GST Composition Scheme-Better or Myth ?

Under various laws, there is a provision of Composition scheme which is for the small businesses and in GST regime also Composition Scheme for many startups and Small & Medium Enterprise (SMEs) has been introduced.

But is it really worthy opting for this scheme? The clear analysis in our blog will help you in forming an opinion.

Benefits of GST composition scheme

As mentioned earlier, the benefits of this scheme will only be available to small taxpayers. Registration for this scheme is optional and the taxpayer needs to apply for it every year. It offers several benefits:

1) Reduced tax liability

Probably 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 5% which is considerably lower than standard tax rates under regular GST scheme.

2) Limited compliance

Another major advantage of composition scheme is that it promises to reduce the number of documents and processes required for compliance with 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 that is GSTR 4 every quarter of a year.

3) 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 the surge of profit margin while on the other limited compliance will reduce hassles allowing a party to focus more on his business.

Limitation of GST Composition Scheme:

1) 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.

2) No Credit of Input Tax:

Compounding scheme has no 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.

3) 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.

4) Penal provisions:

While taking advantage of GST Composition Scheme, one needs to take utmost care as the penalty is severe. If the 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 normal taxes along with penalty equal to 100% of normal taxes levied upon him.

After understanding the Pros and Cons of GST Composition scheme we are sharing our Analysis of this scheme:

GST Composition Scheme has no double taxation element and does not run contrary to the concept of GST.

However, any small manufacturer is not allowed to take input credit of his purchases and again he is paying the turnover tax of 2%. It looks simple but, there is a catch in this scheme as explained.

When he sells his goods, it is the BILL OF SUPPLY and he is not collecting any tax. But, his buyer has to collect full tax when he further sells the goods in retail. Which means the holder of the Composition scheme is almost at par with the regular taxpayer by paying on turnover apart from sacrificing input credit. This brings him at par with the regular taxpayer.

Besides this we believe that the one who opts for Composition scheme is at the great disadvantage vis a vis Big dealer, in the following scenario: I take the case of two manufacturers.
One like me who opts for the Composition scheme with turnover less than 100 Lacs. Second a big manufacturer who is out of the Composition Scheme.

While making my product, I sacrifice input credit on my inputs and pay 2% GST on my turnover, which works out to be equal to full GST rate. But I am issuing BILL OF SUPPLY to my buyer. Now when my buyer sells the product further he charges full GST say 12% from his buyer but can’t take any input credit on the purchase made from me since it is a bill of supply.

Now take the case of a big dealer against whom I am competing. Such big registered dealer when sells, is allowed to collect tax from the buyer but will claim input credit also so net incidence is very less. And again his buyer when sells further will take input credit of the tax which he paid.

Under the situation, not many will be interested to buy from the dealer with the Composition Scheme like me since the buyer is notionally/apparently burdened with much higher tax burden when he sells the goods further as he is not getting input credit.
So either he will refuse to buy from me or wants me to cut the rate equal to GST rate so that he is not affected.

Therefore we think it needs amendment and the bill of supply from the Composite dealer should be considered as TAX PAID INVOICE for all purposes only then this scheme gives relief to the small dealers. There is nothing wrong in giving it the status of TAX PAID INVOICE sine he is paying 2% tax on turnover and also foregoing input credit which works out equal to the full tax. In the present scenario, he or she can’t compete with the big dealers/manufacturers as explained above.

Further, I see little sense in not allowing them to sell out of state. When he is not allowed to claim input credit he should be allowed to sell anywhere.

Conclusion for GST Composition Scheme:

Therefore we suggest that composition scheme shall be availed only by very small scale businesses whose complete business segment is Business to Customer (B2C).  And we strongly believe that it needs amendment and the bill of supply from the Composite dealer should be considered as TAX PAID INVOICE for all purposes only then this scheme gives relief to the small dealers.

References for GST Composition Scheme:

www.gst-insights.com for Composition Scheme

http://cbec.gov.in

 

Composition Scheme under GST

Under various laws there is a provision of Composition scheme which is for the small businesses & in GST also to make compliance easier Composition Scheme for many startups and Small & Medium Enterprise (SMEs) has been introduced.

To know where does these composition scheme applies & it’s further compliance s, read as under:

  1. Any dealer whose aggregate turnover in a financial year does not exceed Rs. 75 Lakh can opt for composition scheme.
  2. Businesses dealing only in goods can opt for composition scheme. i.e. A service provider is mandatory required to get registration under GST without looking to the limit of 19 lacs.
  3. The person who is in the business of providing services cannot opt for this scheme. However, restaurant sector taxpayers may also opt for the scheme( if annual turnover is below Rs 75 Lakhs).
  4. The tax rate in this scheme shall be 1% for manufacturer, 2.5% for restaurant sector and 0.5% for other suppliers of turnover.
  5. Any taxable person covered under Reverse Charge Mechanism cannot opt for this scheme.
  6. A Composition Dealer is not allowed to collect composition tax from the buyer.
  7. Composition Scheme is available only for dealers who are doing business in a single state.

Compliance s for such dealer 

  1. A taxpayer who is opting composition scheme will be required to file one return on quarterly basis by 18th of following month.
  2. Such dealer cannot issue a tax invoice.
  3. A buyer from composition dealer will not be able to claim input tax on such goods, which leads to increase in cost of buyer from such dealer.

Limitation of Composition Scheme:

  1. No Input Tax Credit allowed to whosoever dealing with this dealer.
  2. Even a single rupee Inter State Transaction if happened will not be eligible for composition scheme.
  3. Though the tax rate is very minimal of 1%, 2.5% but that is the burden on the pocket of the composition dealer.
  4. Wrong claim under composition scheme shall lead to heavy penalty i.e. such a person shall be liable to pay all the taxes which  he would have paid under the normal business.

Treatment of Closing Stock of Existing Composition Dealer:

The credit held in Closing Stock of existing composition scheme dealer shall be eligible for credit on the day immediately preceding the date from which they opt to be taxed as a regular tax payer.

Conclusion:

Therefore we suggest that composition scheme shall be availed only by very small scale traders whose complete business is limited to a single state & below 75 lacs i.e. only for B2C businesses. 

Though govt. may, by notification increase the limit but does not exceed 1 crore, as may be recommended by the council

References for Composition Scheme:

http://www.gst-insights.com

http://cbec.gov.in

Best,

Poonam