How would the Composition Scheme work under GST?

In 2017, GST was introduced by the current Government to improve business productivity and reduce the burden of cascading taxes for business owners.  The total revenue collection stood at Rs. 11.77 Crore for the year 2018-19.

The successful implementation of GST encouraged the government to launch an initiative for the huge number of small and medium scale businesses operating across the nation.

India has over 50 million small businesses, which contribute to almost 29% of the country’s economic output. Government of India introduced the composite scheme to support these businesses. GST Composition scheme is an alternative scheme for taxation to encourage small business. This scheme was made available from 1st April 2019 to dealers who provide service. It allows SMEs and MSMEs to pay tax at a reduced rate. 

Eligibility criteria

Any small business whose annual turnover is up to Rs. 1.5 Crore is liable to pay GST under composition scheme.  For a dealer or trader doing business in the North-Eastern states and Himachal Pradesh, the annual turnover limit is Rs. 75 Lakh. Traders or manufacturers with multiple businesses under the same PAN can be registered as composition dealers as well.

How to avail the GST composition scheme

 A dealer should file GST CMP-02 or CMP-O1 if he/she wants to avail the composition scheme.  The scheme is usually applied from the month after it is filed. For example, if someone files CMP-02 in the NOVEMBER 2019, the scheme will be applicable from December 2019.

CMP-01 needs to be filed when a taxpayer opts for GST composition scheme for the upcoming financial year. If he/she decides to opt for the scheme in the middle of a financial year, then CMP-02 is filed. Both of these can be filed through the GST Portal/GSTN online.

The GST rates under composition scheme differ for various types of business. The actual payment constitutes of tax on reverse charges and GST on supplies.

The GST rates under composition scheme are –

  • Traders and other suppliers have to pay 1% of their turnover.
  • The restaurant is required to pay 5% of their turnover.
  • From 1st April 2019, business providing services have to pay 6%.
  • 2% of turnover for businesses in the manufacturing sector.

The composition scheme has several advantages –

  1. Lesser tax burden.
  2. Fewer formalities to complete the process, like maintaining and issuing invoices, maintaining books of record, returns).
  3. Narrow tax liability.
  4. Traders or dealers with small businesses will pay tax at a flat rate every quarter instead of paying it at a normal rate every month.

How to calculate GST under composition scheme-

GST under composition scheme can be calculated easily using the formula-

  • GST amount = (original cost X GST%)/100
  • Net price = Original Cost + GST amount

For example, if the value of goods is 15,000 and applicable GST rate is 18%, then the net price will be calculated as 15,000 + (15,000 X 18%) = 15,000 + 2700 = 17,700. However, the trader or manufacturer may need to take into account other factors to calculate GST.  Here is a detailed guide on how one can calculate GST easily.

The trader can also use online tools like GST calculators. This tool is very useful since it eliminates the hassle of manually calculating and remove the chances of human-made mistake.  

How to use GST calculator-

  • Enter the net value of product or service at the designated space.
  • Enter the GST rate.
  • To know the final price of product and services, click ‘Calculates’.

Since the tax amount is low for the small businesses under the composition scheme, they can use their surplus amount to take out affordable Business Loans from lending institutions like Bajaj Finserv. These business loans can aid them in various ways. They can use it to fulfil all their working capital requirements; they can buy new inventory and pay for operating costs. Apart from these, there are other benefits of MSME loans.

Low tax brackets help SMEs and MSMEs comply with all the necessary tax liabilities, offering them to abide by the law at all times. They can also present these returns in case they need to avail credit from lenders. 

Small business owners can learn more about GST composite scheme which will help to grow their business. Apart from this scheme, they can also follow several other tips to save tax for small business owners.