the composition scheme, as determined by the GST Council.

Compliance under the composition scheme introduces a set of requirements distinct from those applicable to regular GST dealers. Compliance, as highlighted by Sanjay Chhabria, Director, Indirect Tax at Nexdigm, includes quarterly GST payment through Form GST CMP-08, due by the 18th of the month following the quarter. Additionally, composition dealers must file Form GSTR-4 annually, with the deadline set at April 30 after the conclusion of the financial year.

Restrictions and Prohibitions

The simplicity of the composition scheme comes with certain conditions and limitations:

Goods not Taxable under GST: There are restrictions on the supply of goods not taxable under GST, such as alcohol.

Unified Registration under Same PAN: If a taxpayer operates various business segments under the same PAN, all such businesses must register under the composition scheme.

Prohibitions on Various Activities: Composition dealers are prohibited from collecting GST from customers, availing input tax credit, making inter-state supplies, dealing in non-taxable goods and services, and collaborating with e-commerce operators that collect tax at source.

Invoice Dynamics

A distinctive feature of the composition scheme is that dealers cannot issue a tax invoice since they are not authorized to collect GST from their customers. Instead, they must furnish a bill of supply, explicitly stating “composition taxable person, not eligible to collect tax on supplies.”

Ineligibility and Primary Business Nature

Certain categories of taxpayers are ineligible for the GST composition scheme, including those with aggregate turnovers surpassing the prescribed threshold, engaged in specific supplies, and manufacturers and traders of restricted goods like ice cream, pan masala, or tobacco. Importantly, for businesses involved in both manufacturing and trading, the eligibility is determined based on the primary nature of the business.

Conclusion

The GST composition scheme emerges as a pragmatic solution for small businesses, simplifying their tax journey. By understanding its eligibility criteria, compliance requirements, and limitations, businesses can make informed decisions that align with their operational nature. While it may not be a one-size-fits-all solution, the composition scheme provides a tailored approach for businesses to navigate the labyrinth of GST compliance with relative ease.