Composition Scheme Under GST: Rules & Accounting

Small businesses in India often face heavy administrative compliance burdens. To support them, the government introduced the **GST Composition Scheme** u/s Section 10 of the CGST Act, offering a simplified tax option.

Understanding composition scheme limits, eligibility rules, and accounting procedures is essential to ensure compliance.

1. Composition Scheme Tax Rates (Rule 7)

Tax rates vary depending on the business category:

2. Eligibility and Restrictions

To qualify for the composition scheme, a taxpayer must meet several eligibility criteria:

• Turnover Limit: Aggregate annual turnover must not exceed **₹1.5 Crore** (or ₹75 Lakh in special category states) in the preceding financial year.
• No Inter-State Supplies: The taxpayer cannot make inter-state outward supplies of goods or services.
• No E-Commerce Sales: Businesses selling goods through e-commerce operators who collect TCS u/s 52 are ineligible.
• No ITC Claims: The taxpayer cannot claim Input Tax Credit on purchases.

3. Reverse Charge Mechanism (RCM) liabilities for Composition Taxpayers

Although composition taxpayers cannot claim ITC, they remain fully liable to pay GST under the **Reverse Charge Mechanism (RCM)** for specified inward supplies (such as goods transport agency (GTA) services or legal services).

Under Section 9(3) or 9(4) of the CGST Act, composition taxpayers must pay this RCM tax in cash at standard rates (e.g. 5% or 18%). Because ITC is blocked, this paid RCM tax is capitalized or expensed directly to the P&L statement, increasing transaction costs.

4. Case Study: Accounting for a Composition Trader

A retail trader registered under the composition scheme records a quarterly turnover of **₹60,00,000**.

Under the composition accounting rules:

1. The trader cannot charge GST to customers. Instead of a tax invoice, they issue a **Bill of Supply** with the heading "Composition taxable person, not eligible to collect tax on supplies".
2. The flat tax rate is 1% of turnover, amounting to **₹60,000** (₹30,000 CGST + ₹30,000 SGST).
3. In books, the ₹60,000 tax liability is recorded as an expense (e.g. *GST Composition Tax Expense*) rather than an output tax adjustment.
4. The journal entries required to record this quarterly liability in Tally:

Entry: Booking Quarterly Composition Tax Liability (F7 Journal)
Debit:  GST Composition Tax Expense Ledger ₹60,000
Credit: CGST Composition Payable Account          ₹30,000
Credit: SGST Composition Payable Account          ₹30,000

5. Forensic Audit & Under-Declared Turnover Checks

Tax authorities run forensic checks to identify composition taxpayers who split operations across multiple firms to stay under the ₹1.5 Crore threshold.

Auditors match PAN cards to aggregate turnover across all registered entities. If the combined turnover exceeds the limit, the composition scheme is cancelled, and the business faces standard tax rates with penalties u/s Section 73.

6. Setting Up Composition Scheme in Tally Prime

To configure composition tax features natively in Tally: