The Goods and Services Tax (GST) Composition Scheme is a simplified tax regime designed for small taxpayers to ease their compliance burden. It offers a hassle-free way to manage taxes without dealing with complex GST regulations. However, it is not without its limitations. In this blog, we’ll explore the key advantages and disadvantages of the GST Composition Scheme to help businesses decide whether it’s suitable for them.

What is the GST Composition Scheme? and its Advantages

What is the GST Composition Scheme?

The GST Composition Scheme is an alternative tax regime for small businesses, traders, and manufacturers with a turnover of up to ?1.5 crore. Under this scheme, taxpayers pay tax at a lower, fixed rate on their turnover and file quarterly returns rather than monthly. However, businesses that opt for this scheme cannot claim input tax credit (ITC) on purchases.

Advantages of the GST Composition Scheme:

1.     Lower Tax Rates :

    One of the major attractions of the Composition Scheme is the reduced tax rates. Currently, the rates are:

·         1% for manufacturers and traders (0.5% CGST + 0.5% SGST)

·         5% for restaurant services (2.5% CGST + 2.5% SGST)

·         6% for service providers (3% CGST + 3% SGST)

These rates are significantly lower compared to the standard GST rates of 18% or more, which makes it easier for small businesses to maintain their profit margins.

2.     Simplified Compliance :

    Under the scheme, businesses only need to file one quarterly return, the GSTR-4, as opposed to the monthly filings required under the regular GST regime. This means fewer records to maintain and a reduced compliance burden, which is a boon for small businesses that may not have the resources to manage extensive tax documentation.

3.     No Need to Worry About ITC Calculations :

   For businesses that deal largely with end consumers and have low input costs, the inability to claim Input Tax Credit (ITC) might not be a major issue. Since Composition Scheme taxpayers pay tax at a fixed rate on their turnover, they don’t have to worry about tracking and reconciling ITC claims.

4.     Increased Liquidity :

    Because the tax is calculated on a fixed percentage of turnover and businesses don’t have to pay the higher GST rates, they have better liquidity. This can help smaller enterprises manage cash flow more effectively.

Disadvantages of the GST Composition Scheme

Disadvantages of the GST Composition Scheme:

1.     No Input Tax Credit (ITC) Benefits :

    While simplified compliance is beneficial, businesses that operate in a supply chain may find the lack of ITC a significant drawback. The inability to claim ITC means that the tax paid on inputs cannot be offset, potentially leading to higher costs. This can make the scheme less attractive for manufacturers or traders who have significant input costs.

2.     Restricted Interstate Trade :

     The GST Composition Scheme is only applicable for intra-state transactions. Businesses that deal with interstate trade are not eligible for the scheme. This limitation can be a major hurdle for companies that aim to expand or already have a presence in multiple states.

3.     Not for Large Businesses :

    Businesses with a turnover exceeding ?1.5 crore cannot opt for the scheme, which limits its applicability to small businesses only. For medium to large businesses, the benefits of the scheme are out of reach.

4.      Cannot Collect GST from Customers :

    Businesses registered under the Composition Scheme cannot collect GST from their customers. As a result, the GST liability becomes a direct cost to the business, which can lead to increased prices or reduced margins, particularly for businesses that have low margins to begin with.

5.     Limited Eligibility :

    Certain businesses are not eligible to opt for the Composition Scheme, including:

·         E-commerce operators

·         Service providers (except for restaurant services and those notified under the scheme)

·         Manufacturers of certain goods like tobacco, ice cream, and pan masala

The restrictive eligibility criteria further narrow down the scope of the scheme for various businesses.

Conclusion :

The GST Composition Scheme offers a simplified, cost-effective way for small businesses to comply with GST regulations. With benefits like lower tax rates and reduced compliance, it can be an attractive option for businesses with limited resources. However, the lack of input tax credit and restrictions on interstate trade may make it less suitable for businesses with complex operations. Deciding whether to opt for the Composition Scheme ultimately depends on the nature of your business, your input costs, and your long-term growth plans.