Excerpts from https://taxvenue.

com/gst-composition-scheme/

What is the GST composition scheme?

GST composition scheme is a scheme under GST for small businesses belonging to the unorganized
sector with aggregate turnover less than Rs. 1.5 crore (less than 75 lakhs for North Eastern states).
The business owners registered under this scheme are called compounding vendors/dealers, and
these vendors pay tax at a lesser rate. Also, they have fewer returns to file compared to normal
taxpayers.

Features of Composition Scheme:

 Business owners registered under the composition scheme pay tax at a much lesser rate
compared to normal business owners. The tax paid by the compounding vendors will be equal to
at least 1% of the business’s annual turnover.
 A compounding dealer cannot collect tax or claim input tax credit for the supplies delivered to
their clients. Due to this reason, bills of supply are issued for sales transactions, instead of tax
invoices.
 Manufacturers of goods, dealers, and restaurant owners (applicable only to restaurants that do
not serve alcohol) can opt for composition scheme.
 The composition rates are different based on the type of business.
 For traders and manufacturers, it’s 1%.
 For restaurant sector, it’s 5%.
 The registered business owner under Composition Scheme will have to file one return each
quarter by 18th of the month following that quarter.
 If a business owner has 5 different businesses under the same PAN, he must register all the
businesses under Composition Scheme or opt out of the scheme.
 For transactions under the reverse charge mechanism, the compounding dealers will be taxed at
the normal GST rate.
Eligibility criteria
To be eligible, a business must have an annual turnover of less than Rs. 1.5 crore (less than 75 lakhs
for North Eastern states) and sell goods only within their own state.

The following individuals cannot opt for Composition Scheme:

 The casual taxable person or a non-resident taxable person
 The supplier who supply exempt goods
 Suppliers who provide services
 E-commerce operators/aggregators
 Suppliers involved in inter-state transactions
 Manufacturers of ice-cream, pan masala and tobacco & tobacco substitute
What are the returns associated with Composition Scheme?
Businesses that have registered for the composition scheme will need to file GSTR-4, a quarterly
return specifically designed for them. The return for a particular quarter should be filed on or before
the 18th of the month following that quarter. Example, if you are filing the GSTR-4 for the July-
September quarter, you have to file it before the 18th of October.

In addition to GSTR-4, businesses should also furnish GSTR-9A (consolidated annual return for
compounding vendors) as part of the compliance process.

What happens when a business opts out of the composition

scheme?
A business owner availing composition scheme can opt out of the scheme, and instead, choose the
normal tax scheme with the benefit of ITC. The credit will be calculated based on the input, semi-
finished and finished goods held in stock.

Note: You can switch between a normal vendor or compounding vendor only once during a
particular financial year.
Disqualification and Penalty
If tax authorities believe that a business is wrongfully enrolled or not eligible, they may disqualify
the business from the composition scheme or demand a penalty equal to the tax amount owed. In
case of late filing of GSTR-4, the business owner will be fined Rs. 100 per day to a maximum amount
of Rs. 5,000/-. Also, not furnishing returns for 3 consecutive tax periods may result in cancellation of
registration by the tax authorities.