Composition Scheme: Benefits, Restrictions, and Recent Changes

Composition Scheme— The Composition Levy is an alternative method of levy of tax designed for small taxpayers whose turnover is up to prescribed limit. The objective of Composition Levy scheme is to bring simplicity, ease the compliance burden and reduce cost of compliance for the small taxpayers. The scheme is optional.

It essentially provides for a turnover tax regime for such taxpayers, with facility for filing of return on annual basis along with quarterly payment of tax.

Eligibility of Composition Scheme for Manufacturer/ Supplier of Goods—10(1) of CGST Act

Initially composition scheme was available only for supplier of Goods, but in 2019 to benefit small service provider, composition scheme also introduces for service providers.

Eligibility of Composition Scheme for Service providers— 10(2A) of CGST Act

Benefits of the Composition Scheme

Reduced Compliance Burden— under the normal scenario, a taxpayer under GST has to file monthly / quarterly returns and yearly returns. Further, he has to upload details of invoices issued by him during the period. For small suppliers and business, it may be difficult. Whereas under Composition Levy scheme, quarterly payment of tax (CMP-08) and yearly filing of return have been prescribed.

Lower Tax Liability— another advantage of being registered with Composition Levy scheme is the rate structure. While most of the goods fall under 5% or 18% bracket, Composition taxpayer need to pay only 1% of supplies made by them.

Simplified Record-Keeping— Under Composition levy, less detailed documentation compared to regular scheme which is ideal for small businesses with local operations.

High Liquidity— for normal taxpayers, most of the working capital is blocked as Input Tax Credit because the taxpayer can avail ITC only if his supplier has filed the return. The supplier has to pay tax at standard rate and the Credit of Input Tax will be availed only when his supplier files the return. In Composition Levy scheme, the taxpayer need not worry about his supplier filing return as he cannot take the credit and will pay tax at nominal rate.

Restrictions on certain supplies— A taxpayer who has opted to pay tax under section 10(1) or 10(2A) shall-

• Not engaged in making any supply of goods or services which are not leviable (Petrol, Diesel) to tax under this Act.

• Not engaged in making any inter-State outward supplies of goods or services

• Not engaged in making any supply of services through an electronic commerce operator who is required to collect tax at source under section 52

• Not a manufacturer of Ice cream and other edible ice, whether or not containing cocoa, Pan masala, Aerated Water, Tobacco and manufactured tobacco substitutes, Fly ash bricks; Fly ash aggregates; Fly ash blocks, Bricks of fossil meals or similar siliceous earths, Building bricks, Earthen or roofing tiles

• neither a casual Taxable person nor a non-resident Taxable person

Limitations of GST Composition Levy Scheme:

There are some limitations under GST Composition Levy scheme, which a taxpayer must be aware of before opting for the scheme. These are:

1. No credit of Input Tax: Any taxpayer registered under Composition Levy scheme will not be eligible to take Credit of Input Tax paid on purchases. Also, the buyer of taxpayer’s supplies will not get the credit of taxes paid by taxpayer.

2. No Inter-State business: The major drawback of the scheme is that the taxpayer cannot deal in inter-state supplies or affect exports of goods and services. He is barred from performing such actions which limit his territory for expansion and can only conduct local or intra-State transactions.

3. Pay tax form own pocket: Since the taxpayer is not allowed to charge tax from his buyer, he has to pay tax out of his own pocket, despite the rate being low. He is not even allowed to issue a tax invoice, resulting in the burden on the taxpayer to pay tax.

Recent Changes & Developments in Composition Scheme

Extended due date for filing GSTR-4— From FY 2024-25, GSTR-4 shall be required to be furnished by the registered person till 30thof June following the end of relevant financial year, earlier it was 30th of April. Refer CGST (Amendment) Rules, 2024 dated 10.07.2024 w.e.f. 10.07.2024.

Option to pay tax under the composition scheme for registered persons supplying goods through E-Commerce Operator— Finance Act 2023 removed the condition restricting registered persons engaged in supplying through electronic commerce operators from opting for the Composition Levy.

Exclusion of Specific Goods (Fly Ash Bricks): As of 18th July 2022, manufacturers of “Fly ash bricks; Fly ash aggregates; Fly ash blocks” are no longer eligible to opt for the composition levy under section 10(1).

Conclusion

The scheme is quite beneficial to small suppliers and intra-state local suppliers as it prevents them from various procedural compliances and gives a hassle free working environment. The scheme is best suited when:

• Customers are end consumers (not ITC-oriented)

• Business is local

• Margins are sufficient to absorb GST cost

• Compliance simplicity is a priority over ITC benefits