Benefits and Drawbacks of GST Composition Scheme | H&R Block
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Benefits and Drawbacks of GST Composition Scheme

Composition or compounding scheme is nothing new in Indian indirect taxation system. Many taxpayers under state VAT laws already enjoy the benefits of composition. Although service taxpayers never got the benefit of compounding system. GST regime will bring the benefits of composition scheme for all the taxpayers under its net.

Composition or compounding scheme under GST

Composition/Compounding Scheme will be an important feature of GST to protect the interests of small traders and small scale industries. The Composition/Compounding scheme for the purpose of GST should have an upper ceiling on gross annual turnover and a floor tax rate with respect to gross annual turnover. In particular there will be a compounding cut-off at Rs 75 lakh of the gross annual turnover. The scheme would allow option for GST registration for dealers with turnover below the compounding cut-off.

Benefits of compounding / 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 is 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 under 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 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 surge of profit margin while on the other limited compliance will reduce hassles allowing a party to focus more on his business.

Drawbacks or limitations 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 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 taxes along with penalty equal to 100% of taxes levied upon him.

Despite some drawbacks, composition scheme is a very good initiative under GST regime as it promises to improve business environment in our country and help create several new jobs.

Niteesh Singh
Niteesh Singh
Niteesh works as a Tax Researcher at H&R Block India. He makes taxes easy to understand for people. He creates content for the website, marketing activities and social media. He carries experience in creating a wide variety of content like blogs, press releases, research papers, etc.

4 Comments

  1. Raman Kumar says:

    What are provision as Manufactur under composition levy?

  2. Neela Sood says:

    Composite Taxation Scheme under GST is a bluff on small dealers as it is double taxation scheme and runs contrary to the concept of GST

    Under the Composite tax scheme any small manufacturer is not allowed to take input credit on his purchases and again he is paying 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 double taxation as the holder of Composite scheme is paying on turnover apart from sacrificing input credit and his buyer is charging from the retail buyer.

    The one who opts for COMPOSITE scheme is at great disadvantage vis a vis Big dealer, as explained. I take the case of two manufacturers.
    One like me who opts for Composite scheme with turnover less than 50 Lacs. Second a big manufacturer who is out of Composite 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 Composite scheme like me since buyer is 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 on wants me to cut the rate equal to GST rate so that he is not affected.

    This scheme is a great bluff on small dealers and runs contrary to the concept of single taxation under GST. 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 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 him/he to sell out of state. When he is not allowed to claim input crdit he should be allowed to sell anywhere. Pl think over this issue also

  3. Debasish Das says:

    GST Composition scheme does not allow to provide service, the what about small traders who provide electrician, plumber etc. service for homes and offices? It seems some fools have made such laws

  4. Mukesh kumar says:

    Maine meri firm ka registration composition scheme ke tahat karvaya hai, aur abhi tak koi Sels purchase nahin ki hai, kya me composition scheme se regular gst tax me convert Ho sakta hu, agar aisa Hota hai to kin process mai regular tax register Ho skta hu. Pl reply me

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