Composition Scheme

Definition

The Composition Scheme under GST is a simplified tax payment and compliance framework designed for small taxpayers in India. Governed by Section 10 of the CGST Act, 2017, it allows eligible businesses to pay GST at a fixed percentage of their turnover instead of the standard tax rates, and to file quarterly returns (GSTR-4) instead of monthly returns.

In the Indian context, the scheme is particularly significant for small traders, manufacturers, and restaurants that want to reduce their compliance burden. The turnover threshold for eligibility is Rs. 1.5 crore for goods suppliers and manufacturers (Rs. 75 lakh for special category states), and Rs. 50 lakh for service providers under the notification for composition levy on services. The tax rates under the scheme are substantially lower, 1% for manufacturers (0.5% CGST + 0.5% SGST), 1% for traders, 5% for restaurants, and 6% for other service providers.

While the scheme simplifies compliance, it comes with significant restrictions. Composition taxpayers cannot collect tax from customers (they must absorb the tax as a cost), cannot claim Input Tax Credit on their purchases, cannot make inter-state outward supplies, and cannot supply through e-commerce platforms. These trade-offs make the scheme suitable primarily for businesses with limited supply chains and predominantly local customer bases.

Key Points

• Available for businesses with aggregate turnover up to Rs. 1.5 crore for goods (Rs. 75 lakh in special category states) and Rs. 50 lakh for service providers
• Tax is paid at concessional rates: 1% for manufacturers and traders, 5% for restaurants, 6% for other service providers
• Composition taxpayers file a quarterly return (GSTR-4) and an annual return (GSTR-9A) instead of monthly GSTR-1 and GSTR-3B
• Cannot collect GST from customers: the tax must be borne by the business as a cost of doing business
• Cannot claim Input Tax Credit on purchases, which can make the scheme disadvantageous for businesses with high input costs
• Inter-state outward supplies are not permitted; the business can only supply within the state of registration
• Must pay tax under reverse charge mechanism at normal rates on applicable inward supplies, separate from the composition tax