Pros and Cons of the GST Composition Scheme

Prakash Matre
Prakash Matre at March 22, 2023

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What is GST Composition Scheme?

GST Composition Scheme

We live in a world that favors the bigger sectors of the economy. They get to enjoy more benefits than the smaller ones that co-exist in it. But in recent years, the government has started to focus on these small sectors too, which help build an economy. The introduction of GST led to redefinition and restructuring of big businesses, but it also had quite a bundle in store for the micro, small and medium enterprises. One such scheme initiated by GST is the Composition Scheme. As the name suggests, it is meant to soften the taxes levied on small and medium businesses. However, there has been an ongoing debate about the disadvantages that come along with advantages of composition scheme. To understand those, it is first important that we understand what GST Composition Scheme is.

About GST Composition Scheme

The GST Composition Scheme was introduced for smaller businesses and start-ups, which may have found it difficult to comply with the newly introduced taxation system. To solve their issues, the government introduced a composite scheme for them. Earlier, tax had to be filed monthly, but under the Composition Scheme it was changed to quarterly taxation. It is an option to pay taxes on taxable turnover of the business at a flat rate.The scheme has reduced the need to maintain and provide records for filing taxes. The composite taxpayer will have to pay the tax at a fixed percentage which is usually lower than the regular taxpayers. However, there is a criterion for eligibility to apply for this scheme.

The usual tax requirement demands maintenance of substantial documents and records along with regular submission of taxes. Small businesses cannot afford to keep up with a monthly filing system for the same, as their turnover is much lower than the macho companies. Thus, the GST Composition Scheme pardons the regular system in the interest of small businesses which don’t participate in import and export related activities.

Features of the Scheme

Firstly, all businesses cannot avail this scheme as it is limited to certain eligible ones.

  • The business which wishes to apply for this scheme must first ensure that it is a small business with an annual turnover of not more than 1.5 crores.
  • The business should only participate in intrastate transportation of goods.
  • Except for restaurant businesses, any service sector business isn’t eligible for the Composition Scheme.
  • All the entities under the same PAN must be applied for taxation under the Composition Scheme.

Other important features of the GST Composition Scheme include:

  • Composite taxpayers aren’t granted credit of input tax, and their buyers too will not be eligible for the same.
  • Composite taxpayers will have to pay the tax cost without recovering it from the buyers as the Composition Scheme doesn’t provide such benefits.
  • Under Composition scheme a business has to file quarterly returns, whereas a regular business has to file multiple returns every month.
  • If any fraud practices are found to exist, such as ineligible registration for the scheme, there will be penalty charges on the owner of the business along with the difference in tax rates. Thus, eligibility is significant to ponder on before availing the GST Composition Scheme.

Pros and Cons

Just as there are two sides to every coin, the GST Composition Scheme too has its advantages and disadvantages. The pros of this scheme that make it beneficial are:

  • As mentioned above, the very crux of the scheme was to provide lesser rules to comply to and reduce the records and invoice maintenance work of small businesses.
  • The regular tax rates are much higher than the ones provided under this scheme to registered taxpayers.
  • Due to lower tax rates, it leaves a lot of room for business development and, therefore, development of the economy.

However, there are some disadvantages that may come with if you are looking to expand your business or looking to avail benefits that a regular taxpayer would:

  • Composite taxpayers are not allowed to carry out interstate or international transactions of goods.
  • The scheme doesn’t allow taxpayers to collect tax cost from their buyers.
  • Credit cannot be availed against the tax filed under this scheme, and even the buyers will have to practice it.
  • Ineligible registration may lead to strict penalty charges.
  • A business which is selling its product through e-commerce operator is ineligible for availing this scheme no matter how small it is.

Therefore, the GST Composition Scheme has been developed for those businesses which are small in terms of turnover and keep their trading territory within the state. However, a business can withdraw its registration if it wishes to expand its business territory to national and international grounds or if its turnover increases beyond the eligibility criterion. Everything comes with its pros and cons. Similarly, according to their requirements, small businesses can weigh out the benefits and drawbacks of the GST Composition Scheme as a boon or a bane.

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