Introduction: A Comprehensive Guide to GST Composition Scheme Compliance
Navigating the GST regime can be complex, especially for small taxpayers aiming to minimize compliance burdens and tax liability. The GST Composition Scheme offers a simplified framework for eligible businesses, allowing them to pay tax at a fixed rate on turnover while avoiding the complications of regular GST filings.
However, transitioning from a regular taxpayer to a composition dealer involves precise steps, statutory forms, and strict timelines. Filing Form GST CMP-02, submitting stock intimation, understanding eligibility conditions, and ensuring post-conversion compliance are all crucial parts of this process.
This guide provides answers to 22 carefully curated and frequently asked questions (FAQs) related to the GST Composition Scheme. These FAQs will help you find all possible solutions and clarify every aspect of opting for Composition Levy in a legally accurate, practical, and professional manner. Whether you’re a newly registered taxpayer, a migrated dealer, or an existing GST registrant planning to convert, this article covers everything you need to know under the GST framework.
Read on to understand the complete compliance roadmap, avoid penalties, and make informed decisions for your business.
1. Who Is Eligible to Opt for the Composition Scheme Under GST?
Under Section 10 of the Central Goods and Services Tax (CGST) Act, 2017, the Composition Scheme is available to eligible registered taxpayers whose aggregate turnover in the preceding financial year does not exceed ₹1.5 crore (₹75 lakh for special category states, subject to notification).
Eligible categories of taxpayers include:
- Manufacturers of goods (other than notified goods),
- Traders or dealers (i.e., suppliers of goods),
- Restaurants not serving alcoholic liquor for human consumption.
Additionally, under Notification No. 2/2019 – Central Tax (Rate) dated 07.03.2019, service providers (and mixed suppliers providing goods and services) with an annual aggregate turnover not exceeding ₹50 lakh may opt for a composition-like scheme under Section 10(2A). These taxpayers are liable to pay GST at a flat rate of 6% (3% CGST + 3% SGST) and are not eligible to claim input tax credit.
Further, a special composition scheme was notified via Notification No. 3/2022 – Central Tax (Rate) dated 31.03.2022, applicable to manufacturers of bricks (including building bricks, fly ash bricks, roofing tiles, fossil meal bricks, etc.), allowing them to pay GST at 6% without ITC.
The following persons are not eligible for the composition scheme:
- Manufacturers of notified goods: ice cream, pan masala, or tobacco products,
- Suppliers engaged in inter-state outward supplies,
- Casual taxable persons and non-resident taxable persons,
- Suppliers of non-taxable goods under GST (e.g., alcoholic liquor for human consumption),
- Registered persons whose aggregate turnover exceeds the prescribed threshold, and
- Persons supplying goods through e-commerce operators liable to collect tax under Section 52 of the CGST Act.
2. What Is the Process to Opt into the Composition Scheme?
To opt for the Composition Levy, a taxpayer must file Form GST CMP-02 on the common GST portal (www.gst.gov.in), subject to the following conditions:
- The taxpayer must be registered under GST and meet the eligibility criteria laid out in Section 10 of the CGST Act and relevant rules and notifications.
- The option must be exercised at the beginning of the financial year to avail composition benefits for the full year.
Intimation must be made electronically, and the taxpayer must also furnish Form GST ITC-03 within 60 days from the date of exercising the option, declaring details of inputs held in stock, semi-finished and finished goods.
3. What Are the Key Benefits of the GST Composition Scheme?
Taxpayers opting into the composition scheme are entitled to the following compliance and operational benefits:
- Simplified tax compliance: Composition dealers are required to file quarterly statements (CMP-08) and annual returns (GSTR-4) instead of monthly returns like GSTR-1 and GSTR-3B.
- Lower tax liability: GST rates under the scheme are significantly lower than regular rates (e.g., 1% for traders, 5% for restaurants, 6% for certain service providers).
- No requirement for detailed records: Composition taxpayers are not obligated to maintain elaborate books of account or detailed invoice-wise records.
- Improved liquidity: Lower tax rates mean businesses retain more working capital for operations.
These benefits make the scheme particularly attractive for small businesses and startups seeking ease of compliance.
4. What Are the Disadvantages or Limitations of the Composition Scheme?
While the composition scheme simplifies compliance, it has several significant limitations, as outlined below:
- Restriction on inter-state trade: Composition dealers cannot engage in inter-state outward supplies. This limits their business expansion potential across state boundaries.
- No Input Tax Credit (ITC): Composition taxpayers are not eligible to claim ITC on inputs or input services, increasing the overall cost of procurement.
- Restricted business segments: Taxpayers under this scheme cannot supply non-taxable goods such as alcohol, and cannot sell goods via e-commerce operators.
- Invoice format restrictions: Dealers must issue a bill of supply (not a tax invoice), and cannot charge GST separately to customers, affecting B2B clients who seek ITC.
Thus, the scheme is suitable only for specific business models primarily targeting local consumers and end-users.
5. How Is Aggregate Turnover Calculated for Composition Scheme Eligibility?
The term aggregate turnover has been defined under Section 2(6) of the CGST Act. For the purpose of evaluating eligibility for the composition scheme, the aggregate turnover is computed on an all-India basis, across all GST registrations under the same Permanent Account Number (PAN).
Components included in aggregate turnover:
- Value of taxable supplies (excluding inward supplies on reverse charge basis),
- Exempt supplies,
- Exports of goods or services or both, and
- Inter-state supplies between distinct persons having the same PAN.
Not included in aggregate turnover:
- Inward supplies on which tax is payable under reverse charge,
- GST, cess and other taxes charged on outward supplies.
Accurate computation of aggregate turnover is critical, as exceeding the prescribed threshold results in ineligibility and liability for normal taxation, along with associated interest and penalties.
6. What Is the Applicable Tax Rate for Composition Dealers?
The tax rates for persons registered under the Composition Scheme vary depending on the nature of the business. These rates are prescribed under Section 10 of the CGST Act, 2017, and related notifications. The applicable rates are on turnover in the State or Union Territory and are inclusive of both CGST and SGST.
Type of Business | CGST | SGST | Total GST Rate |
Manufacturers and Traders (Goods) | 0.5% | 0.5% | 1% |
Restaurants (not serving alcoholic liquor) | 2.5% | 2.5% | 5% |
Service Providers (under Section 10(2A)) | 3% | 3% | 6% |
Manufacturers of Bricks (including fly ash bricks, fossil meal bricks, roofing tiles, etc.) | 3% | 3% | 6% |
These rates are fixed and the registered person is not allowed to charge GST separately in the invoice.
7. What Is the Effective Date of the Composition Levy?
The effective date of levy under the composition scheme depends on the mode of registration or migration:
- Existing registered taxpayers opting into the scheme must file Form GST CMP-02 prior to the commencement of the financial year. In such cases, the composition levy becomes effective from the beginning of the financial year.
- For new applicants registering under GST via Form GST REG-01, the composition levy becomes effective from the date of registration, as determined under Rule 10(2) or 10(3) of the CGST Rules, 2017.
It is important to file Form ITC-03 within 60 days of opting into the scheme to reverse any input tax credit on stock held.
8. Is Reverse Charge Liability Applicable to Composition Dealers?
Yes. Even though a composition dealer pays tax at a lower rate on their own outward supplies, they are still liable to pay GST under reverse charge wherever applicable under:
- Section 9(3) of the CGST Act, or
- Section 9(4), if notified.
The tax under reverse charge must be paid at the applicable rate for the supply, not at the composition rate. Also, no input tax credit can be availed by a composition dealer on GST paid under reverse charge.
This ensures that composition dealers remain compliant with all applicable reverse charge provisions.
9. Are Composition Dealers Required to Maintain Detailed Records?
No. One of the key benefits of the Composition Scheme is simplified compliance. Composition taxpayers are not required to maintain elaborate records, books of account, or document-wise reporting that a regular registered person must maintain.
However, they must maintain basic records of:
- Outward supplies,
- Stock register,
- Purchase bills,
- Payment vouchers for reverse charge transactions.
These basic documents may be verified during audit or inspection.
10. Can Composition Dealers Avail Input Tax Credit (ITC)?
No. Composition scheme taxpayers are not eligible to claim input tax credit on any purchases, inward supplies, or expenses under any circumstances.
This is in accordance with Section 10(4) of the CGST Act, which specifically bars composition taxpayers from availing ITC on inward supplies, whether for goods, services, or capital goods.
This restriction is also extended to GST paid under reverse charge.
11. Can Composition Dealers Issue Tax Invoices?
No. A composition dealer cannot issue a tax invoice, as they are not permitted to collect tax from recipients.
Instead, they are required to issue a Bill of Supply, as per Rule 49 of the CGST Rules, which should clearly mention:
- That tax has not been charged separately,
- That the supplier is under the Composition Scheme (e.g., “composition taxable person, not eligible to collect tax on supplies”),
- Their GSTIN and other standard details.
This ensures transparency for the recipient and compliance with GST invoicing rules.
12. What Returns Are Required to Be Filed by a Composition Dealer?
A person registered under the composition scheme must file the following returns:
- Form CMP-08: A quarterly challan-cum-statement of self-assessed tax payable, to be filed by the 18th of the month following the quarter.
- Form GSTR-4: An annual return, containing a consolidated summary of outward supplies and tax paid during the year. It must be filed by the 30th of April following the end of the financial year.
Note: Monthly GSTR-1 and GSTR-3B are not applicable to composition dealers.
13. Can a Taxpayer Opt into the Composition Scheme at Any Time During the Year?
No. The option to opt into the composition scheme must be exercised before the beginning of the financial year.
- Existing registered persons must file Form CMP-02 before the start of the financial year for which they wish to avail the composition scheme.
- This declaration is valid for the entire year and cannot be opted in mid-year.
- Service providers eligible under Section 10(2A) must follow the same timeline and process.
Late filing or opting in during the year is not permissible under the GST law.
14. How can a regular taxpayer switch to the Composition Scheme under GST?
A taxpayer who is currently registered under the regular scheme can shift to the Composition Scheme by submitting Form GST CMP-02 on the GST portal before the start of the financial year for which the scheme is to be availed.
Steps to apply for Composition Scheme on the GST Portal:
- Log in to the GST portal using your credentials.
- Navigate to Services > Registration > Application to Opt for Composition Levy.
- Fill in the required details as per the form and submit the application.
15. Is it mandatory to submit Stock Intimation? How is it filed?
Yes, furnishing Stock Intimation is mandatory when opting for the Composition Scheme.
Taxpayers must declare the stock details, including inward supplies from unregistered persons, as held on the day prior to opting for the scheme. This information must be submitted within 30 days from the date of opting into the Composition Scheme.
Although approval from tax authorities is not required for opting in, if the taxpayer is found ineligible or fails to submit stock details, they may be removed from the scheme through proper proceedings. Authorities may initiate actions if any discrepancies are found in stock declarations or ITC reversals.
16. What is meant by Stock Intimation by migrated taxpayers opting for Composition Scheme?
Taxpayers who were migrated into the GST system and wish to opt for the Composition Scheme are also required to file Stock Intimation. This includes details of stock and inward supplies from unregistered persons held on the day before the date of composition levy applicability.
The deadline for submitting this intimation is within 90 days from the appointed date or as extended by the department.
17. Who is required to file Form CMP-03? Why can’t I see the option?
Form CMP-03 is meant exclusively for migrated taxpayers whose effective date of opting into the Composition Scheme is 1st July 2017.
The form will only be visible if all the following criteria are satisfied:
a) You are a migrated taxpayer.
b) The composition scheme was opted with 1st July 2017 as the effective date.
c) You have submitted Form CMP-01 for opting in.
18. Does the Composition Scheme application or Stock Intimation require approval from the GST Department?
No. Both the application for opting into the Composition Scheme and the Stock Intimation form are not subject to approval by GST authorities. However, failure to comply with the eligibility conditions or misreporting may lead to appropriate proceedings by the department.
19. What if I fail to submit Stock Intimation within the prescribed time?
If the stock details are not filed within 90 days (or any extended period) from the appointed date, the tax officials will be alerted. This non-compliance may result in denial of the Composition Scheme and initiation of relevant legal action by the department.
20. How do I file my stock details on the GST portal? Where can I access the form?
To file stock details:
- Log in to the GST portal.
- Go to Services > Registration > Stock Intimation for opting Composition Levy.
You’ll find the form under the Registration section after logging in.
21. Can I submit the stock intimation without paying tax immediately?
No. Submission of stock intimation is not allowed without payment of the applicable tax, unless the tax liability is Nil.
22. Do I need to file Stock Intimation for every GSTIN under my PAN?
Yes, you are required to file separate stock intimations for each GSTIN linked to your PAN.
Conclusion: Ensure Seamless Transition and Ongoing Compliance under GST Composition Scheme
Opting for the GST Composition Scheme is a smart move for businesses seeking simplified compliance and reduced tax rates. However, proper execution is critical to avoid regulatory issues. Filing the correct forms such as CMP-02 and submitting stock intimation within the prescribed timelines is not just a statutory formality—it is a legal requirement under the GST law.
This set of 22 detailed FAQs ensures you are well-equipped with all necessary information to initiate and manage your transition to the Composition Scheme smoothly. Whether it’s understanding eligibility, procedural steps, or compliance obligations, this guide enables you to stay compliant, avoid notices, and maximize benefits under the scheme.
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