Should you use GST Composition Scheme?

15 March 2022

#gst#tax#compliance#filing#e-commerce#business#platform#food

Should You Use GST Composition Scheme?

The GST Composition Scheme is a simplified tax regime designed for small businesses. While it offers reduced compliance costs and less paperwork, it may not be suitable for everyone. In this guide, we will walk through the key features of the scheme, who can benefit from it, and the potential drawbacks to help you decide if it’s the right choice for your business.

What is the GST Composition Scheme?

The GST Composition Scheme is a tax scheme introduced under the Goods and Services Tax (GST) Act, primarily aimed at small businesses with a turnover below a prescribed threshold. This scheme simplifies tax filing by reducing the number of returns and documentation required, allowing businesses to focus more on operations rather than compliance.

For businesses that register under this scheme, the process becomes relatively straightforward:

Quarterly Returns: Businesses only need to file one quarterly return and one annual return, reducing the paperwork burden.
Simplified Tax Rates: Businesses pay a fixed percentage (between 1% and 6%) of their turnover as tax, making it easier to calculate and manage tax liabilities.

For example, a manufacturer of goods (other than tobacco or pan masala) under this scheme pays only 1% tax on their turnover.

Who Can Opt for the GST Composition Scheme?

The GST Composition Scheme is available for businesses that meet the following criteria:

Turnover Limit: The annual turnover should be ₹1.5 crore or less (₹75 lakh for businesses in northeastern states).
Eligibility: This scheme is available for small manufacturers, traders, and service providers, provided their turnover is within the prescribed limits. Service providers can avail up to 10% of their turnover or ₹5 lakh (whichever is higher) under the scheme, as per the CGST (Amendment) Act, 2018.

Exemptions:

Certain businesses are ineligible for the scheme:

E-commerce Sellers: Businesses supplying goods through e-commerce platforms that collect tax at source.
Non-Resident Taxpayers: Non-resident taxable persons cannot opt for the scheme.
Certain Manufacturers: Manufacturers of products such as tobacco, pan masala, ice cream, and some other specific items cannot use the scheme.
Goods Supplied by Unregistered Suppliers: If you’re sourcing goods from unregistered suppliers, you may not be eligible.

Conditions for Availing the GST Composition Scheme

To be eligible and continue in the GST Composition Scheme, businesses must meet certain conditions:

No Input Tax Credit: Businesses under the composition scheme cannot claim Input Tax Credit (ITC), which means they cannot offset taxes paid on their purchases against their tax liabilities.
Limitations on Non-Taxable Goods: Businesses cannot supply non-taxable goods (like alcohol) under this scheme.
Reverse Charge Mechanism: If the business deals with reverse charge mechanisms (e.g., certain types of supply), they will need to pay normal taxes.
Registration for All Units: If a taxpayer has multiple business units under the same PAN number, all of them must be registered for the composition scheme together. There is no option to opt out selectively.
Marking as a "Composite Taxpayer": Businesses must clearly state that they are under the composition scheme at every place of business.
Filing GST CMP-02: To opt for the composition scheme, businesses must file the GST CMP-02 form at the beginning of the financial year.

GST Rates under the Composition Scheme

The tax rates for businesses under the GST Composition Scheme depend on the type of business. Here’s a breakdown of the GST rates:

| Business Type | CGST | SGST | Total | | --------------------------------- | -------- | -------- | --------- | | Manufacturer & Trader of Goods | 0.5% | 0.5% | 1.0% | | Restaurants (Not serving Alcohol) | 2.5% | 2.5% | 5.0% | | Service Providers | 3.0% | 3.0% | 6.0% |

These fixed rates make tax calculation simpler, especially for small businesses that have limited resources for detailed tax management.

Advantages of the GST Composition Scheme

Here are some key benefits of opting for the GST Composition Scheme:

Reduced Tax Liabilities: Businesses under the scheme enjoy lower tax rates, which helps reduce the tax burden significantly compared to the standard GST system.
Simplified Compliance: With only quarterly and annual returns to file, the compliance requirements are significantly reduced. This is ideal for small businesses with limited administrative resources.
Lower Paperwork: Businesses are not required to maintain detailed records like tax invoices, and they only need to file simpler tax returns, reducing the administrative workload.
Improved Liquidity: Lower tax liabilities and fewer compliance requirements mean better cash flow and enhanced liquidity for small businesses.
Easier Business Operations: The scheme simplifies the tax filing process, enabling small businesses to focus on running and growing their operations rather than worrying about complex tax matters.

Drawbacks and Limitations of the GST Composition Scheme

While the GST Composition Scheme offers significant advantages, there are also some drawbacks that businesses must consider:

No Input Tax Credit (ITC): Businesses cannot claim ITC on their purchases, which may increase the overall cost of goods sold. This could affect your profitability, especially if you rely on raw materials that are subject to GST.
Tax Cannot Be Collected from Buyers: Under the composition scheme, businesses are not allowed to collect tax from their customers. This means you cannot charge GST on the sale invoices, and therefore, your ability to recover GST on your purchases is limited.
Limited Geographical Reach: The composition scheme is only available for intra-state transactions. If you plan to do business across state borders, you will need to opt out of the scheme, as inter-state sales are not allowed.
Restrictions on Types of Goods/Services: Some types of goods (e.g., tobacco, pan masala) and services are excluded from the scheme, meaning businesses involved in those activities cannot benefit from the reduced tax structure.

Is the GST Composition Scheme Right for You?

The GST Composition Scheme can be a great option for small businesses that:

Have low turnover (below ₹1.5 crore).
Operate in manufacturing, trading, or limited service sectors.
Are primarily focused on local or intra-state sales.
Want to simplify their tax filings and reduce administrative overhead.

However, if your business has high turnover, is involved in inter-state trade, or deals with high-value goods, the limitations of the composition scheme might outweigh the benefits.

Conclusion

The GST Composition Scheme can be an excellent option for small businesses looking to simplify their tax compliance and reduce administrative costs. It offers lower tax rates, fewer filings, and reduced paperwork, but with some key trade-offs, such as the inability to claim Input Tax Credit and limitations on inter-state sales. Before opting for the scheme, assess your business needs, turnover, and long-term goals to ensure it’s the right fit.

If you're still unsure, consulting a tax professional can help you make an informed decision based on your specific business circumstances.