The Goods and Services Tax (GST) system can feel complex for small businesses. To make compliance easier, the government introduced the Composition Scheme under GST. This scheme reduces tax rates, lowers compliance, and allows small taxpayers to focus on business growth instead of heavy paperwork.
Let’s explore how the GST Composition Scheme works, who can opt for it, and what benefits it provides.
What is Composition Scheme Under GST?
The Composition Scheme is a simplified tax system designed for small taxpayers. Instead of paying GST at standard rates, eligible businesses can pay tax at a fixed percentage of their turnover.
👉 For example, a small trader with an annual turnover of ₹80 lakh can pay a lower composition tax rather than filing monthly GST returns.
Eligibility for Composition Scheme
Not every business can use this scheme. The following conditions apply:
-
Annual turnover must be ₹1.5 crore or below (₹75 lakh for some states).
-
Only manufacturers, traders, and certain service providers can opt in.
-
The scheme is voluntary — businesses choose it if they qualify.
However, businesses engaged in inter-state supplies, e-commerce, or manufacturing of certain goods cannot opt for the scheme.
Tax Rates Under Composition Scheme
| Category of Taxpayer | Tax Rate |
|---|---|
| Manufacturers & Traders | 1% of turnover |
| Restaurants (not serving alcohol) | 5% of turnover |
| Service Providers (eligible) | 6% of turnover |
👉 Note: These taxpayers cannot charge GST separately on invoices. Instead, they pay a fixed composition tax from their turnover.
Benefits of Composition Scheme
Small businesses enjoy several advantages:
-
Lower Tax Rates: Reduces overall tax burden.
-
Simplified Compliance: Only quarterly returns instead of monthly.
-
Improved Cash Flow: Less money blocked in tax payments.
-
Ease of Doing Business: Less paperwork and simplified records.
Limitations of Composition Scheme
While the scheme has benefits, it also has restrictions:
-
No Input Tax Credit (ITC) available.
-
Cannot issue a tax invoice with GST separately.
-
Not available for businesses making inter-state sales.
-
Limited eligibility based on turnover.
Therefore, businesses must weigh both benefits and drawbacks before opting for it.
Example of Composition Scheme Calculation
A trader in Delhi earns an annual turnover of ₹80 lakh. Under the Composition Scheme, tax payable will be:
This trader pays only ₹80,000 as GST for the entire year, instead of filing monthly returns at higher tax rates.
Conclusion: Should You Opt for the Composition Scheme?
The Composition Scheme under GST offers a simple and cost-effective option for small taxpayers. Although it restricts input credit and interstate trade, it significantly reduces compliance burden.
👉 Not sure if the Composition Scheme is right for you? Contact Us today and get expert advice tailored to your business.