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Advantages and Disadvantages of Composition Scheme Under GST

The debate which started months ago about, whether the composition scheme will bring smile or tears is still on and relevant today. Of course, there are many elements which make it shine and the GST Council is brainstorming and fine-tuning it in almost every council meeting. However, the list of the minuses can also not be ignored and needs due attention.

Composition Scheme, detailed in Section 10 is actually devised to squeeze the burden of compliances for the SMB and the start-ups. Around 8 million tax payers are expected to transit to GST and a majority of them would be small time businesses which if asked to comply with all the GST compliances, would be sheer injustice. In tune with that, the turnover eligibility of being a composite tax payer is to have an annual revenue up to Rs.75 Lakhs in notified states & Rs. 1 Crore in other states, wherein the composite tax payer pays taxes on minimal rate with lesser compliances but also an exclusion from availing the input tax credit & supply goods & services in other state.

Let’s take a quick look at the pros and cons of the composition scheme also known as the compounding scheme:

Pros of registering as a composite tax payer:

  • Softened compliances
  • Minimal tax liability
  • Ample liquidity / cash flow
  • Equal opportunity marketplace

Softened compliances:

Composite tax payers are required to provide only total sale instead of bill wise summary and they don’t need to reconcile purchase invoices, they just need to pay fix percentage of sales. Limited compliances enable them to focus on the core business and save a lot of time, effort and energy.

Minimal tax liability:

The GST Act has minimal and nominal tax bindings on the composition tax payers, which is the core USP of it. Overall, a composite payer bottom line strengthens with more profits and lesser compliances.

Ample liquidity / cash flow:

A composite tax payers usually and logically will not have to struggle with the liquidity crunch unlike a normal tax payer who pays output taxes on his supplies at a standard rate. Although, the normal tax payer can only avail input tax credit when his supplier also files the returns which have to sync with his GST returns. The absence of such provisions for a composite tax payer makes him have a roaring working capital with no blockage of funds in the taxation domain.

Equal opportunity marketplace:

It is no true, that a composition scheme weakens your business proposition. Instead, it gives the small players an opportunity to extend their foot print to deeper local markets, where biggies rule – by offering the most cut-throat pricing and passing the rebate taxes further. For, the ambitious small players, the composition scheme may act as a propellant and a growth driver, if used properly with a vision. 

It must also be noted that, if the composite tax payers are found to be indulging in inter-state transactions or any export import dealings, he can be devoid from the composition scheme and will have to re-register as a normal tax payer.

Cons of registering as a composite tax payer:

  • Squeezed markets
  • Less preference by Dealers
  • No / minimal tax
  • No Input Tax Credit
  • E-commerce is excluded
  • Penalties

Squeezed markets:

The composite tax payers are only permitted to operate within their state and can not get involved in any inter-state activity. So, the rest 28 states does not actually exist for him, which is like huge. They can also not indulge in any export-import activity and the international markets are a strict no-no for them both for the buying and selling purposes. So, a tax assesse has to rethink and intelligently evaluate this major restrictions vis-a-vis the pluses being offered.

Less preference by Dealer:

While composite dealer getting benefit of less tax rate on the other hand there is a major loss that they cannot claim ITC on purchase and also they cannot pass on ITC of tax to buyer.

A registered person who wants to claim ITC on tax paid on purchase then they cannot purchase from composite dealer because tax become part of cost for composite dealer and they will charge it from their buyer.

On the other hand if regular dealer purchase from regular dealer then they can claim ITC of tax paid to supplier.

No collection of tax:

The tax rates for the composite tax payer are set at a minimum – .5% / 1% / 2.5% and he can not claim this tax from his customer and also can not issue a tax invoice. No matter, howsoever little the tax is, it has to be borne by the composite tax payer and can not be collected.

No Input Tax Credit:

The composition scheme is debarred from availing the Input Tax Credit on B2B transactions. So, if anyone transacts on a B2B model, his eligibility of receiving the input tax ceases from the output liability. Also, the buyer of such goods will not credit of tax paid leading to price ailments and cascading effects.

E-commerce is excluded:

For E-commerce there are different compliances from composite & regular dealers, so a e-commerce operator & e-commerce vendor cannot claim composite scheme.

Penalties:

The consequences of non-compliance under the composition scheme are hefty enough. If a composite tax payer is found that the conditions for being in the composition scheme are not fulfilled or a deviation is found or the tax paid is less than the actual, then the composite tax payer is liable to pay the differential tax along with a penalty, extendable up to the amount of the total tax liability.

It is tough to analyze for the industry honchos too, to take a stand for the composition scheme being a boon or bane. Probably, it depends on a case to case basis and business to business. While some benefits may not be relevant for someone, there can be some cons, which may seem like a real hard pinch to some people. It is also imperative to note that, the GST Council and Mr. Jaitley seem committed to their promise of strengthening the SMB and the start-ups and major changes have been done in the last few months to the original Composition Scheme. Some major announcement related to the Input Tax Credit is also expected in the next GST Council meeting in Guwahati this month.