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Tata Capital > Blog > Loan for Business > Understanding The GST Composition Scheme: Simplifying Tax Compliance For Small Businesses

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Understanding The GST Composition Scheme: Simplifying Tax Compliance For Small Businesses

Understanding The GST Composition Scheme: Simplifying Tax Compliance For Small Businesses

Are you a small business owner in India looking to streamline your tax compliance and enhance your financial flexibility? Recent changes to the Goods and Services Tax (GST) composition scheme might just have what you need. 

In this article, we will break down the intricacies of the GST composition scheme, shedding light on its advantages, eligibility criteria, and potential drawbacks. Whether you're a manufacturer, trader, or service provider, understanding the nuances of this scheme could be the key to smoother operations and enhanced liquidity.

What is the GST Composition Scheme?

The GST composition scheme simplifies tax for small businesses. Compared to regular GST, it offers two key advantages: reduced paperwork and lower tax liability. Normal taxpayers file multiple returns, but with the composition scheme, it's streamlined to just one quarterly return (GSTR 4) and one annual return (GSTR 9A). You'll pay tax at a fixed rate, ranging from 1% to 6% of your turnover. 

For example, goods manufacturers pay just 1%. It's a significant relief, simplifying tax procedures for small businesses.

Ease of Filing

Simplified filing is the core of the composition scheme. For small business owners, it's a game-changer, freeing up time and energy to focus on growth. With only one quarterly and one annual return to handle, it's a breath of fresh air, especially for businesses without dedicated finance departments or tax experts. Reduced compliance requirements make tax compliance straightforward and accessible.

Eligibility for the GST Composition Scheme

As a taxpayer, you can opt for the GST composition scheme if your annual turnover falls within the specified limits. It's essential to note that the GST composition limit takes into account the turnover for all businesses registered under a particular PAN. In general, this scheme caters to small manufacturers, traders, and service providers.

For Manufacturers and Traders

If you're a newly registered business, your turnover should not exceed Rs. 1.5 crore in the current financial year. If you've already registered, your turnover must not have exceeded Rs. 1.5 crore in the previous financial year.

For Restaurants Not Serving Alcohol

The above terms apply here as well, with a focus on annual turnover not exceeding Rs. 1.5 crore for both newly registered and already registered businesses.

For Service Providers

If you're a newly registered business in the service sector, your turnover should not exceed Rs. 50 lakh in the current financial year. If you've already registered, your turnover must not have exceeded Rs. 50 crore in the previous financial year.

Additionally, the GST composition scheme has special provisions for businesses in specific states. It limits the Rs. 1.5 crore cap to Rs. 75 lakh for businesses in these special category states. If your turnover surpasses the specified composition scheme limit in a financial year, you'll have to transition to the regular GST payment mechanism to comply with the GST composition scheme rules.

Who Cannot Avail the Composition Scheme GST

Certain categories of businesses and individuals are excluded from benefiting from the composition scheme in GST. These include:

Individuals or businesses who supply goods through an e-commerce portal operator that collects tax at the source.

Non-resident taxable persons or casual taxable persons.

Manufacturers of ice cream or other edible ice without cocoa as additives.

Manufacturers of pan masala and tobacco products and substitutes.

Individuals or businesses who have purchased goods from unregistered suppliers.

Suppliers involved in the supply of goods that are exempt under the GST act.

Suppliers involved in the supply of goods and services.

Benefits of the Composition Scheme in GST

Reduced Tax Payments: The composition scheme's fixed tax rate significantly lowers the tax burden for businesses. Manufacturers, traders, and service providers pay minimal taxes, e.g., just 1% of turnover for goods manufacturers.

Lower Compliance Requirements: Unlike regular taxpayers who juggle multiple returns, businesses under the composition scheme file only one quarterly return (GSTR 4) and one annual return (GSTR 9A). This simplifies the process and reduces administrative burdens.

Increased Liquidity: Reduced tax liability results in higher liquidity. More cash on hand helps maintain a healthy cash flow, facilitating business operations and growth.

Tax Rates in the Composition Scheme GST

In the GST composition scheme, tax rates are simplified for small businesses. Manufacturers and traders pay a fixed 1% tax on their turnover, with 0.5% allocated to Central GST (CGST) and 0.5% to State GST (SGST). Restaurants not serving alcohol are charged a 5% tax, with the same division between CGST and SGST. Service providers under the scheme face a 6% tax, split into 3% for CGST and 3% for SGST.

These rates are significantly lower than those for regular GST taxpayers. However, it's crucial to remember that businesses under this scheme cannot charge GST separately to their customers, and the tax paid directly affects their finances, as they do not receive an input tax credit. Understanding these rates is essential for assessing the financial implications of the composition scheme.

How to Apply for the GST Composition Scheme

Applying for the Composition Scheme Under GST is a hassle-free process that can be completed online via the official GST portal. Begin by filing Form GST CMP-02, serving as an intimation of your readiness to join the scheme.

During the application, you will need to provide essential documents such as details of your annual turnover and other relevant financial information. After submitting the necessary documents and Form GST CMP-02, the tax authorities will review your application. If it aligns with the eligibility criteria and the documents are accurate, you will receive approval to join the scheme.

The application process is designed to be straightforward, aiming to encourage small businesses to embrace the composition scheme's benefits without excessive bureaucratic hurdles. Once approved, your business can start enjoying simplified tax compliance and reduced tax liability, enhancing your financial operations.

Conclusion

Whether you're a manufacturer, trader, or service provider, consider the Composition Scheme Under GST as a valuable tool to simplify your tax compliance and enhance your financial flexibility. As you explore this transformative taxation framework, your journey towards a streamlined financial future begins. The Composition Scheme Under GST is not just a financial strategy, it's a lifeline for small businesses, offering a pathway to a more straightforward and prosperous financial future.

To further support your operations, you can also explore financial solutions provided by TATA Capital. These services can help you bolster your finances, manage working capital, and pave the way for smoother business operations.

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