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Is GST Composition Scheme really more profitable than Normal scheme?

Soumya Laha 
on 15 December 2017

LinkedIn


There are several returns and rules in GST Normal Scheme which are really very annoying thing for small taxpayers. To give relief to the small taxpayers, government announced Composition Scheme for taxpayers whose annual gross turnover is below 1.5 crore.

The good thing is Composite Taxpayers need to file only one return (GSTR-4) per quarter. They need not to take the headache of several returns in a month. But They could not avail ITC (Input Tax Credit) and could not collect tax from customers.

Take a look on the GST rates in Composition Scheme


COMPOSITION SCHEME GST RATES

Type of Business

CGST

SGST

TOTAL

Manufacturers & Traders (Goods)

0.50%

0.50%

1%

Restaurants (not serving alcohol)

2.50%

2.50%

5%

Service providers are not eligible for composition scheme


Now, as the composition taxpayer cannot collect GST from the customers, he need to pay GST on his total outward supplies (sales). It means he need to pay tax from his pocket.

So, a big question arises, is the Composition Scheme more Profitable than Normal Scheme or not?

This is a very debatable question. To find out the answer, let's see the following tables,


NORMAL  SCHEME

Vs.

COMPOSITION SCHEME

IF SALE VALUE = (1+20%) X PURCHASE VALUE

A.

Purchase Value

1000.00

Purchase Value

1000.00

B.

GST @ 5%

50.00

GST @ 5%

50.00

C.

Total Purchase Value

1050.00

Total Purchase Value

1050.00

D.

Sale Value

1200.00

Sale Value

1200.00

E.

GST @ 5%

60.00

GST @ 1%

12.00

F.

Total Sale Value

1260.00

Total Sale Value

1212.00

G.

Net GST Liability (E-B)

10.00

Net GST Liability (E)

12.00

Net Profit {F-(C+G)}

200.00

Net Profit {F-(C+G)}

150.00

GST LIABILITY (NORMAL) < GST LIABILITY (COMPOSITION)


According to the First table GST liability in Composition scheme is greater than GST liability in Normal scheme. So, in this case, Composition Scheme is less profitable than Regular Scheme.

Let's see another example:


NORMAL  SCHEME

Vs.

COMPOSITION SCHEME

IF SALE VALUE = (1+25%) X PURCHASE VALUE

A.

Purchase Value

1000.00

Purchase Value

1000.00

B.

GST @ 5%

50.00

GST @ 5%

50.00

C.

Total Purchase Value

1050.00

Total Purchase Value

1050.00

D.

Sale Value

1250.00

Sale Value

1250.00

E.

GST @ 5%

62.50

GST @ 1%

12.50

F.

Total Sale Value

1312.50

Total Sale Value

1262.50

G.

Net GST Liability (E-B)

12.50

Net GST Liability (E)

12.50

Net Profit {F-(C+G)}

250.00

Net Profit {F-(C+G)}

200.00

GST LIABILITY (NORMAL) = GST LIABILITY (COMPOSITION)


According to the Second table GST liability is same in both the scheme. But Sale value in Composition scheme is lesser than sale value in Normal scheme. So, you can attract more customers.

Let's see another example:


NORMAL  SCHEME

Vs.

COMPOSITION SCHEME

IF SALE VALUE = (1+28%) X PURCHASE VALUE

A.

Purchase Value

1000.00

Purchase Value

1000.00

B.

GST @ 5%

50.00

GST @ 5%

50.00

C.

Total Purchase Value

1050.00

Total Purchase Value

1050.00

D.

Sale Value

1280.00

Sale Value

1280.00

E.

GST @ 5%

64.00

GST @ 1%

12.80

F.

Total Sale Value

1344.00

Total Sale Value

1292.80

G.

Net GST Liability (E-B)

14.00

Net GST Liability (E)

12.80

Net Profit {F-(C+G)}

230.00

Net Profit {F-(C+G)}

230.00

GST LIABILITY (NORMAL) >GST LIABILITY (COMPOSITION)


According to Third table GST liability in Normal scheme is greater than GST liability in Composiion scheme. So, in this case, obviously Composition scheme is more beneficial.

Let's see another example:


NORMAL  SCHEME

Vs.

COMPOSITION SCHEME

IF SALE VALUE > (1+25%) X PURCHASE VALUE

A.

Purchase Value

1000.00

Purchase Value

1000.00

B.

GST @ 5%

50.00

GST @ 5%

50.00

C.

Total Purchase Value

1050.00

Total Purchase Value

1050.00

D.

Sale Value

1280.00

Sale Value

1400.00

E.

GST @ 5%

64.00

GST @ 1%

14.00

F.

Total Sale Value

1344.00

Total Sale Value

1414.00

G.

Net GST Liability (E-B)

14.00

Net GST Liability (E)

14

Net Profit {F-(C+G)}

230.00

Net Profit {F-(C+G)}

350.00

SCOPE TO MAKE MORE PROFIT IN COMPOSITION SCHEME


According to Forth table Composition scheme is more profitable than Normal scheme.

So, from the above tables, you may understand that profit making is totally dependable upon you, specially it depends on how you set Sales value regarding Purchase value. I think there is a scope to make more profit in Composition scheme if you want. Also, Composition scheme is very simple and need to file one return per quarter. Only one thing that may makes you mind negative about this scheme is, no ITC available in Composition scheme.

So, these are my opinion about Composition scheme, if you have any other opinion, let me know in the comment section below.


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