Top 10 GST Composition Scheme Rules in India 2025?

In this blog, we will understand the 10 GST composition scheme rules mentioned below for small businesses to benefit from this simplest form of taxation. The GST composition scheme has been set up to help small traders in India pay GST easily and without getting into the complexities of goods and service tax.

This means that through this scheme, people get exemptions, fewer taxes to pay, and fewer formalities, which is suitable for small traders, manufacturers, and service providers to expand their businesses. However, certain standards need to be followed, and certain requirements must be met in order to benefit from this scheme. Knowledge of these rules is important for non-problematic compliance and to avoid penalties.

What is the GST Composition Scheme?

The GST Composition Scheme is a simplified method of taxation created under the GST Act in India. It aims to help businesses, traders and service providers whose turnover is less than a specified amount to deal with their taxes more easily. For this purpose, the tax administration has provided this scheme where taxpayers can choose a fixed lower rate of GST on turnover in lieu of the normal GST rates.

Simplified Compliance: The following includes quarterly tax payments and returns in Form COMP-08 filed.

Input Tax Credit: Tax is levied on purchases that cannot be claimed as credit.

Restrictions: This includes supplies between two different states and involves electronic commerce.

What are the Top 10 GST Composition Scheme Rules in India?

1. Eligibility Criteria

2. Tax Rates

3. Filing and Compliance

4. Restrictions on Input Tax Credit (ITC)

5. Display Requirements

6. Payment and Reporting

7. Opting In and Out of the Scheme

8. Ineligibility for Inter-State Supplies

9. Non-Applicability to Specific Goods and Services

10. Transitioning Rules

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1. Eligibility Criteria

1. Turnover Limit:

• Goods: Total ₹1.5 crore (₹75 lakh for special category states).

• Services: Up to ₹50 lakh.

2. Type of Business:

• It is available to manufacturers, traders, and restaurants, but it is not involved in the sale of liquor.

• Service providers under the scheme.

3. Exclusions:

• They do not make inter-state supplies or sell through e-commerce platforms.”

• Manufacturers of ice cream, tobacco or pan masala should not apply in an organisation.

4. GST Registration: Both registration and option can be done only through GST CMP-02.

5. Restrictions:

• Cannot take credit of input tax (ITC).

• Unable to issue tax invoices or collect tax.

2. Tax Rates

Tax rates under the GST Composition Scheme are lower than the normal GST rates and vary depending on the type of business:

• Can be applied only in the state where the goods or services are supplied.

• Invoice prices cannot be fixed as with GST; firms pay them as per the level of total turnover.

• No ITC is available to FPIs for their expenditure incurred in the India market.

1. Manufacturers and traders

• Tax rate: 1% of turnover.

• Description: Applicable to goods currently produced or imported within the state.

2. Restaurants (as producers of food and beverages).

• Tax rate: 5% of turnover.

• Description: Applicable only to restaurants that do not serve any alcoholic products.

3. Children with intellectual disability and their families who provide service (Special Composition Scheme).

• Tax rate: 6% of turnover.

• Description: For its initial rollout, the system was targeted at small service providers whose annual turnover is up to ₹50 lakh.

4. Mixed Supply Business

• Tax Rate: This means that tax is levied as per the individual category of supply.

3. Filing and Compliance

The GST composition scheme is applicable only to those taxpayers who agree to follow the simplified filing and compliance norms. Below are the key details:

1. Quarterly return filing: Submit CMP-08 by the end of the month or by the 18th of the next month for the quarter preceding the current quarter.

2. Annual return: File GSTR-4 on or before April 30th each year.

3. Bill of supply: Issue bills which are called composition taxable persons instead of tax invoices (Steuerzüteilungschein).

4. Tax payment: Annual tax should be paid on a quarterly basis in proportion to turnover.

5. Minimum record maintenance: Record any records of fixed assets, any accountability or sales and purchases at a minimum level.

6. Transaction restrictions: Raw meat and its products cannot be sold between two states or through electronic commerce.

7. Business display: It is necessary that the words “Composition Taxable Person” are clearly branded on the premises.

8. Late filing penalty: Late fee of ₹200/day (up to ₹5,000) and 18% interest for the year on past due amount.

9. Transition rule: When turnover exceeds that limit, inform the required authorities and use the normal scheme.

10. Audit exemption: GST composition taxpayers are not required to undergo a GST audit.

4. Restrictions on Input Tax Credit (ITC)

The GST composition scheme does not allow any ITC on purchases of goods, services, or capital goods in trading businesses. This means that they are not in a position to recover the GST amount paid on inputs through tax on output. The rate of tax compliance is low in this scheme, and there are certain filing procedures to be completed, but this comes at the cost of surrendering ITC. Also, the ‘consumers’ of a business engaged in the composition scheme can get credit from ITC with respect to purchases made from them, as long as they have valid tax invoices. 

• Simplified compliance: This means that the scheme has replaced ITC with lower tax rates and easier filing for consideration by the small businesses involved, hence the trade-off. 

• Tax liability calculation: This tax is paid based on a certain percentage of turnover. While this system is easy to implement, it does not allow for claiming much input tax.

5. Display Requirements

Under the GST Composition Scheme, the traders and manufacturers who are registered must follow some display rules and regulations for GST and let the customers know about their tax status. Here are the key display requirements:

• “Composition Taxable Person” Display: The taxable person has to show “Composition Taxable Person” at the place of business.

• Invoices: Any bill of supply shall bear the following words: “Composition Taxable Person, not authorised to collect tax on supplies.”

• Signage: Clear notice must be placed to notify the customers at the business location.

6. Payment and Reporting

The payment and reporting mechanism in the GST Composition Scheme is such that the burden on small businesses is reduced to the maximum. The key details about payment and reporting are as follows:

1. Payment of tax:

• 1% of turnover is for manufacturers and traders, 5% for restaurants, and 6% for all other service providers based on turnover.

• It is payable on the 18th of the month following the quarter.

• No Input Tax Credit (ITC).

2. Reporting requirements:

• Please file CMP-08 on a quarterly basis two weeks after the end of the quarter or on the 18th of the following month.

• The annual return GSTR-4 should be filed before December 31st of the next financial year.

3. Invoice: Supply instead of tax invoice.

4. Method of payment: Made electronically through the GST portal using preferred modes like specific banking and debit card facilities.

5. Penalty: It will attract interest on late payment and a fee of Rs 50 per day for late filing of returns.

7. Opting In and Out of the Scheme

1. Opting In:

• Eligibility: Belonging to special states which include Jammu & Kashmir, Himachal Pradesh, Uttarakhand TN and Kerala), it is registered for businesses having turnover up to ₹1.5 crore or ₹75 lakh for special states or ₹50 lakh for service providers.

2. Procedure:

• During Registration: The composition scheme for GST registration is included in the REG-01 form, and hence, a person must choose this option.

• During the Financial Year: The organization must submit GST CMP-02 before the completion of 30 days from the beginning of the year.

3. Opting Out:

• Compulsory Exit: If turnover crosses the limit or if involved in ineligible activities like making interstate supplies supplying special goods.

• Voluntary Exit: File GST CMP-04 to opt out whenever you want.

• After exit: Start filing new GST returns, GSTR-1 and GSTR-3B and start paying regular standard GST rates.

8. Ineligibility for Inter-State Supplies

In India’s GST composition scheme, a trader cannot supply any taxable goods between states. This means that businesses registered under the composition scheme of the Act can only supply exempted goods and services within the same state or union territory.

• No inter-state sales or e-commerce business.

• This limits the market growth to other areas of the same state.

• There is a requirement, but it is not implemented in ATO: No input tax credit for inter-state purchases.

• If a business makes supplies between states, it is required to move to the normal GST regime.

9. Non-Applicability to Specific Goods and Services

Certain commodity and service sectors in the GST composition scheme are not selectable for the business department seeking registration under the scheme. This is to ensure that only those with less complex businesses and those with lower tax liability opt for the scheme. Here are the main goods and services that are excluded from the scheme:

• Manufacturers of specific goods: cigarettes and bidis, pan masala, ice cream and almonds, etc.

• Inter-state supplies: There are restrictions with respect to inter-state sales and services from or to other states.

• Service providers: Excluded except those with turnover less than Rs 50 lakh (for which there is a special scheme for services).

• E-commerce operators: They cannot opt ​​for this scheme.

• Exempted goods/services: Goods that are exempted or attract zero per cent tax.

• Reverse Charge Mechanism (RCM): Companies that have control over the RCM cannot participate in the operation of this scheme.

10. Transitioning Rules

The rules that govern the GST composition scheme also explain the process and conditions for registration to the scheme from the existing normal scheme. These rules facilitate compliance with its tax laws and easy transition when filing with the government. Here is how businesses transition:

1. Opt-in: Use GST CMP-02 for registration if turnover is below ₹ 1.5 crores and ₹ 75 lakh for special states.

2. Exit: Exit if turnover crosses the prescribed limit or for cross-the-state sales. If you have filed GST CMP-04, file GST CMP-04 and switch to regular GST at the beginning of next year.

3. Rejoin: This means turnover should go below the prescribed limit and then re-apply through GST CMP-02.

4. ITC transition: It is advisable to pay regular GST on stock and file GST ITC-01 for input tax credit.

5. Return Filing: After exit, file GSTR-3B and GSTR-1 monthly.

Stock Tax: Pay GST on stock on exit.

6. Final Return: GSTR-10 should be filed within 3 months from the date of exit.

Conclusion 

In fact, the GST composition scheme is very beneficial for small businesses as it has very easy provisions and relatively low tax rates. However, it has its own set of rules and regulations, as well as requirements that any business must fulfil to be considered compliant with this programme. Some of them are the requirement of registration based on turnover, restrictions on the availability of input tax credits and restrictions on the sale of goods from one state to another. To exit and enter this scheme, one needs to apply ahead of time and fill out forms like GST CMP-02 and GST CMP-04. Despite the fact that it brings ease in taxation, the business must first look at the eligibility criteria and then plan for their future expansion before joining the GST composition scheme.

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