Composition Scheme under GST for traders/manufacturers of goods

As per the GST law, generally a taxpayer pays tax under normal rates i.e 5%, 12%, 18%, 28% and avails cenvat credit on inputs, input services and capital goods. The balance tax payable after claiming the cenvat is paid in cash to the government. Using this method all the procedural compliances have to be adhered to.

To decrease the burden of compliance and legal formalities, there is a provision under GST to register under composition scheme. This composition scheme is almost similar to the composition schemes prevalent in previous vat regime in almost all states. It gives the tax payer to pay tax  at a flat rate without claiming input credit and makes the procedural compliance very easy.

Persons Eligible to Register under Composition Scheme

  • Only persons who deals in goods can opt for such scheme.  Manufacturers can also opt for composition scheme, although manufacturers of ice-cream, pan masala and tobacco are not eligible for this scheme. There is a separate composition scheme for service providers. Although restaurants who does not serve alcohol can opt for the composition scheme under this section.
  • Persons whose Aggregate Turnover in the preceding financial year doesn’t exceeds Rs. 1.5 crore are only eligible under this scheme. For persons in state of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Himachal Pradesh this limit will be Rs. 75 lakhs.
    Aggregate turnover means aggregate value of all taxable and non-taxable supplies, exempt supplies and export of goods and/or services of a person having same PAN. GST is not included in the aggregate turnover. So if an individual open two firms and combined turnover is more than above mentioned limit then he can not take composition scheme.
  • If a person’s turnover exceeds the above mentioned limits in a financial year then from such day the person ceases to be in composition scheme and needs to pay tax under normal scheme from such day.
  • If a person wants to opt for the composition scheme, then all of his firms should opt for composition scheme. It is not allowed that some of his firms are in composition scheme and some are not. If one of the firms becomes ineligible for composition scheme, then all other firms also become ineligible.
  • Person should not make inter state sales of goods. Such person is only allowed to make intra-state sales, i.e., in the same state or union territory in which firm is registered.
  • Person should not make sales through any e-commerce portal like Amazon or Flipkart.
  • Casual taxable person and non-resident taxable person can not register under composition scheme.

Restrictions on persons registered under composition scheme

  • Such person can not make inter state sales.
  • Such person can not make sales of exempted goods.
  • Such persons shall not be entitle to input tax credit. Net tax payable =  Turnover multiplied by Composition Rate
  • Such person also breaks the input credit chain so it also cannot pass the input tax credit. In other words if another dealer purchases goods/services from composition dealer then such dealer also can not take input tax credit. So composition scheme is not suitable for wholesalers and B2B businesses.
  • Such person can not charge composition tax separately in the invoice issued.
  • Such person can not make sales through any e-commerce portal like Amazon or Flipkart.
  • Such person is liable to pay tax on purchases of goods or services from un-registered persons and on import of services under reverse charge. Such tax is be calculated using the normal GST rates and CGST and SGST will apply even if purchase is from outside state.
  • Such person should mention the words “composition taxable person, not eligible to collect tax on supplies” at the top of the bill of supply issued by him.
  • Such person shall mention the words “composition taxable person” on every notice or signboard displayed at a prominent place at his principal place of business and at every additional place or places of business.

You can find registration status and registration date of any registered person with GSTIN using our GSTIN Search and validator.

GST Rates under Composition Scheme

Restaurants not serving alcohol2.5%2.5%5%
All other traders0.5%0.5%1%

GST Return and Payment

Persons in composition scheme are required to file quarterly returns and also pay GST on quarterly basis. All other normal dealers are required to file monthly returns and also make monthly payment.

Due date for return filing and also for GST payment is 18 days from the end of the quarter. Such quarterly return is to be filed in Form GSTR-4 and the details of input supplies will be made available in Form GSTR-4A.

An annual return is also to be filed in Form GSTR-9A on or before 31st December after the end of the financial year.

Process to file GST return by composition dealer.

Benefits of registering under composition scheme

  1. Less compliance
    Composite dealer has to file quarterly returns and make quarterly payment while normal dealers has to file monthly returns and make monthly payments. Record keeping work also decreases to a substantial level.
  2. Less cost to customer
    If the person has a high margin, then the cost to the final customer also decreases if he opts for composition scheme.
    Example –     Normal Dealer Composite Dealer Purchase Price 50 50 GST @ 18% on purchase 9 9 Cost 50 59 Margin 50  50 Sale Price (Without GST) 100 109 GST @ 18% 18   Composition Fees    1.10 (109*1%/.99) Cost to customer 118  110.10 Composition Fees is assumed at 1%. Composition fees can not be charged by dealer from customer separately. In the above example, both dealers are enjoying a margin of Rs. 50 but the final cost to the customer is 9.33% less in case of sale by composite dealer.

Drawbacks of registering in composition scheme

  1. Such person can not make sales through E-commerce operator
    As discussed above the person registered in this scheme can not make sales through an e-commerce operator like Flipkart, Amazon etc. So composition scheme is not for those who are making online sales or planning in near future.
  2. Not suitable for wholesalers
    Such persons can not pass the input tax credit and any other dealer would not like to purchase from such person. If any dealer wants to purchase goods from such person, then it would amount to double taxation and will increase costs.
  3. Can not make sales outside state
    Such person can not make sales outside the state or union territory in which he is registered. This decreases the scope for the business.
  4. Heavy penalty
    If the person is not eligible to register under composition scheme but continue to do so then the officer may ask to deposit tax at standard rates and penalty equal to tax. If person makes a mistake in following the eligibility criteria then he may be liable for a very hefty penalty.

How to Apply for Composition Scheme

Procedure to opt

Any person who is registering directly under GST and wants to opt for composition scheme has to opt such option given in Part B of Form GST REG-01.

Any person who wants to opt composition scheme after registration has to file Form GST CMP-02 before the commencement of the financial year for which person wants to opt. And he also has to file Form GST ITC-03 within sixty days from the commencement of the relevant financial year. Such intimations should be filed only once at time of opting and not in all financial years.

The goods held in stock by him on start of financial year should not be purchased from an unregistered person and if such purchases was made then tax is to be paid on such stock.

Effective date for composition levy

The effective date for composition levy will be the beginning of the financial year for which intimation is filed in Form GST CMP-02. In case person opts for composition scheme at time of registration only the effective date will be the date of registration. Such person should also take due care that if his registration is not accepted under composition scheme then he may be liable to pay tax at full rate for the sales already made.

Opting out from the composition scheme

The person who doesn’t satisfy any condition for eligibility under this scheme has to pay tax at normal rates and issue tax invoice from the day such condition ceases to be satisfied. He is also required to file an intimation for withdrawal from the scheme in Form GST CMP-04 within seven days of such date.

The person who wants to withdraw from such scheme voluntarily has to file Form GST CMP-04 before the date of such withdrawal.

Every person who has filed GST CMP-04 or has been issued order for withdrawal of scheme under GST CMP-07 has to furnish GST ITC-01 containing details of the stock of inputs and inputs contained in semi-finished or finished goods held in stock by him on the date on which the option is withdrawn or denied, within 30 days, from the date from which the option is withdrawn or from the date of order passed in FORM GST CMP-07, as the case may be.

An intimation sent to any state or union territory or withdrawal of option by officer shall be deemed to be an intimation or withdrawal in respect of all other places of business registered on the same PAN.

Withdrawal of Scheme for a person by proper officer

Where the GST officer has reasons to believe that the registered person was not eligible to pay tax under section 10 or has contravened the provisions of the Act or these rules, he may issue a notice to such person in FORM GST CMP-05 to show cause within fifteen days of the receipt of such notice as to why option to pay tax under composition scheme should not be denied.

The person have to reply to the notice in Form GST CMP-06. The proper officer has to  issue an order in FORM GST CMP-07 within thirty days of receipt of such reply, either accepting the reply, or denying the option to pay tax under section 10 from the date of option or from the date of the event concerning such contravention, as the case may be.

Penalty in case of wrongful claim

If the officer founds that the person is not eligible to pay tax under this scheme and continuing to pay tax under this scheme then the person is liable to pay tax at normal GST rate and also a penalty equivalent to the tax payable. Proper officer should issue notice in Form GST CMP-05 to such defaulting person to show cause within fifteen days of the receipt of such notice as to why option to pay tax under composition scheme should not be denied. The person has to reply in Form GST CMP-06 and the proper officer has to issue order under Form GST CMP-07 within 30 days of such reply.

GST Forms

Form No.Description
GST CMP-01Intimation to pay tax under section 10 (composition levy) (Only for persons registered under the existing law migrating on the appointed day)
GST CMP-02Intimation to pay tax under section 10 (composition levy) (For persons registered under the Act)
GST CMP-03Intimation of details of stock on date of opting for composition levy (Only for persons registered under the existing law migrating on the appointed day)
GST CMP-04Intimation/Application for withdrawal from composition Levy
GST CMP-05Notice for denial of option to pay tax under section 10
GST CMP-06Reply to the notice to show cause
GST CMP-07Order for acceptance / rejection of reply to show cause notice

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Prateek Agarwal

Prateek Agarwal

I am Practicing Chartered Accountant from Jaipur and in practice for more than 9 years. I writes mainly for GST and Finance.

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