GST Composition Scheme

By Registrationwala

26th April 2017


Goods and Services Tax is set to bring along a new regime of business compliance in India. Large organizations have the requisite resources and expertise to address these requirements. Startups and Small and Medium Enterprises (SMEs) on flip side may struggle to comply to these provisions. To resolve such scenarios, government has introduced composition scheme under GST, which is merely an extension of current scheme under VAT law.GST Composition Scheme also contains an option for a registered taxable person having turnover less than the limit to pay tax at a lower rate respect to certain specified conditions.

What is GST Composition Scheme?

GST arrangement plan will be an alternative accessible on an enrolled taxpayer which necessitates with advise of those tax authorities of as much purposeful to make enrolled under the scheme. Every tax system prescribes several actions which need to be taken by businesses to ensure compliance with statutory provisions. Things like periodic payment of taxes, filing timely returns and maintaining prescribed records are necessary steps in a tax system for corporate taxpayers.In case the registered taxpayer fails to comply with the same he would be treated a normal tax payer and administered accordingly. However, small business owners find it overwhelmingly challenging to deal with such requirements of the law due lack of knowledge and expertise. 

For small businesses, a lot of people state administrations bring procurements on their vat framework for installment of an arrangement demand Toward little organizations. This ensures greater compliance without the need for maintaining copious records. Although such a system is missing in Service Tax laws. The One Nation One Tax Scheme (GST) which promises to club all the indirect taxes into one also boasts a composition scheme for small businesses. The GST Composition scheme will make consistence with assessment laws bother spare to qualified organizations opting for the scheme.

Turnover and Rate of Tax under GST Composition Scheme

Section 8 of the Model GST Law contains provisions for Composition Scheme permitting the tax payer to opt for payment of GST as a fixed percent on turnover instead of paying tax under regular provisions of the law. A registered taxpayer, whose aggregate turnover does not exceed Rs. fifty lakh in the preceding financial year pay tax at a rate not less than 2.5% for manufacturer and 1% for others.

Eligibility for GST Composition Scheme

GST model law prescribes stringent eligibility criteria for the composition scheme. Thus, taxpayers need to make voluntary registration every year for getting the benefits of GST Composition Scheme. However, if at any time the taxpayer crosses the minimum turnover limit of Rs. 50 lakh then he will be transferred to the regular scheme.Further, many of the small businesses that come under the following criteria would also not qualify for the scheme who:

  • Supplies goods not livable under the Act
  • Supplies services
  • Makes a supply of goods other than intra state ie interstate or import/ export
  • Makes a supply of goods through Electronic Commerce Operator ie Ecommerce and liable to collect taxes
  • Manufactures such goods as may be notified

Further, it is also if in case a taxable person has different business segments having same PAN as held by the taxable person, he must register all such businesses under the scheme.

If an individual has different business segments such as:

  1. Textile
  2. Electronics and accessories
  3. Groceries

Then he must register all the above segments collectively under the composite scheme or simply opt not for the scheme.

Finally, concerning illustration for section 16, the individuals merchandise also administrations with respect to which piece charge need been paid (under section 8) don't qualify for input tax credit.

No Tax No Credit

  • No Credit of Input Tax

 There has been no provision of input credit on B2B transactions. Thus, if any taxable person is carrying out business on B2B model, such person will not be allowed the credit of input tax paid from the output liability. Also, the buyer of such goods will not get any credit of tax paid, resulting in price distortion and cascading. Scheme holder cannot claim input tax credit even if he makes taxable purchases from a regular taxable dealer. This will further bring about shortages under misfortune of business, similarly as purchasers might keep away from buys starting with taxpaying under composition scheme.Ideally, the taxable amount might be included to the composite duty payer’s expense

No Collection of Tax

Though the rate of composition tax is kept very nominal at 1% or 2.5%, a taxpayer under composition scheme is not allowed to recover such tax from his buyer, as he is not allowed to raise a tax invoice. Consequently, the burden of such tax is kept on the taxpayer himself and this must be paid out of his own pocket. Thus, the fundamental principle of limited compliance and tax burden on small taxpayer is defeated here.

Lesser Compliances

A normal taxpayer is required to submit a minimum of three returns on monthly basis and one yearly consolidated return i.e. 37 returns in a whole year non-filing of which will attract penalty. Under the scheme a tax payer is required to file one return in each quarter, he need not worry on record keeping and focus more on his business. Since a scheme holder will be not obliged to pay charges at standard rates, he will be not at risk to issue an assessment receipt instead issue a bill for supply making this helpful choice as lesser points are needed.

Strict Penal provisions

Under GST if in the opinion of proper officer, it is found that a taxable person not being eligible for the scheme have opted for the scheme, he shall be liable to pay differential taxes along with penalty and provisions of demand and recovery will apply to him.

This means that before opting for the scheme a taxable person must be free from any or all doubts of his eligibility for the scheme to avoid such penal provisions. However, if a small taxpayer who has limited knowledge of tax laws and compliances makes any mistake under composition scheme, he shall be liable to pay tax at standard rate on his total turnover along with a penalty which will be equal to the total tax liability.

Merits of the scheme

Below are some of the prominent reasons why you should choose to get registered as a supplier under the composition scheme:

  • Limited Compliance: Lesser compliance w.r.t. furnishing of returns, maintenance of books of records, issuance of invoices more focus on business
  • Limited Tax Liability: on comparison with regular taxpayers, person taxed under Composite Scheme will be liable to pay tax at a rate not less than 2.5% for manufacturer and 1% in any other cases instead of a standard rate of 18%
  • High Liquidity: Unlike normal tax payers, tax payers under Composite Scheme will be liable to pay taxes at a lower rate resulting in lesser chunk on his working capital.

Demerits of the scheme

The demerits of registering under Composite Scheme by a taxable person are as follows:

  • Limited Territory for Business: A taxpayer registered under the composition scheme is barred from carrying out inter-state transactions and cannot affect import-export of goods and services.
  • No Credit of Input Tax: Under the scheme, the credit of input tax paid on the purchases of inputs from a normal tax payer will not be allowed.The purchaser of products supplier by scheme holder will additionally not appreciate assessment credit bringing about cost distortion, cascading, passing of benefits of the business of scheme holders.
  • No Collection of Tax: Though the rate of tax for a scheme holder is lower the burden of such tax is kept on the taxpayer himself, leading to higher cost of sales.
  • Penal Provision:As per the model GST Law, assuming that the tax payer who has a while ago been provided for Enlistment under scheme may be discovered to be unqualified under the scheme or those reasonably allowed sooner might have been erroneously granted, then such taxpayer will be liable to pay the differential tax along with a penalty
  • Not applicable to the supplier supplying goods through E-commerce.

GST Composition Scheme Transition Provision 

As current regime provides for the composition scheme subject to certain conditions, GST Composition Scheme transition provision provides for allowance of credit of eligible duties and taxes on inputs held in stock subject to certain conditions.

However, a taxable person may be discovered not qualified to this scheme after that the tax authorities can force a punishment equivalent to the measure for duty for such person alongside as much his tax liability. Hence, most extreme consideration necessities to be made when opting for this scheme and paying taxes.


1. The Composition Schemes are available in Service tax and State Vat laws as on date. They are different for different kind of Suppliers. So the schemes need to be made in reference to nature of business besides the size of business as is proposed in the Model law.

2. The amount of composition levy needs to be fixed up in reference to value of input supplies in case of Supplier of goods as expecting these suppliers to be maintaining records of their turnover is expecting impossibility. The record of his input supplies will already be available in the GSTN from the figures submitted by his suppliers.

3. The amount of levy need to be fixed as percentage of taxable turnover only and not as percentage of aggregate turnover.


GST Composition Scheme