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Advantages and Disadvantages of Composition Scheme

Advantages and Disadvantages of Composition Scheme

Advantages and Disadvantages of Composition Scheme

Implementation of Goods and Service Tax in India has brought along with it lots and lots of compliance. Dealing with the compliance part is not much difficult for big players in the market, however, small businesses find it hard to deal with the same. In order to help the small players prevailing in the market, Government has come up with the concept of GST composition scheme under the Goods and Service Tax Act. The main condition for being eligible under the composition scheme is ‘turnover limit’ and the said turnover limit has undergone various amendments. In this article, we look at the various advantages and disadvantages of composition scheme in detail.

No Late Fee for GSTR-1 & GSTR-3B Return

The biggest relief extended to small business by the 31st GST Council is the waiver of late fee for filing GSTR-1 and GSTR-3B return. The GST Council has announced:

“Late fee shall be completely waived for all taxpayers in case FORM GSTR-1, FORM GSTR-3B &FORM GSTR-4 for the months/quarters July 2017 to September 2018, are furnished after 22.12.2018 but on or before 31.03.2019.”

Thus, filing of Form GSTR-1, GSTR-3B and GSTR-4 will not attract any late fee penalty until 31st March 2019.

GST Annual Return Due Date Extended

All entities having GST registration are required to file GST annual return in form GSTR-9. The due date for filing GST annual return is usually 31st December of each year for the financial year ended on 31st March of the same calendar year. As GST is newly introduced in India, the Government has decided to extend the due date for GST annual return filing to 30th June 2019. The due date for filing GST annual return was originally extended upto 31st March 2019, which has been further extended to 30th June 2019 by the GST Council.

Eligibility for Composition Scheme

Initially, the eligible turnover limit under the composition scheme was INR 75 Lakhs, however, in the 22nd meeting of GST Council held on 6th October, 2017, the said limit was increased from INR 75 Lakhs to INR 1 Crore. Further in the 23rd GST Council meeting held on 10th November, 2017, the said limit was further increased from INR 1 Crore to INR 1.5 Crore.

A taxpayer has to decide whether he is opting in or not for the composition scheme. A simple overview of the composition scheme can result with the marking that the small taxpayer is at a win-win situation if he opts for the composition scheme, however, there are both advantages and disadvantages for opting in the composition scheme.

This article helps the taxpayer to figure out both the advantages and disadvantages involved in the composition scheme so that the same can be helpful to the taxpayer in deciding whether opting for composition scheme is beneficial for him or not.

Advantages of Composition Scheme

Less Compliance Involved In Composition Scheme

One of the biggest and the most attracting advantage involved in the composition scheme is that the same comes with less compliance. In other words, the taxpayer opting for composition scheme has to undergo less compliance under GST. GST being the new taxation law much of the time and cost of the taxpayer is being consumed in filing the GST returns, however, the same gets lessen up in case of composition scheme.

A person registered under composition scheme is required to file in total only 5 returns (i.e. 4 quarterly return in form GSTR 4 and one annual return in form GSTR 9A). On the other hand the regular registered person is required to file monthly returns and an additional annual return.

Taxpayer opting under composition scheme is even not required to maintain detailed records.

Lower Tax 

Taxpayer registered under the composition scheme in GST are benefited by low tax rates. Separate rates are specified by the Government for the taxpayer opting for composition scheme and the rates specified are comparatively very low from that of the normal GST rates.

Category of Composition

Scheme Dealer

Rate of Tax
Manufacturer and traders 1% of turnover
Restaurants not serving alcohol 5% of turnover

Checkout all GST rates and HSN Codes.

Less Tax And High Liquidity

Since opting for composition scheme results into less payment of tax, as discussed above, there would be less amount of working capital blocked in tax payment resulting therein high liquidity for small taxpayer and the same can prove to be helpful in widening the business.

Disadvantages Of Composition Scheme

Inter-State Sale Not Permitted 

The biggest disadvantage of composition scheme is that taxpayer opting for the same is restricted from inter-state sale. In other words, a taxpayer engaged in interstate sales cannot opt for composition scheme or if the taxpayer wants to opt for composition scheme and avail its benefit he has to restrict himself by supplying his goods within the state in which he is registered.

It must be noted that since inter-state sale is not permitted under composition scheme the same goes with export of goods i.e. taxpayer opting for composition scheme cannot even export his goods since the same is considered as inter-state sale under GST.

Inter-state vs intra-state meaning.

Non-availability of Input Tax Credit

Composition scheme debars the taxpayer from availing input tax credit. The main moto for introduction of Goods and Service Tax Act was to remove the cascading effect and double taxation, however, the introduction of composition scheme and restriction in availment of the input tax credit hinder the entire moto of Goods and Service Tax.

The taxpayer opting for composition scheme is not allowed to avail the input tax credit paid by him on his inward supply from the registered taxable person and on the other hand the person buying the goods from the taxpayer opting under composition scheme also cannot get any credit. Due to the same the taxable amount gets added to the cost of composition scheme taxpayer and the same will increase the cost of his customer.

Collection of Tax Is Not Allowed

Taxpayer opting for composition scheme is not allowed to collect any tax from the buyer of his goods. In fact, the composition scheme dealer is not allowed to raise tax invoice. The tax to be paid under compositions scheme by the taxpayer is to be borne by him only.

Supply of Services Not Covered

Taxpayer engaged in providing services (other than restaurant related services) cannot opt for the composition scheme. Entire service sector (excluding restaurant services) are not covered within the ambit of composition scheme and hence the taxpayer providing taxable services cannot avail the benefit of the composition scheme.

Generally Less Preferred By The Registered Person

Due to the disadvantage of non-availment of input tax credit under the composition scheme, as discussed above, the registered person would generally prefer less purchasing goods from the composition scheme dealer. The main reason behind the same is loss of input tax credit in inward supply done by the composition scheme dealer resulting in price distortion and the said loss would ultimately have to be borne by the registered person in case he purchases goods from the composition scheme dealer.

Know more about GST registration.

Non-eligibility To Supply Exempt Goods

Taxpayer engaged in supplying exempted goods are outside the scope of the composition scheme and hence cannot opt for the same.

Non-eligibility To Supply Goods Through E-commerce Portal

Taxpayer supplying goods through e-commerce portal are excluded from the purview of composition scheme and hence they cannot opt for composition scheme.