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Composition Scheme under GST- Is it really beneficial?

Lekhraj sood 
on 10 August 2020

LinkedIn


The objective of the Composition scheme under GST is to spare small taxpayers from detailed compliances under GST and provide a simple mechanism which has minimum compliance and record maintenance requirements.

Currently there are two composition schemes - one is meant for those small taxpayers who are predominantly involved in supply of goods and provide little incidental services. The other scheme is for all those taxpayers who are predominantly in the business of providing services. However, there is no bar for them to supply goods also.

Generally, it is observed that taxpayers eligible for composition scheme opt for it for the reason of lesser GST compliances but miss out on other important factors and consideration which have a significant impact on their business. The purpose of this article is not to detail down the rules, regulations, tax payments, returns, and such other compliances but whether, and if yes then how beneficial the composition scheme is. Therefore, I will briefly mention only important features of these schemes that are useful in the context of this article.

Composition Scheme under GST- Is it really beneficial

Composition Scheme 1- Section 10(1)

  • Turnover limit – Rs.1.5 crores
  • Special Category states** – Rs.75 lakhs
  • Turnover to be considered of all units under same PAN at all India level
  • All units must opt for the scheme
  • Can supply services up to 10% of the turnover in the previous year or Rs. 5 lakhs w.e.i higher.
  • Cannot collect tax from customer
  • He cannot avail Input tax credit of the GST paid on the procurements of goods and services.
  • Tax rate 1% for manufacturer and 1% for others

**Special Category states-Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim,Tripura,Uttarakhand

 

Composition Scheme 2- Section 10(2A)

  • Also applicable to those suppliers of goods who are not covered under regular composition u/s 10(1)
  • Turnover to be considered of all units under same PAN should not exceed Rs.50 Lakhs.
  • Can supply goods and services, in any proportion.
  • All units must opt for the scheme
  • Cannot collect tax from the customer and customer cannot take credit
  • Tax rate 6%

Before a taxpayer opts for the composition scheme it is extremely important for him to understand and analyze the implications this decision is going to have on his business.

Following factors need to be carefully considered-

1. Financial Impact:

With a very simple example below one can see the comparative financial implications of being a composition dealer and regular dealer.

 

Comparative Analysis -Regular and composition dealer

   
       

Regular Dealer

Composition Dealer

 

Purchase

 

100

100

GST

 

18

18

Total cost

118

118

Less: ITC

 

-18

0

Net cost

 

100

118

 

Margin

 

25

25

 

Sale price

125

143

GST @ 18%/composition @1%

22.5

1.43

Cost to customer- B to C

147.5

143

Cost to customer- B to B

125

143

 

Assume the selling price is kept same (B to C)

143

143

Tax burden

4.5

1.43

Profit assuming same selling price -Rs.143.

20.5

23.57

You will notice from the above table that where the dealer is engaged predominantly in B to C (selling directly to consumers) it is slightly beneficial to be in composition in terms of price competitiveness and profitability. However, if a dealer is involved in B to B (supplying to other dealers) composition scheme is not all beneficial – be it the price or profitability.

2. Main restrictions/limitations for the composition dealers:

  • Cannot supply interstate – goods and services.
  • Cannot make export of/supply to SEZ, goods or services
  • Goods supplier, under 1st scheme, cannot supply more than 10% services.
  • Cannot sell through e-commerce operator websites (say Amazon) who is collecting TCS.
  • Loose out on ITC of the GST paid on purchases of goods/services
  • Customers may insist on tax invoice with GST to claim ITC.

3. Benefits of Composition Scheme:

  • Minimal and simple compliances under GST – quarterly return and payment and one annual return. This is one good advantage of being not liable for extensive compliances under GST.
  • Limited maintenance of records/accounts. Note that you must still raise e-way bills, pay GST on RCM supplies and maintain reasonable records/accounts to defend any query from the Government –GST, Income Tax etc.

Important considerations for Decision making:

  • Whether it is before, during, or post COVID online marketing will overtake offline channels. Entrepreneurs do the business to grow and expand the business. Inability to sell interstate will hamper the growth. If you take registrations to service the customers in other states then not only the compliances will increase but the organization will also become complex. Businesses may stand to lose many sales opportunities. You don’t know which customer will turnout to be growth driver of your business.
  • Export opportunities are huge and composition dealers cannot make export or even supply to SEZ. Especially the situation that has emerged in the world after the onset of Covid-19, there are ample opportunities to expand through exports. You can also earn significant export incentives.

There are no boundaries in online marketing and one can reach out to an exponentially large number of potential customers.

  • Unless the scale of business increases, the cost competitiveness will be impacted significantly. With economies of scale one will become more cost competitive even within the state.
  • Non-availability of ITC on procurement makes you non-competitive in B to B model. It is also seen that the larger customers prefer buying from regular dealers over composition dealers because the buyer can avail the credit.
  • At the same time there are significant compliances under GST for regular dealers which increases the compliance cost. And the GST compliances under composition scheme are much less. In fact, I see that this is the only advantage to count.

Conclusion:

In the end, it boils down to the nature of your business & related facts, your goals, and your preferences. You may prefer some peace of mind over-expansion of the business.

It may NOT be beneficial to opt for a composition scheme if you are in B to B business and having a reasonably good size of the business including within state. The composition dealer will be significantly uncompetitive compared to the regular taxpayers.

 

For businesses in B to C supplies, it could be a better option, but one must see the impact of losing out on the interstate, sale through e-commerce operator, and export market.

In light of what is stated above, a careful analysis should be done before taking this important business decision. This is should not merely be seen from the ease of GST compliance angle should be considered a very important business decision.

Disclaimer- The views expressed in this article are personal views of the writer and should not be construed as legal advice.There may be other views on the subject.

The writer is a member of the Institute of Chartered Accountants of India. He possesses about 3 decades of corporate experience in reputed multinational companies. He has handled various roles in the finance and tax domain as a part of senior management. He also specializes in GST.

Also:

How can composition dealers file the new GSTR-4(Annual Return)?


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