HOW DOES GST COMPOSITION SCHEMES WORK?
INTRODUCTION
The GST Composition Scheme is a simplified tax regime that is available to small businesses with an annual aggregate turnover up to Rs. 1.5 crore. Under this scheme, businesses are required to pay GST at a flat rate of 1% (0.5% CGST and 0.5% SGST) on their taxable supplies.
The GST Composition Scheme is a good option for small businesses that want to simplify their tax compliance and reduce their tax liability. However, businesses should carefully consider the eligibility criteria and limitations of the scheme before opting for it.
Here is an overview of how the GST Composition Scheme works
- Businesses that want to opt for the scheme must meet the eligibility criteria, which include having an annual aggregate turnover up to crore and not being Rs. 1.5 engaged in the supply of exempted goods or services.
- Businesses must make an application to the GST authorities in Form CMP-02 before the start of the financial year in which they want to opt for the scheme.
- Once the application is approved, the business will be issued a certificate of registration under the GST Composition Scheme.
- The business will then be required to pay GST at the flat rate of 1% (0.5% CGST and 0.5% SGST) on its taxable supplies.
- The business must also comply with the other requirements of the GST Composition Scheme, such as filing returns and paying taxes on time.
Here are some of the benefits of the GST Composition Scheme:
- Reduced compliance burden: Businesses that opt for the scheme are not required to file monthly or quarterly returns. They only need to file an annual return.
- Lower tax rate: Businesses that opt for the scheme pay GST at a flat rate of 1%, which is lower than the regular GST rates.
- No need to claim input tax credit: Businesses that opt for the scheme do not need to claim input tax credit. This can save them time and effort.
However, there are also some limitations to the GST Composition Scheme:
- Restriction on inter-state supplies: Businesses that opt for the scheme cannot make inter-state supplies.
- Inability to claim input tax credit: Businesses that opt for the scheme cannot claim input tax credit. This can be a disadvantage if the business makes a lot of purchases from other businesses.
Advantages of the GST Composition Scheme:
Simplified Compliance: One of the primary benefits of the Composition Scheme is that it simplifies tax compliance for small businesses. Under this scheme, taxpayers are required to file quarterly returns instead of monthly ones, reducing the administrative burden.
Lower Tax Liability: Businesses under the Composition Scheme pay GST at a lower rate as a percentage of their turnover, which is significantly lower than the standard GST rates. This reduces the overall tax liability for eligible businesses.
Ease of Calculation: Calculating GST liability is much simpler under the Composition Scheme, as businesses only need to compute tax as a percentage of their turnover, without the need for detailed invoices and tax calculations for individual transactions.
Reduced Record-Keeping: Since businesses under this scheme are not required to maintain detailed invoices for every transaction, they can reduce their record-keeping and paperwork, saving time and resources.
Improved Cash Flow: Businesses in the Composition Scheme do not have to pay GST on their inputs, which means they have improved cash flow, as they can use the entire revenue for their expenses without having to set aside a portion for tax payments on inputs.
Disadvantages of the GST Composition Scheme:
Limited Eligibility: The Composition Scheme is available only for businesses with an annual turnover below a certain threshold. This restricts its applicability to small businesses and excludes larger enterprises.
No Input Tax Credit: Businesses under this scheme cannot claim input tax credit (ITC) on GST paid on their purchases. This can increase the cost of inputs and affect the competitiveness of the business.
Interstate Transactions: Businesses under the Composition Scheme are not allowed to make interstate sales. They can only operate within the state where they are registered, limiting their market reach.
Restricted Product Categories: Some businesses, such as service providers and manufacturers of certain goods, are not eligible for the Composition Scheme. This limits its applicability to specific sectors.
No Tax Recovery: Businesses registered under this scheme cannot collect GST from their customers separately on invoices. This may lead to reduced competitiveness if customers prefer dealing with businesses that can provide input tax credit.
Limited Growth Potential: As businesses grow and cross the threshold limit for the Composition Scheme, they must switch to the regular GST regime. This transition can be complex and may lead to increased compliance and tax liability.
HOW AURIGA ACCOUNTING HELP YOU TO GST COMPOSITION SCHEME
GST Calculation and Reporting: Auriga Accounting can automate the calculation of GST liability based on your turnover and the applicable composition rate. It can generate GST reports for filing with the tax authorities, making it easier to comply with GST requirements.
Quarterly Return Filing: The GST Composition Scheme requires quarterly GST return filing. Auriga Accounting can simplify this process by providing a user-friendly interface to input your data and generate the necessary GST return forms. This reduces the manual effort required for compliance.
Invoice and Record Keeping: While businesses under the Composition Scheme don’t need to maintain detailed invoices, it’s still important to keep records of turnover and sales. Auriga Accounting can help you maintain organized records of your business transactions, making it easier to calculate your turnover accurately.
Threshold Monitoring: If your business approaches the turnover threshold for the Composition Scheme, accounting software like Auriga Accounting can provide alerts and notifications to help you plan for the transition to the regular GST regime.
GST Compliance Updates: The tax laws and GST rates can change over time. Auriga Accounting often includes updates to keep you informed about any changes in the GST Composition Scheme, ensuring that you remain compliant with the latest regulations.
Customer Support and Guidance: Auriga Accounting providers offer customer support and guidance to help you understand the GST Composition Scheme better and resolve any queries or issues you may have related to your GST compliance.
Financial Reporting: Beyond GST compliance, Auriga Accounting can provide you with financial reports and insights into your business’s financial health. This can be useful for making informed decisions and managing your finances effectively.
