Advantages of Opting for the GST Composition Scheme
This article details the advantages of enrolling in the Goods and Services Tax (GST) Composition Scheme for small taxpayers in India. It explains that the scheme aims to reduce compliance burdens by requiring only quarterly returns and imposing lower tax rates on turnover. Businesses under this scheme benefit from enhanced liquidity due to minimal output tax liability and improved competitive standing in local markets. However, the scheme is primarily suitable for intra-state transactions and not for inter-state or import-export activities.
This article examines the advantages of enrolling in the GST Composition Scheme, even for businesses that may not meet the standard GST registration turnover requirements.
Understanding the GST Composition Scheme
Section 10 of the GST legislation outlines provisions for taxpayer registration under the composition scheme. The fundamental goal of this scheme is to reduce the compliance obligations for small businesses. A significant number of taxpayers transitioning to the GST framework may have modest turnovers and insufficient resources or expertise to adhere to all standard GST procedures.
To address this, the government introduced the composition scheme. Under this scheme, taxpayers with an annual turnover below a specified threshold (initially "₹"1 crore, later raised to ".5" crore) can opt to register as a composition taxpayer instead of a regular taxpayer. They pay taxes on their supplies at a minimal rate but cannot issue tax invoices or claim input tax credit. The CGST (Amendment) Act, 2018, effective from February 1, 2019, also permits composition dealers to provide services up to 10% of their turnover or ".5" lakh, whichever amount is greater. The 32nd GST Council meeting further proposed increasing this limit for service providers.
Key Advantages of the GST Composition Scheme
Enrolling as a supplier under the composition scheme offers several notable benefits:
Reduced Compliance Burden
Under the composition scheme, taxpayers are only required to file quarterly returns, significantly simplifying record-keeping and administrative tasks. This allows business owners to dedicate more attention to their core operations rather than complex compliance procedures.
Lower Tax Liability
A key advantage of the composition scheme is the reduced tax rate applied to eligible taxpayers under GST law. These rates are calculated as a percentage of turnover.
As per Notification 01/2018, effective January 1, 2018, turnover for traders is specifically defined as the 'turnover of taxable supplies of goods.' The following table illustrates the financial advantage for small taxpayers:
| Particulars | Description | Registered as a Normal Taxpayer | Description | Registered as a Taxpayer under Composition Scheme |
|---|---|---|---|---|
| Total Sale Value (MRP) | 118000 | 118000 | ||
| Sales Value exclusive of taxes | 100000 | 118000 | ||
| GST @ 18% on sales value | 18000 | GST @ 1% on sales value | 1180* | |
| Input Purchases | 70000 | 70000 | ||
| GST @ 18% | 12600 | 12600 | ||
| Total Purchase Value | 82600 | Total Purchase Value | 82600 | |
| Net GST Liability | 5400 | Net GST Liability (only C) | 1180 | |
| Net Profit | 30000 | Net Profit | 34220 |
*Please note that a composition supplier cannot charge tax separately on an invoice. The breakdown above is provided for illustrative purposes. This example demonstrates that a composition scheme supplier can achieve higher profits and lower tax obligations when supplying goods to consumers at comparable prices.
Enhanced Business Liquidity
Registering under the composition scheme significantly improves a business's liquidity. A standard taxpayer must pay output tax at the prevailing rate, and input tax credit is only accessible once their suppliers have filed their returns and reconciliation occurs. This process can tie up a substantial portion of working capital as input credit. In contrast, a composition supplier faces minimal output tax liability and is not concerned with their supplier's return filings. Referring to the earlier example, a regular taxpayer incurs a higher tax liability of ".220" ("₹"5,400 - "₹"1,180), plus ",600" remains blocked as input credit until their supplier files returns. A composition scheme supplier, however, only pays ",180".
Balanced Competition
Opting for the composition scheme does not imply a loss of competitive advantage. Given that composition scheme suppliers often have better profit margins than larger taxpayers, they can leverage this to offer more competitive pricing. This allows them to effectively compete with larger businesses and secure a stronger foothold in local supply markets. The composition scheme thus safeguards the interests of small suppliers primarily engaged in intra-state transactions, fostering a sustainable and competitive environment.
It is important to note that the composition scheme is primarily designed for small taxpayers conducting intra-state transactions, not for those involved in import-export or inter-state transactions. Businesses engaged in such activities are required to register as normal taxpayers.