Understanding the Composition Scheme under GST – A Simple Guide with Examples
Understanding the Composition Scheme under GST—A Simple Guide with Examples
If you are a small business owner or someone who has just started a business, you might be worried about complex GST rules, filing multiple returns, and maintaining loads of paperwork. That’s where the Composition Scheme under GST comes as a relief.
Let’s understand everything you need to know about the Composition Scheme in GST in a simple and easy-to-understand manner, along with practical examples.
What is the Composition Scheme?
The Composition Scheme is a simple and hassle-free option under GST for small taxpayers. It allows them to pay GST at a fixed rate on their turnover instead of going through the regular GST process (which includes collecting GST from customers and claiming Input Tax Credit).
In simple terms:
Under the Composition Scheme, you pay a small percentage of your total sales as tax, and you don’t need to get into the complex GST formalities.
Who Can Opt for the Composition Scheme?
✅ Eligible businesses include:
-
Traders (dealers) selling goods
-
Manufacturers
-
Restaurants (not serving alcohol)
-
Service providers (with some conditions)
🛑 Not Eligible:
-
Businesses supplying goods inter-state (i.e., outside their own state)
-
Businesses supplying through e-commerce platforms like Amazon, Flipkart
-
Businesses dealing in non-taxable goods (like alcohol, petrol)
-
Casual taxable persons or Non-resident taxable persons
Turnover Limit for Composition Scheme
The turnover limit depends on the type of business and the state:
| Type of Business | Annual Turnover Limit |
|---|---|
| Goods (Trader/Manufacturer) | ₹1.5 Crore (₹75 Lakhs for NE states) |
| Restaurants (Non-alcoholic) | ₹1.5 Crore |
| Service Providers | ₹50 Lakhs |
Tax Rates under Composition Scheme
| Type of Business | GST Rate under Composition |
|---|---|
| Manufacturers | 1% (0.5% CGST + 0.5% SGST) |
| Traders (dealers) | 1% (0.5% CGST + 0.5% SGST) |
| Restaurants (non-alcoholic) | 5% (2.5% CGST + 2.5% SGST) |
| Other service providers | 6% (3% CGST + 3% SGST) |
Example to Understand Better
🧾 Example 1: Retail Shop Owner (Trader)
Mr. Raj owns a small grocery store in Kolkata. His annual turnover is ₹40 lakhs. He registers under the Composition Scheme.
Since he is a trader:
-
His tax rate is 1%
-
So, he will pay ₹40,00,000 x 1% = ₹40,000 as GST for the whole year.
-
He doesn’t have to collect GST from his customers or give them a GST invoice.
🧾 Example 2: Service Provider
Ms. Priya runs a small beauty salon in Jaipur with an annual turnover of ₹30 lakhs. She opts for the Composition Scheme for service providers.
-
Her tax rate is 6%
-
She pays ₹30,00,000 x 6% = ₹1,80,000 in GST.
-
Again, no need to charge GST separately from customers.
Benefits of the Composition Scheme
✅ Simple compliance – Less paperwork, no need to file monthly GST returns
✅ Lower tax liability – Fixed and small percentage
✅ No need to maintain detailed records
✅ Peace of mind – No tension of issuing GST invoices or collecting taxes
Drawbacks of Composition Scheme
⚠️ Cannot claim Input Tax Credit – You pay GST on your purchases, but cannot claim it
⚠️ Cannot make inter-state sales
⚠️ Cannot issue tax invoices – Only bill of supply
⚠️ Tax to be paid even on exempt goods sold
Returns to be Filed under Composition Scheme
Very minimal compliance:
| Return Name | Frequency | Description |
|---|---|---|
| GSTR-4 | Yearly | Annual return with details of turnover and tax paid |
| CMP-08 | Quarterly | Statement for payment of tax |
Bill Format under Composition Scheme
Since composition dealers cannot charge GST, they issue a Bill of Supply, not a Tax Invoice. It should mention:
-
"Composition Taxable Person, not eligible to collect tax on supplies"
-
GSTIN (if registered)
-
Details of the buyer, seller, and item
-
Total amount
How to Apply for the Composition Scheme?
-
You must be registered under GST.
-
File Form GST CMP-02 on the GST portal.
-
File this before the beginning of the financial year.
-
You can switch to regular GST later if needed.
Should You Opt for It? – Final Thoughts
The composition scheme is best suited for:
-
Small businesses with limited turnover
-
Who sell within their own state
-
Who do not want complex GST compliance
-
Who do not deal with large businesses that ask for tax invoices
💡Pro Tip:
If your clients are end consumers, and you don't need to issue GST invoices, the Composition Scheme can be a smart and stress-free option.
Conclusion
The GST Composition Scheme is a blessing for small businesses in India. It makes tax payments easier, cheaper, and compliance-friendly. If you qualify, consider opting in and focusing more on your business than paperwork.
👉 Still Confused?
Drop your questions in the comments or contact us at –91-6033526962
We’ll help you decide what’s best for your business!
Comments
Post a Comment