Answer By law4u team
1. What is the Composition Scheme under GST? The Composition Scheme is a simplified GST compliance mechanism designed for small taxpayers. It allows them to: Pay GST at a fixed rate of turnover rather than the standard rates of CGST, SGST, or IGST. File fewer returns and maintain simpler records. Reduce compliance burden while remaining within the GST framework. Purpose: The government introduced the Composition Scheme to: Encourage small businesses to register under GST rather than avoiding it. Simplify tax compliance for businesses with low turnover. Help small traders, restaurants, and manufacturers focus on business operations rather than complex filings. 2. Eligibility Criteria A taxpayer can opt for the Composition Scheme if they meet certain conditions: 1. Annual Turnover Limit: As of 2026, a business with aggregate turnover up to ₹1.5 crore (₹75 lakh for special category states) is eligible. Aggregate turnover includes all taxable supplies, exempt supplies, and exports across India. 2. Type of Business Allowed: Manufacturers, traders, and restaurants (excluding alcohol for human consumption). Service providers can only join if turnover ≤ ₹50 lakh (as per recent amendments). 3. Not Eligible: Service providers with turnover above ₹50 lakh. Businesses dealing in inter-state supply. E-commerce operators and those required to collect TCS. Casual taxable persons and non-resident taxable persons. 4. Mandatory GST Registration: Even though compliance is simplified, a taxpayer must register for GST to use the composition scheme. 3. Tax Rates Under the Composition Scheme The scheme allows payment of GST at fixed rates on turnover, rather than on individual goods/services: Traders: 0.5% of turnover Manufacturers: 1% of turnover Restaurants (not serving alcohol): 5% of turnover Service providers (eligible under recent rules): 6% of turnover Note: These are aggregate rates, combining CGST and SGST, so businesses do not have to calculate separate taxes for each state. 4. Compliance Under the Composition Scheme Compared to normal GST, compliance is simpler but still mandatory: 1. Filing Returns: Taxpayers must file quarterly returns (CMP-08) instead of monthly returns. 2. Invoice Rules: Composition taxpayers cannot issue regular tax invoices. Must issue a bill of supply mentioning the GST is under composition scheme. 3. Restrictions: Cannot claim input tax credit (ITC) on purchases. Cannot make inter-state sales or supply through e-commerce platforms. 4. Transition Rules: If a taxpayer exceeds the turnover limit, they must migrate to normal GST. They must pay tax on the turnover from the beginning of the financial year at normal rates. 5. Advantages of the Composition Scheme Reduced Tax Burden: Fixed rate may be lower than regular GST for small businesses. Simplified Returns: Filing once a quarter instead of monthly. Less Record-Keeping: Only basic turnover records required. Encourages Compliance: Small businesses are more likely to register under GST. 6. Disadvantages / Limitations Cannot Claim Input Tax Credit: Purchases are not credited, which may increase cost for businesses with high input tax. Cannot Trade Inter-State: Only valid within a single state. Limited Eligibility: Service providers and e-commerce sellers often cannot join. Invoice Restrictions: Cannot issue regular invoices for input tax credit purposes, which may limit clients dealing with GST-registered buyers. 7. Practical Example Suppose a small bakery in Delhi has a turnover of ₹50 lakh in a year. If they are on the normal GST scheme, they would charge 5% GST on each sale, file monthly returns, and maintain detailed records. If they opt for the Composition Scheme, they would: Pay 5% of total turnover quarterly as GST. Issue a bill of supply instead of a tax invoice. Not claim ITC on ingredients like flour, sugar, and packaging. Simplify accounting and focus on running the bakery. This shows how the scheme reduces compliance burden for small businesses. 8. Modern Perspective (BNS/BNSS and Startups) Under BNS/BNSS frameworks for startups and small businesses, the composition scheme is heavily encouraged for micro and small enterprises. Many state GST portals now allow online migration to the scheme, quarterly e-filing, and online payment, reducing paperwork. Helps startups focus on growth rather than tax complexity. 9. Summary The Composition Scheme under GST is: A simplified tax scheme for small businesses with low turnover. Allows paying a fixed percentage of turnover as tax instead of full GST. Reduces compliance and record-keeping, making it ideal for traders, small manufacturers, and restaurants. Restrictions apply: cannot claim ITC, make inter-state sales, or serve large service-based businesses. Online compliance and BNS/BNSS digital frameworks make it easier for modern startups and small enterprises.
