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Overview of Composition schemes under Goods and Service tax Act

This article is an attempt to explain in brief about Composition Scheme, considering the recent changes recommended by the GST council in its last meeting.

Composition levy (Section 10) 

The composition levy is designed for small taxpayers whose turnover is up to 1.5 crores in case of supply of goods and Rs. 50 lakh in case of a supplier of services.

The purpose of this scheme is to reduce compliance cost for the small taxpayers. Moreover, this scheme is an optional one as eligible taxpayers can decide whether to opt for it or not.

A person who has opted for composition scheme is not entitled to collect any tax from the recipient on supplies made by him nor shall he be entitled to any credit of input tax.

A person who has opted for composition scheme has to issue Bill of supply instead of Tax Invoice.

The option of composition scheme will lapse as soon as turnover exceeds prescribed limit ie. 1.5 Crores for a supplier of goods and 50 lakhs for a supplier of services. 

GST Rates of Composition levy : 
Category                                 Rate of tax 
Manufacturers & Traders          1%
Restaurant services                  5%
Supplier of services                  6% (wef. 1st April, 2019)

Persons not eligible for composition scheme:
  • Person making any interstate supply of goods or services.
  • Supplier making any supply of goods through an electronic commerce operator (who is required to collect TCS)
  • Supplier whose aggregate turnover exceeds the limit prescribed for composition scheme.
  • Person making the supply of non-taxable goods.


Payment of tax under composition scheme (goods) :
  • Payment of GST is to be made by 18th of the month following the quarter for which payment is to be made.

  • Returns to be filed under composition scheme (goods) : GSTR-4 is required to be filed by every person who has opted for composition scheme. Like payment of tax under composition , the return is also to be filed on 18th of the month following the quarter for which return is to be filed. Also, an annual return GSTR-9A has to be filed by 31st December of the next financial year.

  • Payment and return under composition scheme (services) :  In this newly introduced scheme of composition levy, a supplier of services who has opted for this scheme is required to pay tax on a quarterly basis and file return annually along with simple declaration. This scheme shall be made operational from 1st April, 2019.


Advantages of composition scheme: 
  • Minimum compliance with respect to the filing of return, issuance of invoices.
  • Composition tax payers have to pay taxes at lower rates hence, they tend to have more liquidity in terms of working capital


Limitations of composition scheme: 

  • The taxpayers under this scheme have been debarred from availing input tax credit on supply received from the regular tax payer.
  • The taxpayers under this scheme can not collect tax from customer hence, they have to pay the tax out of their pocket.
  • Composition dealer is not allowed to issue tax invoice , he is required to issue a bill of supply
  • Composition dealer is not allowed to make taxable inter-state supply.

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