What is the Composition Scheme Under GST?

The Goods and Services Tax (GST) was introduced to make the calculation and collection of indirect taxes simpler and faster. However, there are still many aspects of the new regime which are confusing for many. One of these is the Composition Scheme.

What is the composition scheme?

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The composition scheme is a special scheme under the GST regime that was designed for the small businesses so that they can avoid a large portion of the formalities and pay the taxes in a simpler manner.

Any business whose annual turnover is below Rs. 1.5 crores can opt for the composition scheme. However, for the north-eastern states like Sikkim, Arunachal Pradesh, etc. and Himachal Pradesh the limit is Rs. 75 lakhs.

What are the pros and cons of the composition scheme?

The following are the main benefits of the composition scheme:

  • The compliance requirements for a business under this scheme are easy to fulfill. The taxpayer doesn’t have to reconcile the purchase invoices and can pay only a certain percentage of the total sales instead.
  • The applicable taxes under the scheme are quite low. The CGST and SGST for the manufacturers stand at 1%, and for suppliers at 1%.
  • While the normal taxpayers have to file a minimum of 3 tax returns per month, those under the composition scheme have to file only one return per quarter i.e. every 3 months.

There are some disadvantages of the composition scheme as well, which are:

  • Businesses under the composition scheme can’t claim Input Tax Credit, which is the refund of the taxes paid to the business owners by the government
  • Large businesses prefer dealing with other standard businesses under the GST regime. This is because they can’t ITC benefit from the composition scheme businesses.
  • Composition scheme businesses can’t supply goods through e-commerce stores.
  • They also can’t carry out inter-state transactions.

Overall, it’s hard to say how the pros stack up against the cons. For some businesses, the former outweighs the latter, and for some, it’s the other way around.