GST and its provisions

On 1 st July 2017 the GST taxation system was introduced in India and it has revolutionized the taxation system in India. The VAT regime had many problems and GST seems to have eradicated those problems like the cascading effect of taxes. However, one issue still remains with the GST system, the issue of high-maintenance compliance. In order to address this issue, the government introduced the Composition scheme under GST to ease the compliance load on small-scale enterprises. The main eligibility criteria for composition scheme is turnover of the company. Here, we will look at the advantages and disadvantages of composition scheme.

Composition Scheme Eligibility

 Not every enterprise can register under the composition scheme to avoid the intricate compliances of GST. There is an upper limit of the maximum turnover a company can have to be eligible for the composition scheme. Earlier, this limit used to be Rs 75 lakhs, however, the GST council raised this limit to Rs. 1.5 Crore in November 2017.

New taxpayers migrating to GST or any relevant small-scale business taxpayers have to face the dilemma of whether to opt for the composition scheme or not. With this comprehensive list of advantages and disadvantages, we help you to make an informed decision about the right taxation scheme for your business.

Advantages of Composition Scheme

Less Compliances

One of the most attractive features of the composition scheme introduced under GST is that it comes with reduced and less complex compliances. As a regular taxpayer under GST, an eligible taxpayer has to expend a lot of effort and time into filing GST returns as well as keeping up with other compliances. Under the composition scheme, a taxpayer is not subject to as strict compliance requirements as in the regular GST taxation system.

Under the composition scheme, a taxpayer has to file a total of 5 returns (4 Quarterly Returns as per GSTR 4 form and 1 Annual Return as per GSTR 9A form)

As for the regular taxpayers, they have to file annual monthly returns as well as an annual return. Regular Taxpayers have to file forms GSTR 1, GSTR 2, GSTR 3 as well as Annual Returns as per Form GSTR 9.

Lower Tax Rates

The tax rates for taxpayers opting for composition scheme have been structured in a way to cost less to these taxpayers. as compared to a regular taxpayer under GST.

Here are the Tax Rates for a dealer registered under the composition levy scheme of GST.

Category of Composition Dealer Tax Rate
Manufacturers and Traders 1% of  Turnover
Restaurants not serving alcohol 5% of Turnover

You can also check out the GST Rates and information about GST HSN Codes.

High Liquidity

Since a taxpayer who has opted for composition scheme has to pay taxes at lower rates, less amount of working capital goes towards tax payment . This ultimately means a high liquidity for the composition taxpayer, which can be used to inject capital into business growth and development.

Disadvantages of Composition Scheme

Prohibitions on  Sale of  Goods

One of the major drawbacks of registering under the composition scheme of the GST is that it prohibits the traders from doing sales outside of the state in which they have registered themselves. This means traders, businesses opting for the composition levy scheme of taxation under GST have to restrict themselves to selling their goods within the state.

This restriction also extends to export of goods which means composition taxpayers cannot even export their goods as that is considered as inter-state sale under new GST rules.

In addition to this, the goods produced cannot be sold via E-commerce platforms.
Traders are also not allowed to make the sale of exempted goods as these goods are outside the scope of the composition scheme.

Input Tax Credit Unavailable

Regular taxpayers registered under GST are eligible for availing and claiming Reconciliation of Input Tax Credit as per the Form GSTR 9C.

One of the major hindering factors in the composition scheme is that composition dealer cannot avail the input credit tax credit paid on inward supply as opposed to the regular taxpayer who reclaims the input tax at the point of sale.

This provision in effect nullifies the effect of GST as GST was introduced to remove the cascading effect of taxes and the double addition of taxes. In effect, this will increase the cost of the goods for the consumers.

Can’t Collect Taxes

A dealer/ business-owner under the composition levy scheme can’t collect taxes from the buyer of goods. In fact, composition dealers cannot even raise a tax invoice. The taxes to be paid under the composition levy scheme has to be borne by the trader himself.

Supply of Services Not Covered

If a trader/ business-owner is involved in the supply of services (except restaurant services) cannot opt for the composition scheme as the scheme does not permit for the supply of services and only trading of goods is allowed and as we said, composition taxpayers cannot be trade goods across state borders.

Hence, like everything within the GST taxation system, the composition has its benefits as well as pitfalls. Listing down the Advantages and Disadvantages of Composition Scheme can help you make an informed decision about what scheme to opt for. At LegalRaasta, we provide comprehensive GST registration services along with taxation services such as Income Tax Return Filing with our GST Suvidha Provider software Taxraahi. Create your account to start your Free Trial!

In addition to GST services, we pride ourselves with our services for corporates such as Company Registration, Trademark Search, Trademark Registration and FSSAI registration for restaurants. Call us with your requirements at +91-8750008585 or drop us an e-mail at [email protected].