Explanation:

The composition scheme is an alternative method of levy of tax designed for small taxpayers whose turnover is up to Rs 75 lakh — Rs 50 lakh in the case of eight north-eastern states and the hilly state of Himachal Pradesh. The objective behind it is to bring simplicity and reduce the compliance cost for small taxpayers.
The scheme is optional under which manufacturers other than those of ice cream, pan masala and tobacco products have to pay a 2% tax on their annual turnover. The tax rate is 5% for restaurant services and 1% for traders.
As per the Central GST Act, businesses are eligible to opt for the composition scheme if a person is not engaged in any inter-state outward supplies of goods and not into making any supply of goods through an electronic commerce operator who is required to collect tax at source.
While a regular taxpayer has to pay taxes on a monthly basis, a composition supplier is required to file only one return and pay taxes on a quarterly basis. Also, a composition taxpayer is not required to keep detailed records that a normal taxpayer is supposed to maintain.

Benefits of Registering under GST Composition Scheme

Reduced tax liability: The biggest benefit of registering under compounding scheme is the reduction in taxes. Tax rates under composition scheme are expected to be in the range of 1% to 3% which is considerably lower than standard tax rates under regular GST scheme.
Limited compliance: Another major advantage of composition scheme is that it promises to reduce the number of documents and processes required for compliance under GST law. Where a normal taxpayer will be required to file a minimum of 3 returns in a month, a compounding dealer will be asked to file only 1 return every quarter of a year.
Ease of doing business: Reduced tax liability and limited compliance will make it easy for small businesses to grow and flourish. On one hand reduced taxes will result in surge of profit margin while on the other limited compliance will reduce hassles allowing a party to focus more on his business

Limitations of GST Composition Scheme

No inter-state business: Tax benefits of GST compounding scheme are only given if a taxpayer carries his business within the boundaries of a state. A taxpayer registered under the composition scheme is barred from carrying out inter-state transactions and cannot affect import-export of goods and services. Thus, he is compelled to carry only intra-state transaction and limits the territory of his business.
No Credit of Input Tax: compounding scheme has any provision of input credit on B2B transactions. Therefore, if any taxable person is carrying out business on B2B model, such person will not be allowed the credit of input tax paid from the output liability. Also, the buyer of such goods will not get any credit of tax paid, resulting in price distortion and cascading effect.
Pay tax from your own pocket: Although the rate of composition/ compounding tax is expected to be very low, a taxpayer under this scheme is not allowed to recover such tax from his buyer. The taxpayer is not allowed to raise a tax invoice. Consequently, the burden of such tax is kept on the taxpayer himself and this has to be paid out of his own pocket.
Penal provisions: While taking advantage of GST Composition scheme, one needs to take utmost care as the penalty is severe. If taxpayer is found wrongly registered under this scheme while not fulfilling eligibility criteria and therefore avoiding normal taxes. Then the person will have to pay taxes along with penalty equal to 100% of taxes levied upon him.