Chapter 5: Composition Scheme

The Composition Scheme under GST is designed to ease compliance for small taxpayers by allowing them to pay tax at a fixed percentage of turnover instead of at regular rates, and to file simplified returns.

Statutory Basis: Sections 10(1) to 10(4) of the CGST Act, 2017 read with Rule 3 to Rule 7 of the CGST Rules.

Eligibility Criteria:

Registered taxable person whose aggregate turnover in the preceding financial year did not exceed the specified limit:

₹ 1.5 crore for most States

₹ 75 lakh for Special Category States (North-Eastern States, Himachal Pradesh, Uttarakhand)

The person must not be engaged in:

Inter-State outward supply of goods or services

Supply through e-commerce operators collecting TCS under Section 52

Manufacture of goods notified as ineligible (e.g., ice cream, pan masala, tobacco)

May supply limited services (up to 10% of turnover in a State or ₹5 lakh, whichever higher, per Notification No. 14/2019-CT dated 7-Mar-2019).

Tax Rates under Composition Scheme:

Benefits: ✅ Reduced tax rate and easy computation ✅ Simplified quarterly returns (CMP-08) ✅ Lesser record-keeping and compliance burden ✅ Enhanced liquidity as tax is paid on turnover, not invoice basis

While the composition scheme is beneficial for small taxpayers, it comes with specific limitations:

Key Limitation: If turnover exceeds the prescribed limit during the year, composition benefit ceases from the day the limit is crossed, and normal registration provisions apply.

(a) Opting In for Composition Scheme

When to Apply:

New taxpayers can opt at the time of registration (Form GST REG-01).

Existing taxpayers can opt at the beginning of a financial year (Form GST CMP-02).

Steps:

File Form CMP-02 electronically before the commencement of the financial year.

File Form ITC-03 within 60 days to reverse input tax credit on stock and capital goods.

Pay tax under the scheme from the effective date.

Effective Date: From the first day of the financial year following the date of filing the option.

(b) Opting Out / Withdrawal

If the taxpayer’s turnover crosses the limit or becomes ineligible, he must file Form GST CMP-04 within 7 days of such event.

Regular provisions apply thereafter, and ITC on closing stock may be reclaimed via Form ITC-01.

Composition taxpayers enjoy simplified compliance but must adhere to specific rules and timelines.

Additional Compliance Points:

Maintain basic records of outward supplies and inward purchases.

File CMP-08 within 18 days from the end of the quarter.

File GSTR-4 by 30th April following the financial year.

Pay tax on total turnover out of own pocket (cannot charge customers separately).