Composition Scheme under GST – Pros and Cons

Last Updated at: Jan 13, 2021

The advent of GST has made sure that the burden of taxes on the final consumer or goods as well as services goes down to a substantial extent. But the small, micro and medium enterprises have experienced challenges in following the letter of the law on many occasions.

By the enforcement of the GST Act, the tax imposed on every stage of the production where an extra value is added to the product, was regulated and the actual liability of the end consumer reduced to a great extent, making the goods available to a more wider range of consumers. However, the act came with certain complex compliances which the small start-ups and Small And Medium Enterprises(SMEs) are having a tough time fulfilling them. So to give them a hassle-free process of tax paying, without the need of maintaining proper accounts and records, the start-ups and SMEs were given a choice of opting for the composition scheme under the GST.

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The composition scheme is a simplified version of paying taxes for small taxpayers without having to go through the detailed compliance provisions of the law. The taxpayers who opt for the composition scheme will pay taxes based on their annual financial turnover as fixed percentages. without providing them with the benefit of Input Tax Credit. The fixed rates are provided in the CGST Act as well as the SGST/UTGST Act accordingly, which is not less than 1%. The threshold turnover for opting the Scheme was 75 lakhs as per the original bill but was increased to 1 crore in the 22nd meeting which was said to increase to 1.5 crores in the 23rd meeting in November 2017. The scheme has also laid down certain other eligibility criteria other than the threshold turnover such as a person liable by reverse charge mechanism cannot opt for the scheme and manufacturers of ice-cream, pan masala and other substitutes are not eligible to opt for the scheme.

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Although the composition scheme, in general, has a lot to offer the small enterprises, there are few cons to this scheme that cannot be neglected, however. The debates of whether the scheme is advantageous or not has made the GST council scrutinize the scheme to make it more practically applicable with lesser discomforts for the taxpayers.

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Pros of composition scheme

  1.   Less compliance. The composition taxpayers need not undergo the detailed record maintenance process and hence lesser compliances. They are only required to provide with the total sale, unlike the normal taxpayers who will have to provide a bill wise summary. This saves them a lot of time, effort and energy that could be used for widening the business. A composition taxpayer needs to file only five returns in total, i.e., four quarterly returns in form of GSTR 4 and one annual return in form of GSTR 9A. Whereas, a normal taxpayer will have to file monthly returns and one annual GST return.

2. Less tax liability. Taxpayers under the composition scheme are given fixed tax rates which are comparatively lower and nominal than the tax liability incurred by a normal GST taxpayer.

3.  High liquidity. Since the composition scheme reduces the tax liability of the small enterprises, there is a clearance of blockage of the working capital. As a result of this clearance, there is a high liquidity that can be used for broadening and developing the business.

4.  Better access to the local market: Though the composition scheme restricts a taxpayer from doing inter-state business, it provides a better access to the local markets by reducing their tax liability and helping them to sell goods at a much lower price than the large companies in the same market.

Cons of composition scheme

  1.  Narrowed market: Under the composition scheme, the taxpayers are not allowed to carry out interstate or foreign trade, which eventually narrows down their market to within the state. The opted taxpayers cannot even export their goods to other states and if found to be doing so, their registration in the scheme is revoked and are made to freshly register as normal taxpayers.

2. No input tax credit: The very essence of introducing the GST was to eliminate the cascading effect but however the composition scheme inhibits the taxpayer from availing input tax credit which ultimately adds more taxes in the form of double taxation on goods.

3. Exclusion of service providers: Restaurants are excluded from the scheme. Also, taxpayers who are service providers do not come within the purview of the scheme.

4. Exclusion of e-commerce: The e-commerce operators and e-commerce vendors do not come within the scope of the scheme as they have different compliances from composite and regular taxpayers. Taxpayers are also not allowed to sell exempt goods.

5. Cannot collect taxes: The composite taxpayers are not allowed to collect taxes from their buyers of generating invoices but are expected to bear the liability of taxes, no matter how big or small the taxes may be.

6. Inevitable pecuniary penalties:If the composite taxpayer is found to not abide by the compliances of the scheme, he has to face a hefty penalty. If the taxpayer is found to have paid less tax than the actual amount, he/she has to pay the differential tax amount along with a penalty that could extend up to the total tax liability.

The list of pros and cons of the scheme are however variable and relative. They may vary from business to business, benefiting some while the others are not. The points that seems disadvantageous to one may seem useful to another. So, on the whole, the composition scheme cannot be definitely considered either as a boon or a bane.

You can also read more about the features of GST composition scheme here.

It is vital to analyze the pros as well as cons of GST. Upon proper analysis, one can say that it has a lot of advantages and some minor demerits. But nothing is perfect and the taxation system is meant to be as fair as possible. So, it is welcome change that people must appreciate.