GST COMPOSITION SCHEME GST RATES BENEFITS & LIMIT?
INTRODUCTION
The GST Composition Scheme is a special scheme under GST designed for small businesses with a turnover below a specified threshold. It allows eligible taxpayers to pay GST at a fixed rate on their turnover without the need for detailed invoice-wise calculations. Instead, they need to file simplified quarterly returns.
BENEFITS OF GST COMPOSITION SCHEME
Reduced Compliance Burden: Small businesses often find it challenging to comply with the extensive GST regulations. The Composition Scheme significantly reduces the compliance burden by allowing businesses to file quarterly returns instead of monthly returns.
Lower Tax Liability: Businesses under the Composition Scheme are subject to a lower GST rate, which means they pay a lower percentage of their turnover as tax. This helps in reducing the overall tax liability.
No Input Tax Credit (ITC): Under the Composition Scheme, businesses cannot claim Input Tax Credit on their purchases. While this may seem like a drawback, it simplifies the process as businesses do not have to maintain detailed records of input and output taxes.
Ease of Administration: The Composition Scheme is straightforward to administer, making it suitable for small businesses with limited resources for tax compliance.
Increased Competitiveness: The lower tax rates and reduced compliance requirements can make businesses more competitive in their respective markets.
LIMITS OF GST COMPOSITION SCHEME
Annual Turnover Limit: Businesses with an annual turnover of up to Rs. 1.5 crores (Rs. 75 lakhs for special category states) were eligible for the composition scheme. It’s important to check the latest threshold limit as it may change over time.
Restricted Interstate Sales: Businesses under the composition scheme are not allowed to make interstate sales. They can only make intrastate sales.
Limited to Certain Businesses: Not all businesses are eligible for the composition scheme. Certain businesses such as manufacturers of tobacco and tobacco products, ice cream, and pan masala are not eligible for this scheme.
No Input Tax Credit (ITC): Businesses under the composition scheme are not eligible to claim input tax credit on the GST paid on their inputs and cannot pass on the benefits of ITC to their customers. This can lead to higher costs for such businesses.
Cannot Charge GST Separately: Businesses under the composition scheme cannot charge GST separately on their invoices. They are required to pay GST at a fixed rate, and the cost is absorbed within the selling price.
Limited Compliance: Simplified compliance procedures are a benefit of the composition scheme, but it also means businesses cannot issue tax invoices and need to follow a less complex set of rules.
Limited to B2C Transactions: Businesses under this scheme are primarily suited for business-to-consumer (B2C) transactions, as they cannot cater to business-to-business (B2B) transactions effectively due to the restrictions on charging GST and ITC.
No Exporting Allowed: Businesses under the composition scheme are not allowed to export goods and services.
Limited Growth: As a business grows and its turnover crosses the threshold limit, it must switch to the regular GST scheme. This transition can be cumbersome and may result in increased compliance requirements.
ADVANTAGES OF GST COMPOSITION SCHEME
Lower Tax Rate: Businesses under the composition scheme pay GST at a lower rate compared to the regular GST rates. This reduces their overall tax liability.
Reduced Compliance Burden: Simplified compliance requirements under the composition scheme mean less paperwork and a reduced administrative burden. Businesses do not need to maintain detailed records of inward and outward supplies or file monthly returns.
No Input Tax Credit (ITC) Restrictions: Since businesses under this scheme cannot claim input tax credit, they do not need to worry about tracking and maintaining records of GST paid on inputs and input services. This simplifies accounting.
Ease of Filing: Composition scheme taxpayers have to file quarterly returns instead of monthly returns, making it easier to manage their tax obligations.
Limited Liability: Businesses under this scheme are not liable to pay GST on the full value of their supplies. Instead, they pay GST at a fixed rate on their turnover. This can help them budget and manage their cash flow more effectively.
No Need to Charge GST Separately: Composition scheme businesses are not required to charge GST separately on their invoices. They can simply include the composition tax in the price of their products or services.
Attractiveness for Customers: Lower tax rates for composition scheme businesses may make their products or services more attractive to price-sensitive customers.
Simplicity: The composition scheme is straightforward and suitable for small businesses with limited resources and expertise in tax matters.
No Interstate Sales: While this can be a limitation as well, for businesses focused on intrastate transactions, the composition scheme simplifies compliance by restricting them from making interstate sales.
Ease of Transition: Small businesses with a turnover below the threshold for composition scheme eligibility can easily transition into this scheme, simplifying their tax compliance process.
DISADVANTAGES OF GST COMPOSITION SCHEME
Limited Annual Turnover: Businesses under the composition scheme are subject to a limited annual turnover threshold (usually Rs. 1.5 crores). If a business’s turnover exceeds this threshold, they must switch to the regular GST scheme. This limitation can hinder the growth of businesses.
No Input Tax Credit (ITC): One of the significant disadvantages is that businesses under this scheme cannot claim input tax credit on the GST paid on their purchases. This means they cannot offset the GST they’ve paid on inputs against the GST they collect from customers, potentially increasing their cost of goods and services.
No Interstate Sales: Composition scheme businesses are restricted from making interstate sales. They can only engage in intrastate transactions. This limitation can hinder the expansion of businesses beyond their home state.
Limited Customer Base: Businesses under the composition scheme are generally not suited for business-to-business (B2B) transactions, as they cannot charge GST separately on their invoices. This limits their customer base to primarily business-to-consumer (B2C) transactions.
Higher Tax Rate on Certain Goods: The composition scheme imposes a fixed tax rate on the turnover of a business, regardless of the nature of goods or services they provide. This can be disadvantageous for businesses dealing in goods or services with lower GST rates under the regular scheme.
Difficulty in Pricing: Since composition scheme businesses cannot charge GST separately, they need to absorb the GST liability within their selling price. This can make pricing and competitiveness challenging, especially if the competition is not under the composition scheme.
Limited ITC on Previous Stock: When a business transitions into the composition scheme from the regular scheme, it cannot claim input tax credit on its existing stock. This can lead to a loss for the business.
No Exporting Allowed: Composition scheme businesses are not allowed to export goods and services, limiting their international trade opportunities.
Quarterly Returns: While quarterly return filing can be an advantage for some, it can also lead to delayed cash flow for businesses, as they pay GST on a quarterly basis rather than monthly.
Exit Difficulties: If a business wishes to exit the composition scheme and switch to the regular scheme, there may be certain complexities and procedural requirements involved, potentially causing disruptions in business operations.
Who can opt for the GST composition scheme?
- Manufacturers of goods, other than alcoholic beverages, tobacco products, and pan masala
- Traders of goods, other than alcoholic beverages, tobacco products, and pan masala
- Restaurants (not serving alcohol)
- Service providers, with an annual turnover of up to Rs. 50 lakh
How to opt for the GST composition scheme?
To opt for the GST composition scheme, businesses need to file an application with the GST authorities. The application can be filed online or offline.
The online application can be filed on the GST portal. The offline application can be filed on Form CMP-02.
The application must be filed before the end of the financial year in which the business wants to opt for the scheme.
CONCLUSION
The GST composition scheme is a simplified tax regime for small businesses. It offers a number of benefits, such as reduced paperwork and compliance requirements, lower tax liability, and no requirement to collect GST from customers. However, it also has some disadvantages, such as higher tax liability and limited flexibility. Businesses should carefully consider whether the GST composition scheme is right for them.
HOW AURIGA ACCOUNTING HELP YOU TO TAKE COMPOSITION SCHEME IN GST
Eligibility Assessment: Auriga Accounting can assess whether your business qualifies for the GST Composition Scheme based on factors like your annual turnover and the nature of your business activities. They can help you understand whether this scheme is suitable for your business.
Registration Assistance: If your business is eligible and you decide to opt for the composition scheme, Auriga Accounting can assist you with the registration process, helping you complete the necessary paperwork and submit the required documents to the tax authorities.
Compliance Guidance: The composition scheme has its own set of compliance requirements, such as quarterly return filing and payment of fixed taxes. Auriga Accounting can provide guidance on how to fulfill these obligations correctly and on time.
Tax Calculation: Auriga Accounting can help you calculate the GST liability under the composition scheme. Since this scheme involves paying tax at a fixed rate on your turnover, they can assist in determining the accurate tax amount.
Record Keeping: Even though the composition scheme involves simplified compliance, you still need to maintain certain records. Auriga Accounting can help you set up a record-keeping system that aligns with the scheme’s requirements.
Transition Support: If your business is transitioning from the regular GST scheme to the composition scheme, Auriga Accounting can assist in the process, ensuring a smooth transition and compliance with all regulatory requirements.
Tax Planning: Auriga Accounting can provide tax planning services to optimize your tax liability under the composition scheme. They can help you structure your business operations in a tax-efficient manner.
Annual Review: As your business grows, it’s important to periodically review whether the composition scheme is still the most suitable option. Auriga Accounting can conduct annual reviews to assess whether your business should continue with the scheme or transition to the regular GST scheme.
Advisory Services: The composition scheme may have advantages and disadvantages depending on your specific business circumstances. Auriga Accounting can provide advisory services to help you make informed decisions regarding your tax strategy.
Audit and Compliance Checks: Auriga Accounting can perform internal audits and compliance checks to ensure that your business is adhering to the rules and regulations of the composition scheme and GST in general.
